Digital White Papers

8 WWW.ILTANET.ORG | ILTA WHITE PAPER FINANCIAL MANAGEMENT Creating and Renewing Client Relationships and Fee Arrangements new providers would involve transaction costs. However, their need for progress is intense, and persuading law firms to change their ways has proven elusive. Altman Weil notes that clients have felt compelled to move work in-house (37 percent) or to new providers, and to adopt alternative fee arrangements (AFAs) and impose outside counsel guidelines (OCGs) to achieve their goals. OCGs: Each Deal Is Unique and Complex The question of profitability is further complicated by an increasing number of clients issuing outside counsel guidelines. Typical guidelines comprise a large of set of financial and non-financial business provisions that can be as precise as dictating how maers are to be staffed, as micro-detailed as stipulating reimbursement for photocopying and as urgent as rules on conflict and data security. Substantively, OCGs have become vendor contracts and need to be treated as such: Terms must be met in order to receive payment, and contracts are full of tripwires that firms must avoid or risk jeopardizing payment. Bills could be rejected; oen firms must resort to invoice write-downs. Law firm respondents to IADC's 2015 "Inside/Outside Counsel Relationship Survey" said that delays in processing bills have joined rate levels and staffing limitations as the biggest challenges in working with in-house counsel. Write-downs can be significant as some of the guidelines include rules specifying who may work on a maer and in what capacity. There are also risks of legal liability in many of the OCG contracts as they provide for indemnification, widen who is considered a client for conflicts teams and stipulate contractual reporting on data breaches. This is to be expected: 31 percent of chief legal officers responding to the Association of Corporate Counsel's "Chief Legal Officer (CLO) 2016 Survey" report that their company has been targeted by a regulator or other government entity for an enforcement action and they fully expect their vendor-firms will be similarly scrutinized. The Federal Trade Commission and other organizations have begun holding law firms responsible for their security infrastructures. Rate Renewal The formation and renewal of these arrangements is handled in different ways. Some clients proactively issue requests for information (RFIs) regularly, typically every two to five years. These RFIs are designed to renew relationships with the respective firms; their goal is to measure the success of the representation and, more important, renew the financial aspects of the relationship. Besides using RFIs, some clients hold reverse auctions. In a reverse auction, firms are invited to bid for work, the lowest bidder usually being the winner. This mechanism provides a structured process to renew the relationship. It also prevents the raising of hourly rates outside of the RFI. Historically, most firms have sought proactively to raise their rates annually. When the majority of clients were on standard rates, firms were comfortable sending notice of the rate increase and dealing with any clients that pushed back. As the number of clients with unique deals has increased, there is now a need to be more process-oriented and have a broader plan for managing the rate renewal process. A median of 21 to 30 percent of all law firm fees came from discounted rates in 2015.

• Cover