The rising cost of legal services is forcing corporate legal teams to rethink their approach to managing outside counsel. Rates have seen consistent increases—according to the Wolters Kluwer 2024 Real Rate Report, partner rates rose over 6% from 2022 to the first half of 2024, and a staggering 23% among the largest firms for litigation work during the same period—putting pressure on legal departments to innovate and find cost-saving strategies while maintaining strong law firm relationships and quality representation.
At Wolters Kluwer’s flagship user conference, ELM Amplify 2024, industry leaders explored this critical issue in the session “Is it a Deal or Not: Rate Negotiations and AFAs.” The discussion offered insights into how legal teams are tackling rising rates, leveraging data, and strategically using alternative fee arrangements (AFAs).
Strategies for effective rate negotiation
A key theme from the session was the importance of data-driven negotiations and employing creative strategies to manage costs effectively. Here are some of the top tools and strategies discussed:
1. Centralizing negotiations: Centralizing rate negotiations within the legal operations team allows departments to leverage comprehensive data and maintain consistency. By using data to highlight the trade-offs of rate increases, legal departments can ensure firms understand the impact of their pricing decisions on work allocation.
2. Leveraging fast pay discounts: Offering quicker payment terms can be a win-win strategy. By agreeing to review and pay invoices within a shorter window, legal departments may be able to negotiate modest rate decreases. Law firms benefit from improved cash flow, while corporate legal teams see immediate savings.
3. Locking in multi-year rates: Multi-year rate locks were highlighted as another effective strategy. While they may require higher rates upfront, the stability they offer can result in long-term cost savings, stability, and predictability as inflationary pressures increase.
4. Incorporating volume discounts: Volume discounts are an excellent tool for managing costs, especially for departments with substantial outside counsel spend. By setting clear thresholds and negotiating automatic discounts for a high volume of work, teams can generate savings that scale up with their needs and avoid surprises.
5. Utilizing procurement: Partnering with the procurement team adds another layer of rigor to rate negotiations. Procurement professionals often take on the “bad cop” role, pushing harder for concessions while allowing legal teams to maintain strong, collaborative relationships with their firms.
Beyond negotiation
Beyond considerations during the negotiation process, the session covered several other methods companies use to minimize legal spend, including AFAs. While AFAs are often seen as a solution to rising costs, the session highlighted that their application can vary widely depending on the organization and type of work. AFAs work best when they are backed by historical data and aligned with the department’s overall objectives. Clear communication and collaboration with firms are essential to achieving successful outcomes. The key takeaways about AFAs include:
Fixed fees for specific matters: Partnering with firms to establish fixed fees for recurring or routine matters can lead to greater cost certainty and streamlined billing processes.
Inclusion in RFPs: Incorporating AFAs, such as blended rates, into RFPs can simplify budgeting, ensure alignment with overall cost management goals, and establish expectations early.
Challenges to adoption: Despite their potential, AFAs remain underutilized in many sectors. A lack of clarity around their definition and inconsistent application were noted as common barriers.
The session highlighted some additional ways that legal teams are innovating to keep costs down. For example, one speaker talked about his company’s process of issuing requests for information (RFIs) among the 20% of firms with which they have the highest spend. They use the RFIs to gather essential information, such as timekeeper rates and service capabilities, which they use as benchmark data in negotiations across firms.
Key takeaways
Navigating the complexities of rate negotiations and AFAs requires a combination of data, sound processes, and creativity. Keep the following in mind when seeking to reduce spend and maintain quality:
- Don’t be afraid to negotiate: Even with established rate cards, revisiting terms and asking for better deals should be a regular practice.
- Focus on strategic partnerships: Concentrating efforts on a select, well-aligned panel of firms can lead to stronger relationships and better value.
- Leverage technology and data: Use your legal management systems to track rates, enforce discounts, and manage payment terms efficiently.
For more insights on driving legal department value, listen to our Legal Leaders Exchange podcast episode From cost center to profit center: Innovative legal strategies.
