A recent General Counsel Roundtable (GCR) analysis found that the best ways to control external legal spend are (in order of effectiveness):
In other words, to manage costs law departments need to align fee arrangements with desired outcomes rather than with law firm inputs (billable hours). Common sense? Apparently not. It's certainly not how law departments pay for most of their external legal work.
The 2009 Altman Weil Chief Legal Officer Survey found that nearly three quarters of law departments reported that 10% or less of their legal fees were non-hourly. (There are exceptions of course. 30% of Telstra's legal work is not based on time [full disclosure, Telstra is an Exari client]. Pfizer wants 75% of it's 2010 legal spending to be fixed fee. And Comcast is asking its outside lawyers "to do more to jettison the traditional hourly billing rate.")
So, if the market for legal services is competitive (which I think it is) and large law departments have purchasing power (which they do at the moment), why is so much external legal spend still time-based?
I think the reason is best captured in Can Lawyers Live in an Approximate and ‘Good Enough’ Universe?, a fantastic blog post in which Ron Friedmann argues that lawyers are uncomfortable with approximations. Lawyers have grown up with time-based billing. Time can be tracked in a very precise manner. Outcome-based billing, on the other hand, requires estimates; scary stuff for risk averse, perfectionist lawyers. And don't forget that 90% of in-house lawyers started in private practice, which means their "general view of value is based on perceptions developed within law firms."
As I've said previously, the move away from time billing will be a slow process. Not because it is inherently complicated, but because it requires significant change. In mindset more than anything. Steven Levy put it best in a comment he made on AFAs (alternative fee arrangements):
"Underlying fixed fees – and most AFAs – is the requirement that law practices 1) understand how they do the work they do and then 2) approach it with a plan not just for the legal issues but for how to do the work itself."
While these capabilities are well established in other industries, they are still new concepts in the practice of law.