Last week, I made the case for why it’s a good time to address legal services spend. Rising unemployment and declining revenues in the legal field provide opportunity to finally address this category, which has been historically treated as a 3rd rail. Whether you’re seeking to find a new firm or looking to change your cost structure with existing outside counsel, the priority is in moving away from the billable hour and towards a more performance based (or at least more predictable) pricing model.

DuPont pioneered the alternative billing model years ago. Thomas L. Sager, VP and Assistant General Counsel at DuPont, summed up their underlying motivation; “DuPont, like other clients, does not want to buy time; it wants to buy results”. According to DuPont’s Legal Model website, their approach ties cost to value received, distributes risk between client and firm, and creates a true collaborative partnership for reaching objectives. They make no secret of their strategy and in fact literally published the book on the subject. Well worth a read if you’re considering a change in your legal services sourcing and procurement.

Alternative billing methods pioneered by DuPont include:

• Flat fees for repetitive, predictable services.
• Discounted fees in exchange for performance bonuses (based on cost savings).
• Blended rates for any resources used - from Sr Partner to paralegal - that should push the firm to use lower level employees when possible.
• Volume discounts that discount hourly rates as the volume increases.
• Capped fees, which may be a gamble, but can provide predictability.

The push towards more predictability in legal spend and performance based payment has created a new entrepreneurial spirit among many smaller firms. Valorem Law Group (which proclaims the billable hour is dead on their website), claims to have ”an unlimited supply of fee arrangements”. So we can expect more firms to be receptive to changing their billing structures to more closely align with what the market wants.

In addition to addressing the billable hour, I would highly recommend rightsizing the number of providers. Often times, companies have different firms with overlapping expertise. Consolation with fewer firms gives you more bargaining room over the fee structures since you’ll be sending more work their way.

For a deeper look at the options, I’d recommend this white paper from the Sugarcrest Development Group, a legal consulting firm. They do an excellent job of summarizing the models, pros/cons and when to use each approach. Next week, I’ll dig into the legal categories that are ripe with opportunity in the current environment. And since there are so many options billing models, I’ll try to point you in the right direction for each of the categories you’re considering. But the bottom line is all the same…you want to pay for performance.

Nick Cherrone is a Category Manager for business services in Ariba’s Global Services Organization. Nick has several years of sourcing experience with General Electric and as a logistics officer for the US Army. Nick is currently working towards his certification as a purchasing manager (C.P.M) from the Institute for Supply Management.