Creating a Legal Value Score: Why the Industry Needs to Look Beyond Hourly Rates

30
Aug
2011

Craig Raeburn

Earlier this month, The Wall Street Journal published an article that grabbed the attention of many attorneys: “Pricing Tactic Spooks Lawyers”. The article discussed how some large companies, including Toyota Motor Corp. and GlaxoSmithKline, have been using reverse auctions (also known as competitive bidding) to pit law firms against one another for their business. The goal of these reverse auctions is to reduce costs, especially for high-volume workloads.

At the surface, reverse auctions appear to be a good idea for corporations. The competition it creates forces law firms to lower their rates in order to win work. But, as is frequently the case with legal billing, what we see at the surface isn’t the whole story.

For example, let’s say a partner from one law firm (Partner A) charges $2,000 an hour and a partner from another firm (Partner B) charges $500 an hour. Looking only at those rates, a corporation might chose to work with Partner B and his firm. What the hourly rate fails to show is how long it will take Partner A to complete the work versus Partner B and what the likely result of the work will be. If Partner A has considerably more experience than Partner B and a larger staff behind him, it might take Partner A 10 hours to finish the work with a $0 outcome (a total cost of $20,000). If Partner B doesn’t have as much experience and a smaller staff, it could take him 25 hours to finish the same amount of work and the case could have a $50,000 settlement (making the total cost to the corporation $62,500). In this example, it would actually cost much less to work with Partner A, although this is not directly seen in the billable hour rates.

While reverse auctions may be a good way for corporations to bundle a portfolio of cases and get a reasonable and predictable cost from law firms, to be truly effective a corporation needs access to more data than just hourly rates. The legal industry needs to start thinking about value scores for legal services. Similar to the credit scores that each of us have, value scores identify the future ability of a law firm or lawyer to provide quality legal services at a reasonable value. Just like how a bank can look at my credit score and determine that I will likely pay off my debt, a corporation can look at a lawyer’s value score to predict if the firm will produce quality work.

This value score would ideally combine qualitative and quantitative data. Qualitative data about firm performance already exists. The Association of Corporate Counsel (ACC) surveys corporations about their satisfaction working with outside counsel.  ACC members can then search the ACC Value Index to find firms that provide high-quality work and have satisfied clients. The next step in creating an industry value index would be to combine this qualitative information with quantitative data about the actual rates that law firms and individual timekeepers charge for specific types of work (not just what they say they charge per hour, but what actually appears on the timesheet). By combining this information, the corporation could then look at value scores to get a better look at that $500-an-hour attorney to see if he produces work good enough to make his lower hourly rate worthwhile.

Asking law firms to compete for corporate work is a good idea, since the competition can help a corporation get the best work for its money. However, making these determinations by looking at hourly rates alone is dangerous. Legal professionals have increasing volumes of data at their fingertips. It’s up to the industry to take the next step to analyze and combine existing data to provide a complete view of legal spend and identify those most qualified firms to complete the work.