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In-house teams search for alternatives to the billable hour

Posted by: Clare Butler 13/09/16
As the US’ leading legal market, New York is not only home to 223 of the country’s top 500 law firms, but also 22,642 lawyers working within National Law Journal (NLJ) 500 practices. Yet, despite its reputation as the most expensive place in the US to source legal counsel - given top firms’ notoriously high hourly billing rates – even New York has started to embrace the shift towards alternative fee arrangements.

The billable hours structure has long been favored by law firms. However, highly efficient legal teams are searching for more cost-effective outside counsel, increasingly opting for alternative fee arrangements (AFA) in the form of flat fees, RFPs (Requset for Proposal) and reverse auctions, over the once ubiquitous hourly fee structure.

Global pharmaceutical leader GlaxoSmithKline recently revealed that 84% of work assigned to law firms in 2015 was done so under an AFA, a figure up from 68% in 2011, and just 3% in 2008. Amidst the height of the financial crisis, the pharma giant set out to ‘dramatically change the paradigm’ by which it paid for external legal services, with the company’s newly appointed general counsel, Dan Troy, tasked with significantly reducing outside counsel spend while continuing to source excellent legal representation.

This shift is illustrative of the changing priorities of large legal consumers across the US. As in-house departments expand and their bottom line becomes a growing priority, many are conducting pervasive reviews of their legal providers and drastically reducing the number of firms that they partner with. Both GlaxoSmithKline and AIG have adopted innovative reverse auctions for flat fee arrangements, with the aim of reducing their legal spend.

The shift is one that will no doubt challenge the cultural mind-set of BigLaw, where the billable hour has soared above the $1000 mark, but if firms fail to innovate, it’s likely that legal consumers will begin to look elsewhere for external counsel.
Tagged In: USA
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