In my April 19 blog post, I reported on a study by a legal software company in Inside Counsel that indicated as companies consolidated legal work, rates at those firms tended to increase so that overall, the consolidated legal work tended to cost more, not less. The study also showed that matters staffed by newer associates tended to cost up to 20% more.
At first, I tended to write that counter intuitive study result off as it was just one more example of how some corporate legal departments can fail to properly execute on what should be a slam dunk way to save on outside legal costs. But as I considered the matter further, I realized that there certainly are ways consolidating claims legal work into fewer law firms actually can wind up costing more money.
Of course, one of the chief reasons to consider consolidation is to save on legal costs. After all, with all other things being equal, if you are not going to save money by consolidating legal work, why do it? So it is that many insurers have found that consolidating legal work within fewer law firms results in a net savings on legal costs through being able to bargain for better hourly rates or other cost concessions (e.g., reduced travel costs).
But saving on legal costs is just one factor to consider when consolidating legal work. Insurers also need to consider indemnity results achieved and cycle time reports on files handled a firm. For any legal costs savings achieved through consolidation can quickly evaporate if indemnity payouts and cycle time go up.
If the number of files to be consolidated is large, there is the additional factor of the “bench strength” of the firm to consider. That is, does the firm have the personnel capable of handling the additional work and still achieve the anticipated legal costs savings without indemnity results or cycle time declining?
Remember, that the good results and cycle times may have been achieved by just one attorney in the firm. If that attorney must now bring in another partner or use more associates to help out, does the firm have the personnel capable of sustaining the same good indemnity cycle time results and at a lower cost? Or will using newer associates, for example, result in 20% more legal costs as the survey study reported on in Inside Counsel.
Because of the importance of making sure that all relevant factors are identified and properly considered before making decisions on which firms to use when colidating legal work, some insurers use a formal RFP process. Please contact me if you would like to learn more about what should go into an RFP for selection of counsel when consolidating legal work or for use in the selection of panel counsel.