Law Firms Feeling Headaches from Outside Counsel Guidelines, Struggling to Comply, Report Says

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For law firms and their clients, Outside Counsel Guidelines (OCGs) are simply a fact of life.

More than 80% of corporations reported they use some form of OCGs to manage the work and billing practices of their outside law firms, according to a report recently released by the Association of Legal Administrators (ALA) and legal tech company Bellefield Systems.

Legal departments view OCGs as one of the most effective tools they have for controlling their outside counsel spend, typically one of the largest budgetary line items that corporate legal departments face. OGCs are also a highly effective means of enforcing the kinds of change that legal departments have been asking for, but which many law firms have been slow to offer.

Nearly every firm that is subject to OCGs experiences some degree of invoice rejection as a result of non-compliance.

On one side of the equation, OCGs could be viewed as a good thing. The client is spelling out exactly what they expect from a law firm. All the firm has to do is read the guidelines and comply. Seems easy enough.

Unfortunately, as anyone who has had to deal with OCGs can tell you, that’s a bit simplistic. There is no such thing as a standardized set of guidelines, nor are clients interested in trying to standardize them. OCGs will undoubtedly vary from client to client, and often even from matter to matter even with the same client. It’s the client’s chance to customize the kind of legal service they expect to receive; and not surprisingly, the clients want to take full advantage. This puts a large burden on law firms to read, interpret, clarify, implement and follow the guidelines for each individual matter. Consequences for failing to comply can range from delays in payment to legal action or even to being fired.

The ALA/Bellefield report estimates that for some firms, the cost of complying with OCGs exceed $15,000 per day or nearly $4 million per year! Not every firm will see such a large burden, but it is unquestionably true that there will be compliance costs involved that ultimately cut into a law firm’s realization and collection totals.

And that’s not the end of the pain for law firms either. Nearly every firm that is subject to OCGs experiences some degree of invoice rejection as a result of non-compliance. About 43% of law firms see between 5% and 10% of their invoices rejected due to compliance issues. Shockingly, almost 36% of firms see 20% or more of their invoices rejected or reduced due to compliance problems. This is staggering.

The Cost of Complying with OCGs

Not surprisingly, clients aren’t going to move away from using OCGs. And law firms have no choice but to follow them or pay the penalties. So, what is to be done?

Simply put, law firms need to get better at tracking, managing and complying with OGCs. Less than one-quarter of law firms report having a consistent process to review, analyze and document OCGs as they come in. And even among those law firms that have a consistent process in place for intake of OCGs, 20% of the time no one tells the billing partner. This means that even those firms that are trying to get it right every time miss the critical step of telling the partner managing the matter one-out-of-five times.

…For some firms, the cost of complying with OCGs exceed $15,000 per day or nearly $4 million per year!

Worse yet, some 23% of law firms do not communicate OCGs to their attorneys at all. How can the billing partner, who is ultimately tasked with quarterbacking the matter, or the attorneys doing the bulk of the work, be expected to manage the matter in an effective and compliant manner when they’ve never been shown the playbook?

It is not the client’s responsibility to make sure the billing attorney knows what they expect. The client sent the guidelines through; that should be sufficient. No, it’s a matter of process and procedure within the law firm itself.

Many law firms will point to the fact that they lack the staffing or the technological acumen to manage OCGs. But rather than providing an excuse, this highlights an area of needed investment. These firms have clearly identified a shortcoming in their service delivery model; therefore, the next step should be making plans to address this need.

Compliance requires both awareness and action; the law firm must first be aware of the requirements, then must take the necessary actions to follow them. If staffing or technology issues are preventing the firm from becoming effectively aware of the expectations, that is a gap that should be filled as close to immediately as possible.

But as the results of the ALA/Bellefield survey point out, simply having the staff and technology isn’t sufficient either. Those resources must then be used to implement and follow a standardized set of practices and procedures for the firm with regard to how OCGs are analyzed, documented and followed. This should, at a minimum, consist of the following:

  • All OCGs are analyzed immediately upon receipt and checked for conflicting guidance from the same client on the same matter so clarification can be sought if needed.
  • OCGs are summarized and circulated to, at least, all partners working on the effected matter, especially the billing and/or relationship partner.
  • Partners are held accountable for acknowledging receipt of the OCGs and disseminating that information to their teams as appropriate.
  • Processes are implemented across the firm to ensure ongoing compliance with OCG terms.

Yes, OCGs are long, dense and complicated documents. They’re written by lawyers. That’s no excuse ― particularly for lawyers ― for a failure to read, understand and comply with them. If outside law firms do a poor job of complying with OCGs, it’s not as if clients will decide to stop issuing them. Rather, they’re liable to get even more complex and onerous.

Building the staff, tech stack and procedures to effectively comply with OCGs is, without question, a burdensome task. But the alternative is untenable.