Legal departments are leveraging volume commitment clauses as a way to secure discounted rates from partner firms by committing to a high volume of work.
Essentially, this is committing to buy legal services in bulk: the more your department spends, the better discount you receive. Typically, volume discounts are based on a calendar year schedule. Volume commitments could be a fixed scale (i.e., spend $1M, then your hourly rate is reduced from $500/hr to $475 per hour); or it could be a relative scale according to a baseline metric (i.e., 15 percent of the last calendar year’s legal spend). Additionally, volume discounts can be applied at various spending tiers. Volume commitments are designed to be symbiotic structures that foster ongoing business relationships.
While volume commitments foster synergistic effects, they also have their downfalls. Let’s dive in.
1) The Benefits of Volume Commitments
Volume commitments certainly provide bulk discounts for legal services, but beyond just a good deal, volume commitments have many positive outcomes that are often overlooked:
Long-term Relationship. Volume commitments can foster a long-term relationship and additional cooperation between legal departments and outside counsel. With increased volume usually comes established patterns of communication, deeper trust, increased prioritization of your matters, and ultimately a partnership-type relationship. Legal departments can increasingly rely on their outside counsel to understand their business and inversely, the outside counsel can increasingly depend on recurring revenue.
Reduced Transaction Costs. Repeatedly negotiating your legal rates can be time-consuming, so leverage your buying power and negotiate volume commitments only once, at the outset. l This is increasingly risky when you have a time-sensitive legal matter on the table, every minute it takes to secure outside counsel counts. Additionally, the human capital spent on negotiating is streamlined if volume commitments are already in place.
Expertise. The higher the volume of work your committed outside counsel takes on, the better they will understand your business. As your outside counsel becomes familiar with your recurring legal matters, they can work more effectively and efficiently. Your outside counsel won’t have to start working on your matters from scratch; certain economies of scale will be generated as they recycle your documents from past matters for future matters. Additionally, with higher volumes, outside counsel will spend less time researching or becoming familiar with your specific legal needs.
Price Stability. The costs of legal services are constantly in-flux depending on whether the market for legal services at the time favors buyers or sellers. In fact, Thomson Reuters reported that hourly rates increase an average of 4.4 percent year over year. If it’s a seller’s market for legal services and the cost of service increases, your volume commitment has probably landed you legal services at an undervalued price point. Additional price stability aids in forecasting your legal spend and keeping you within your budget.
Increased Priority. As your outside counsel becomes increasingly dependent on your legal spend, your legal matters will gain priority over other clients. Because of the relational nature of volume commitments, your matters will be at the top of the list.
2) The Downfalls of Volume Commitments
Before signing an agreement, consider the following downfalls of a volume commitment clause:
Incorrect Forecasting. If your corporation’s legal spend is extremely variable, then volume commitments may not be for you. If legal spend is incorrectly forecasted and you’ve committed to giving higher volumes than you need, you could be breaching your volume commitment clause at the end of the year when you haven’t spent enough. Failing to fulfil a volume commitment could result in damaged relationships, monetary damages, and firms deprioritizing your legal matters.
The Cheapest May Not Be The Best. Volume commitments may require your legal department to choose your committed outside counsel even when going with a different firm could deliver the requisite expertise for some matters. Your committed outside counsel might not have the expertise necessary for every issue that comes through. If you’re contractually obligated to fill a volume with a certain firm, you might need to forgo the firm with the right expertise to fill your volume.
Price Stability. If the price of legal services declines, then you could be contractually committed to paying over the market price. It can be difficult to predict what the cost of legal services will be in 12 to 36 months (a standard duration of a volume commitment clause). In a buyer’s market where the price of legal services drops if you have a fixed cost for legal services, you will be overpaying for your matters.
Foregoing Competitive Bidding. If you’ve got a volume commitment in place, this may restrict your ability to run competitive bidding among your panel firms to obtain the best price for legal services. Through issuing RFPs and conducting real-time auctions, your rates may be even lower than by leveraging volume commitments.
Year-Over-Year Growth. Your committed firm may require year-over-year growth in the volume commitment clause. If your legal department is unable to meet that year-over-year growth, you will be placed in lower priority among its clients and could be in breach of contract.
Best Practices of Volume Commitments
To get the most out of your volume commitments, we’re offering a few best tips and best practices:
Routine Matters. Use volume commitments only for routine matters that can be reliably forecasted. The better you can predict what your routine legal spend will be, the better position you are in to negotiate volume discounts. With reliable forecasting data, you will not be pressured into a higher volume than your legal department needs. Routine matters are best suited to volume commitments because your committed firm will become very familiar with your recurring work and will develop expertise in that niche.
Still Run RFPs If Possible. Structure your volume discounts in such a way that you can still run a competitive bidding process among your firms. While it may make sense to enter into a volume commitment contract for routine matters that can be forecast with some certainty, do not include your volume for complex or extraordinary matters into your commitment. When your matter is highly sensitive, requires additional expertise, and is out of the ordinary course of business, run an RFP; RFPs will help you obtain a better price and better choice for your outside counsel instead of being committed to the wrong firm.
Check Your Commitments Now. Typically, volume commitments need to be met within a calendar year. Because we’re at the beginning of 2021, now is the time to check your panel firm agreements for volume commitments. Be aware of these allocations and strategically give work according to those volume commitments evenly throughout the contract; this ensures your legal department is not in breach of contract or scrambling to meet a commitment at the end of Q4. There will be nothing more frustrating in December than to be forced to go with the wrong, but committed outside when you haven’t met your volume commitments.