Chapter 5: Outside Counsel & Vendor Management
The Modern RFP, escaping the billable hour through Alternative Fee Arrangements, and managing law firms by performance — building a vendor ecosystem that delivers measurable value.
The Vendor Ecosystem, Redesigned
The relationship between a corporate legal department and its external providers in 2026 bears little resemblance to the gentleman's-agreement model of a decade ago. The modern legal vendor ecosystem is a managed portfolio of providers — law firms, ALSPs, contract staffing agencies, technology vendors — each selected, onboarded, measured, and retained (or exited) based on demonstrated performance against defined criteria.
This is vendor management, and it is one of the highest-leverage activities in Legal Operations. External counsel spend typically represents 50-70% of the total legal budget. A 10% efficiency gain on that spend line delivers more absolute savings than a 30% gain on any internal operational metric. The tools to achieve that efficiency are the modern RFP, alternative fee arrangements, and structured performance reviews.
The Modern RFP
Evidence-Based Selection
The modern law firm selection process builds on the traditional credentials presentation by adding structured, evidence-based evaluation criteria. Where firms were historically selected primarily on the strength of their pitch and the chemistry of the proposed team, the modern RFP adds rigorous performance data, pricing transparency, and delivery track records to the assessment.
The modern RFP is an evidence-based procurement exercise. It evaluates firms on four dimensions:
1. Capability and Experience. Demonstrated track record in the specific matter type, jurisdiction, and industry. Assessed through matter case studies, named lawyer CVs, and client references — not firm-level marketing materials.
2. Pricing and Commercial Terms. Detailed fee proposals including rate cards, proposed fee arrangement (hourly, fixed, capped, or hybrid), estimated total cost, and assumptions underlying the estimate. The pricing proposal should be structured to enable apples-to-apples comparison across respondents.
3. Technology and Process. What technology does the firm use for matter management, document review, and client reporting? What is their approach to process efficiency? In 2026, firms with articulated technology strategies demonstrate commitment to delivery efficiency and create cost advantages for their clients.
4. Diversity and ESG Commitments. Staffing diversity metrics, pro bono commitments, and environmental sustainability practices. These have become core procurement requirements, driven by the client organisation's ESG obligations and supply chain reporting mandates.
The ALSP Dimension
Alternative Legal Service Providers (ALSPs) have matured from niche outsourcing shops to sophisticated, technology-enabled service platforms. The modern RFP should evaluate ALSPs alongside traditional law firms for appropriate work categories.
| Work Category | Law Firm Strength | ALSP Strength |
|---|---|---|
| Complex litigation strategy | Deep expertise, partner judgment | Limited — this is law firm territory |
| High-volume contract review | Expensive at scale | Purpose-built for volume, 30-50% cost advantage |
| Regulatory compliance (routine) | Over-qualified and over-priced | Process-driven, technology-augmented |
| Legal project management | Often under-resourced | Core competency for many ALSPs |
| Document review (discovery) | Typically outsourced internally to junior associates | AI-augmented platforms, per-document pricing |
The key principle: the RFP should be work-type specific. Issuing a single RFP that asks one firm to handle everything from M&A advisory to NDA processing is the procurement equivalent of asking a cardiothoracic surgeon to also handle your dental work. Both are medical professionals; the specialisation matters.
Pricing Models: Escaping the Billable Hour
Why the Billable Hour Persists
The billable hour is the default pricing model for legal services for a simple reason: it transfers all pricing risk to the client. The firm bills for time spent regardless of outcome, efficiency, or value delivered. For the firm, this is economically rational. For the client, the pricing structure produces an incentive dynamic where the firm's revenue increases when work takes longer — an outcome to address through alternative arrangements.
This dynamic does not mean firms deliberately work slowly. Rather, the pricing model creates economic incentives that are neutral toward efficiency and innovation. Alternative Fee Arrangements (AFAs) reorient these incentives to reward both parties for improved efficiency.
The AFA Spectrum
| Model | Structure | Risk Allocation | Best For |
|---|---|---|---|
| Hourly (baseline) | Rate × hours | 100% client | Genuinely unpredictable work |
| Capped fee | Hourly up to a maximum | Shared — client capped, firm absorbs overrun | Matters with moderate predictability |
| Fixed fee | Set price for defined scope | 100% firm (for defined scope) | Repeatable, well-scoped matters |
| Success fee | Base + premium on outcome | Shared — premium tied to result | Litigation, recovery matters |
| Portfolio pricing | Fixed annual fee for a basket of work | Shared — volume and mix risk pooled | High-volume, predictable work streams |
| Subscription model | Monthly retainer for defined services | Shared — client gets predictability, firm gets revenue stability | Ongoing advisory relationships |
Implementing AFAs: Practical Guidance
Start with data. AFAs require historical matter cost data to negotiate effectively. When you know that your average employment dispute costs $45K and takes 14 months, you can accurately assess whether a firm's $50K fixed fee proposal is competitive. The e-billing data discussed in Chapter 4 provides this foundation.
Begin with high-volume, predictable work. Fixed fees work best for matters with well-understood scope and effort profiles. NDAs, standard employment contracts, routine regulatory filings — these are ideal AFA candidates because the historical data provides a reliable cost baseline.
Protect scope boundaries. Every AFA must clearly define what is in scope and what constitutes a scope change. Clear definitions enable smooth execution and prevent ambiguity about whether the third round of negotiation was "included" or "extra." Define scope in measurable terms: number of negotiation rounds, document page counts, court appearances.
Share the data. The most productive AFA relationships involve transparency from both sides. Share your matter volume forecasts with the firm. Ask them to share their cost assumptions. When both parties operate from the same data, pricing negotiations become collaborative rather than adversarial.
Strategic Insight
The goal of AFAs is to align incentives so that both parties benefit from efficiency, not to extract the lowest possible price from law firms. A fixed fee that is fair and well-scoped produces a firm that invests in process improvement because every hour they save drops directly to their margin. This incentive alignment — where efficiency directly benefits the firm — is the competitive advantage that AFAs create over hourly billing.
Quarterly Business Reviews (QBRs)
Managing by Performance, Not Pedigree
The QBR is the governance mechanism that transforms a law firm relationship from a trust-based arrangement into a performance-managed engagement. QBRs enable vendor management based on demonstrable performance outcomes rather than historical inertia, ensuring alignment with client objectives and business value.
The QBR Scorecard
An effective QBR evaluates performance across five dimensions:
1. Quality. Matter outcomes, substantive accuracy, strategic value of advice. This is inherently subjective but can be partially quantified through internal client satisfaction surveys and outcome tracking.
2. Efficiency. Average cost per matter type, hours per matter versus budget, and trend over time. Is the firm getting more efficient with experience, or are costs creeping upward?
3. Responsiveness. Turnaround times on deliverables, adherence to agreed SLAs, and proactive communication. Measured through matter management system timestamps and internal stakeholder feedback.
4. Billing Compliance. Adherence to OCBG rules, accuracy of invoices, timeliness of WIP reporting, and e-billing adoption. Sourced directly from the e-billing platform.
5. Innovation and Value-Add. Is the firm proactively suggesting efficiency improvements, sharing market intelligence, providing training, or investing in technology that benefits the client engagement? This dimension identifies strategic partners who drive ongoing value creation.
The QBR Conversation
The QBR should be a structured 60-90 minute meeting, held quarterly, with the firm's relationship partner and the key matter leads. The agenda:
- Scorecard review (20 minutes): Present the data, discuss trends, and identify areas for improvement
- Pipeline discussion (15 minutes): Share upcoming work volume and any changes to the relationship scope
- Innovation agenda (15 minutes): Discuss process improvements, technology opportunities, and ways to deliver more value
- Relationship health (10 minutes): Address any interpersonal or communication issues directly
The most important aspect of the QBR is documented follow-up. Every action item is recorded, assigned an owner, given a deadline, and reviewed at the next QBR. This structure transforms the conversation into operational momentum and measurable improvement.
Panel Rationalisation
QBR data, accumulated over 12-18 months, provides the evidence base for panel rationalisation — the periodic exercise of reviewing the external provider roster and deciding which firms to retain, which to grow, and which to exit.
The data-driven panel review asks three questions for each firm:
- Are they competitive on cost? Compare their average cost per matter type against the panel median and against AFA benchmarks.
- Are they delivering quality? Review outcome data, satisfaction scores, and quality incident reports.
- Are they a strategic fit? Does the firm's practice mix, geographic coverage, and innovation posture align with the organisation's forward-looking legal needs?
Firms that score strongly on all three dimensions are candidates for increased volume allocation. Firms with weaker performance are managed according to improvement plans or transition strategy. The evidence-based approach provides clear rationale for all decisions, enabling transparent communication with stakeholders.
In the Trenches
The $1.2M Panel Reset
Priya Mehta, Head of Legal Ops at a mid-cap Australian mining company, inherited a panel of 23 law firms — a number that had grown organically over 15 years as successive GCs added their preferred firms without ever removing any. No firm had ever been subjected to a formal performance review. Fee arrangements were exclusively hourly, negotiated (or more accurately, accepted) on a firm-by-firm basis with no benchmarking.
Priya's first action was to pull 24 months of e-billing data and build a spend heat map. The data revealed that 80% of external spend went to five firms, and the remaining 18 firms collectively handled 20% of the work — most of it in small, sporadic matters. Three of the top-five firms had never been asked to compete for the work they received.
She launched a formal RFP for the company's four highest-spend practice areas. She required AFA proposals for all repeatable matter types. She evaluated responses using a weighted scorecard covering capability, pricing, technology, and diversity.
The result: the panel was consolidated from 23 firms to 9. Two incumbent firms lost significant allocations to competitors who offered fixed-fee arrangements at 25-30% below historical hourly costs. One new ALSP was added to handle high-volume contract review at 40% below the prior law firm cost.
Total annual savings in the first year: $1.2M against a prior spend base of $6.8M — a 17.6% reduction with no degradation in quality (as measured by matter outcome tracking and internal satisfaction surveys). The savings funded the CLM implementation that had been on the wish list for three years.
The Monday Morning Checklist
- Count your law firms. How many external firms received payment from your legal department in the last 12 months? If the number exceeds 2-3x the number you would select if starting from scratch, a panel rationalisation exercise will unlock meaningful efficiency gains.
- Identify your AFA candidates. Pull your top 5 matter types by volume. For each, determine whether the scope is predictable enough to support a fixed or capped fee arrangement. High-volume, repeatable work with clear scope boundaries is ideal for cost-effective AFAs.
- Schedule your first QBR. Pick your highest-spend firm. Build a one-page scorecard covering the five dimensions above. Present it as a collaborative discussion, not an adversarial review — the goal is to build a performance-managed partnership, not to ambush a supplier.
- Benchmark one rate. Select the most common timekeeper role you engage externally (typically a senior associate). Compare the rate you are paying across your top three firms and against published market benchmarks for your jurisdiction and practice area. If you find a 20%+ variance, you have a negotiation opportunity.
Chapter 4: Financial Management (FinOps)
Budgeting, forecasting, accruals, and e-billing — the core mechanics of Legal Operations. Master the numbers and earn the mandate to build transformative initiatives.
Chapter 6: Process Mapping & Knowledge Management
Whiteboarding messy legal processes before buying technology to fix them, and building self-serve knowledge ecosystems that stop the business from asking legal the same five questions.