Emily Jelich, assistant general counsel at Royal Bank of Canada, says her employer wasn't seeking to change the way it hires its external lawyers just because of the increasing amounts of money it was handing over to law firms.
It was about the unpredictability.
"The law department was one of the last places where, when you were asked what your annual spend was going to be, you kind of went, 'I don't know'," said Ms. Jelich, who oversees the hundreds of law firms RBC uses in Canada and around the world. "It's like going to the grocery store, not knowing if you have enough money for the bread and milk you're going to buy."
That's why, in the last few years, RBC and other big companies that use Bay Street's pricey law firms have been pushing for new billing arrangements that go beyond the decades-old standard of the "billable hour," where firms tally up the number of working hours spent on a case.
It's a method that rewards firms for putting too many lawyers on files and provides little incentive to keep bills from ballooning. Traditionally, a law firm would simply present clients with a larger-than-expected bill months after the fact.
While most legal work is still billed by the hour, many Bay Street firms are eagerly responding to demands from Ms. Jelich and other in-house counsel, many of whom are facing intense pressure to cut costs.
The result is an increasing push for what are known as alternative fee arrangements. For example, a law firm could charge a client a flat fee for a particular service, such as a corporate acquisition, no matter how many hours it ends up taking – essentially spreading more risk from the client to the law firm.
Bay Street law firms are also increasingly looking to outsourcing, either to lower-cost legal-service providers in Canada or new overseas providers in India, for rote legal tasks that before would have been done in-house And those savings, in many cases, are being passed onto clients.
McCarthy Tétrault LLP partner Matthew Peters, who is the firm's national leader for markets, says there is a transformation under way. The traditional law firm, with its pyramid of associates and partners all charging clients hundreds of dollars an hour, is headed for history's dustbin. High-end law firms, such as McCarthys, will specialize in complex legal work and farm out the rest to the equivalent of legal factory production lines.
"The Industrial Revolution happened for the rest of the world and kind of missed the legal profession," Mr. Peters said.
He compares high-end Bay Street law firms to old-fashioned cobblers, good at making high-quality custom shoes but bad at mass production. This is why he says McCarthys, counterintuitively, sometimes tells its own clients to hire another cheaper law firm or service provider for certain types of legal work. And when McCarthys outsources work for a client, he says, they show the client exactly what it is costing them.
"If you need some custom shoes developed, absolutely, that's what we're going to make. If you are putting in an order for 4,000 running shoes, well, that's not the best job for us," he said.
Sean Weir, managing partner and chief executive officer of Borden Ladner Gervais LLP, says his firm now uses sophisticated software and budgeting tools to determine how much a legal job is likely to cost. A decade ago, he said, the process involved an "eyeball" quote from a senior partner. Clients were often surprised to see litigation go on much longer than predicted and a bill that was much higher than estimated.
"Clients want certainty," he said. "And they don't want things going on forever."
Technology is also a factor. Computers can now do many legal tasks that used to be performed by junior lawyers, such as reviewing masses of documents, even better than humans, said Jordan Furlong, a legal industry consultant and a principal with Edge International.
"I think we are going to need fewer lawyers across the board," said Mr. Furlong. He does not predict Canada will see anything like the dramatic shedding of lawyers that U.S. firms have experienced. However, he added, "A lot of the stuff that lawyers have traditionally done for money is going to go to someone else."