Adapt or Die

shutterstock_852782921

In yesterday’s edition of Law360.com, former McKesson in house lawyer Jill Dessalines wrote an excellent piece on the Corporate Demand for Value from outside law firms.  In the article, entitled, “Adapt Or Die: Law Firms In Tomorrow’s Economy,” Dessalines says that while the billable hour is still here, “it is gasping for breath and failing fast.”

Dessalines writes about the truth many old-line outside firms try to ignore about the billable hour:

“The problem is not just that it encourages inefficiency — like paying a kid to pull weeds in your yard by the hour rather than by the job. The problem is not just that it rewards quantity over quality. No, the essential problem… is that it is disconnected from the value of services rendered. For the corporate client, who by definition measures success and failure based on the value delivered to its bottom line, this disconnect is unfathomable.

Unfathomable.  That is pretty strong language from a lawyer who has had to purchase the services of outside firms and at the same time  remain accountable to her corporate client.  Unfathomable.  For outside firms to ignore that disconnect any longer is to ignore the need to adapt or die.

Dessalines points out that historically, the billable hour was a function of recapturing an outside firms overhead plus a profit.  But the market now recognizes that the costs of services as determined by the seller is a proposition completely divorced from the value of services as perceived by the buyer.  And the latter is the only thing the buyer really cares about in the end.

Dessalines writes:

“Why should a client pay for a firm’s marketing costs, or phone bill or taste in art, or for any overhead cost? What correlation is there between the firm’s overhead and the value of the services delivered? There is none. And corporate clients know it.”

Alternative fee arrangements, and sophisticated means of measuring value are now commonplace.  To compete, outside law firms must offer value and predictability to their corporate clients, including insurance companies, which remain a major purchaser of outside legal services.  Value pricing, Dessalines observes, is gaining traction.  And in the face of the economic realities of today’s legal marketplace, how could it not be?

A new economic model for the pricing and delivery of legal services requires alternative fee arrangements.  Reach me for more information on how to deliver or purchase outside legal services more efficiently.

Re-Pricing Subrogation Litigation For The Benefit of Clients

outside-counsel

The  beauty of alternative fee arrangements are that they are alternative — the flexibility they provide make them useful in a number of contexts, and  in a number of different sizes (from the single assignment to a large block of work).   That flexibility can be applied to subrogation matters insurers often assign to outside counsel.

Traditionally, such assignments are handled on a simple contingency arrangement, or a flat fee basis.  Certain larger subrogation assignments can be assigned out by insurance company legal departments on an hourly basis as well.  Insurers are interested in other arrangements, however, which can increase their net recovery, which is a nice way of saying cut the costs of acquisition.  Outside subrogation lawyers are a large cost of acquisition.

Enter again the alternative fee option.  We recently quoted a monthly flat fee arrangement on a mid-size property subrogation claim.  There is an overall cap on the number of chargeable months (and therefore the maximum legal fee), and that cap number represents a sufficiently small percentage of the potential  subrogation recovery so as to be attractive to the insurer who was looking for a fee quote.

At first blush, the arrangement would seem to be less efficient than a contingency fee arrangement- it looks as if the outside law firm has an incentive to stretch out the duration of the subrogation case to maximize their fee.  But this suspicion ignores two patent realities: 1.) it is far better business to turn a subrogation case around in three months than three years, because it will lead to additional assignments; and 2.) insurance companies have so much subrogation work that they know the reasonable life span of any given subrogation matter, and therefore how their outside law firms compare to those norms.

Insurance company legal departments face cost pressures today like no other time.  Fee arrangements on subrogation cases which give insurers a means of increasing their net recovery, when compared to contingency, flat, and billable hour arrangements, will become increasingly attractive.  Lawyers and firms looking to keep the subrogation business they have, or to increase their market share, will have to offer something more than the traditional subrogation fee arrangements.

Dollarize The Benefit Of Alternative Fee Arrangements For Clients

economics

In house legal departments are all under the imperative to spend legal expense dollars more efficiently.  At the same time, they may also be wary of trying new fee arrangements with outside firms, unsure of whether or not they will “win” the gamble.  It does not, however, have to be a gamble at all.

Good outside law firms should be feeding back data to their clients on how alternative fee arrangement’s are working.  Where positive, this feedback will only encourage the client to put the arrangement into wider usage.  Where negative, it should be the basis of renegotiation for the benefit of the client, to arrive at an arrangement which does what the outside law firm promised to do:  reduce legal expense.

Here is an excerpt from a recent feedback report sent to a client on how a monthly flat fee subscription arrangement was working out for them.  It is a report in-house departments would all like to see, and should be demanding from their outside lawyers:

Dear _______ and ________, 

I thought you might like an update on how you were doing by using the monthly flat fee subscription arrangement  we piloted on some new assignments you have made.  I hope you will be pleased with the results: 

Case           Hourly                Flat                     Savings

A                 $4,621.00          $3,900.00         $821.00

B                  $5,587.00         $2,925.00          $2,662.00

C                  $2,554.00         $2,985.00         -$431.00

D                  $3,926.50         $2,925.00           $371.50

 

TOTAL       $16,058.50        $12,635.000       $3,423.50

SAVINGS         21.32%

What jumps out at me  is not so much the savings — although that is a good thing — but the leverage the arrangement could provide when scaled up.  In other words, the wider you put the fee arrangement into usage, the more money you are likely to save in legal expense, which is one of the key imperatives of claims and legal departments in this day and age.  Hypothetically, if this arrangement were applied to $200,000.00 in legal expense under the traditional hourly arrangement, you would cut this expense to $160,000.00, a savings of $40,000.00.

We wanted to make sure you knew that we were not merely making promises on the fee arrangements upon which we could not deliver.  It appears the arrangement is saving your department money, which is what any good outside law firm should be trying to do for you in this highly competitive environment.

We hope you are pleased, and we are happy to put the arrangement to wider use whenever you believe it is wise to do so.

 Thanks, as always, for your business. 

CJ

Share the news, good or bad, with in-house legal departments to help them to the job they have been charged to do:  handle the company’s legal matter faster, better, and more efficiently.  It can only help.

Alternative Fees Case Study: Flat Monthly Subscription Fee Arrangement’s First Birthday Party

firstbirthday

Innovation is worrisome to outside law firms.  In most cases, at best it is given passing lip service as part of the DNA of any law firm attempting to keep pace with the changing market of working for in house legal departments.  At worst, innovation is the object of secret fear and loathing.  The billable hour is comfortable, predictable, measureable.  The problem is,  your clients don’t care about that.  You are in business for them, not the other way around.

But to all of those in secret fear of innovation and giving alternative fee arrangements a try, take heart, and be not afraid, for I bring good news.  In actual, real-life practice, the flat monthly subscription alternative fee arrangement works, and is popular with in house legal departments looking for greater cost control over outside legal fees.

In the past year a large, multi-state errors and omissions insurer was looking to its outside counsel to offer alternative fee options.  I matched them up with the monthly flat fee subscription arrangement with limits on the duration of the subscription for the matters they assigned us.  At the time we were doing work for this legal department in only one state – Pennsylvania.

The mechanics are straight forward – I conduct a brief review of every new assignment to get a sense for the size and probable case duration, and then provide the in house legal department with a quote for handling the case, expressed in a set payment per month with a maximum duration of months.  Each side can request to renegotiate the case duration if there are major changes in case complexion during the life of the case.  Trial prep, trial, and appeal are separately negotiated if necessary on either an hourly fee or flat fee per day basis with parameters on the number of agreed upon days, at the option of the client .

We are now a year into the program, and  we are now working for this insurer in five states, not one.  They have fed back to us the following about the program:

  • the primary benefit to this insurer’s claims operation is the injection of some cost – certainly into an inherently cost-uncertain endeavor — litigation;
  • cost-efficiency of the subscription arrangement grows with the number of assignments made on that basis;
  • they like the billable hour comparison data we provide so they can compare the relative cost, and benefits received, by the monthly subscription arrangement;
  • they enjoy the ability to adjust the subscription duration should new developments in the case, changes in parties, etc., take place during the life of the case; and
  • they appreciate the fact that we often “no charge” them for any months in which no substantial work takes place due to factors beyond our control, and they are willing to extend the subscription duration for a corresponding length in exchange.

Innovation in outside law firms can be taken beyond merely lip service.  It can be put into practice when it comes to alternative fees, and it can be successful for both the lawyer and the client.

For more information on how to deliver efficient, and cost-effective service to  your in house legal department through the use of flat monthly subscription and other alternative fee arrangements, reach  me at chaddick@dmclaw.com or 717-731-4800.

The Economics of Loyalty: Why In-House Legal Departments Can’t Afford To Be Nice All The Time

economics

I turned 51 today.  So I consider myself  a Tweener when it comes to the practice of law:  I am not so old yet to be considered one of the Old Guard Traditionalists, but I am too old to be considered New Blood.  This  gives me a unique perspective of both traditional thinking  about the relationships between law firms and in-house legal departments, and the new reality which doesn’t seem as friendly as collegial as the Old Guard Traditionalists remember it.

I confess I lean a little toward the Old Guard Traditionalists, because I can recall a time when in house legal departments for insurance companies and corporate clients, after a law firm delivered them a defense verdict or a well below case authority settlement, would complain that the bills were not sufficiently large in comparison to the result which was obtained.   Admittedly, this is a distant memory, but it is a memory just the same.

But because I  know and recognize this as a distant memory, I recognize the current reality younger lawyers in outside firms face in working for in house legal departments, and in desperately try to retain work from those departments, and to keep those departments satisfied.

It can become circular discussion.  The Old Guard Traditionalists in  outside firms bemoan the lack of loyalty from clients, some of them previously long-standing ones.  For their part, the in house legal departments bemoan the lack of efficiency and responsiveness of their roster of outside law firms in a patently changing marketplace.  The New Blood wonders which came first in this dialogue, the chicken or the egg?

My perspective as a Tweener is that the latter question doesn’t matter, and the former confidence of the Old Guard Traditionalists in the virtue of their position  about the decline in client loyalty is just as irrelevant.

Which comes first, the chicken or the egg?  The Client.

In house legal departments have always had purchasing power.  They have in the distant past simply not used this lever, a lever they have had all along.  They could afford the luxury of loyalty.  Today, however, in the pressure of the marketplace from both without and within, General Counsel’s offices simply cannot afford to ignore efficiency, responsiveness, and cost – effectiveness.

They will always like you if you have had a good relationship with them.  That is not the question any longer.  The question is can they afford to do business with you?  Do you provide them value over and above the value they give to you in the form of fees?  Are you responsive to requests for alternative fee arrangements, volume discounts, and adherence to budgets and litigation management plans?  Do you give them a straight line plan to their result, or are you simply going to follow a litigation script by rote?

I have spent more than 25 years in an outside law firm, so what I am about to say is at most an educated guess.  I would wager that if in house legal departments could , they would simply operate on the principle of loyalty also.  After all, it is easier for them too, to work with lawyers they have used for a long time, and whom they like.  But they can no longer afford to measure suitability and to  do things that way, and neither can the outside law firms who work for them.  Efficiency and value must be delivered.  Those benchmarks will be rewarded with client loyalty.  Length of service is no longer the metric.

Those are the Economics of Loyalty in today’s legal marketplace.

For more information on how to deliver efficient, and cost-effective service to  your in house legal department, reach  me at chaddick@dmclaw.com or 717-731-4800.

Subscription Flat – Fee Efficiency Comes to Insurance Litigation and Non-Litigation Matters

subscribe

“Adapt or die….”

Billy Beane, Moneyball

As insurance company legal departments continue to feel organizational pressure to improve efficiencies in the  engagement of outside law firms, many outside firms lag behind in adapting products and services to meet this need.  Those firms who have, however, risen to meet the demands of the market continue to innovate.  Subscription fee arrangements are one such innovation.  Under these arrangements, in which clients pay outside firms an monthly flat fee  subscription  for legal services, provide much – wanted control over expense, and help insurers’ legal departments convert variable costs into fixed ones.

We have discussed a broad range of alternative fee innovations in these pages many times in the past.  Subscription fee arrangements represent a narrow but powerful segment of this range.

Rather than pay outside firms by the hour, a referred matter, litigated or not, is quoted by the outside firm at a flat monthly price.  Assignments with a shorter life span of 60 days are simply quoted on a flat rate fee basis.  Most litigated matters are quoted with a cap on the number of months the subscription fee is to be paid.  Both the lawyer and client agree, however, to be open to reasonable adjustments  of the length of subscription, especially in cases of unforeseen circumstances, delays, as well as events which may shorten the life of the assignment.  Trial preparation and trial are billed separately, either on an hourly basis, or an after-negotiated flat rate per day quote.

For comparison purposes, our firm provides clients with a statement of what a subscription fee matter would have cost if it were billed hourly.  This data is used not only to demonstrate extra value provided to the client, but to make adjustments in the monthly subscription fee, if necessary, in similar future assignments to make sure the client is satisfied with the arrangement.

The subscription fee arrangement is also scalable.   Assignments can be negotiated in blocks for a single subscription fee, for example, and volume subscription discounts can also be offered and agreed upon.

Subscription flat fee arrangements are win-win for both legal department and outside law firms.  Firms are encouraged to handle matters quickly and efficiently, and insurance company legal departments can migrate a large portion of outside legal expense to a fixed cost as opposed to a highly variable one.

Reach  me at chaddick@dmclaw.com or 717-731-4800 for more information on how the use of flat fee subscription agreements in insurance litigation and non litigation matters can create efficiencies for your legal department.

Outside Counsel Re-Packaged and Re-Focused: Four Pillars

PILLARS

If your outside counsel has not worked on re-purposing how their services  are delivered to suit your needs, you are entitled to ask why, and to ask them to get to work on doing so.  In-house legal departments in the current market are entitled to value in at least four key areas:

1.  Monthly Access to Counsel at No Cost For Questions on Miscellaneous or on-Assigned Matters – My clients each have several hours per month of free phone consultation time, analysis, or research on any subjects of their choosing.   A good client who invests their money in you to represent them in paid matters is entitled to be able to pick up the phone or send an email with a random or miscellaneous question without worrying about the meter running.  It is a way to provide value to good clients, and a way to encourage them to reach out and stay in touch to take advantage of the benefit.

2.   No-Cost Quarterly  At-Client “Office Hours” – This is an extension of the no-cost consultation service.  My clients each get eight hours per quarter of my spending time in their offices, where I can assist and consult on matters of importance, provide updates or continuing education on topics of interest, or to listen and learn about the legal department’s or company’s goals and objectives, and to discuss how we might assist the client in achieving those goals.  It is a great way to learn more about a client’s DNA and institutional culture, so that legal services can be aligned with those things.

3.   Alternative Fee Options, And The Willingness To Negotiate Any Fee, Any Time – I have posted about the complex subject of alternative legal fees many times, and have a page dedicated to describing many popular alternative fee options.  Clients like the ability as they assign matters to outside counsel to toggle back and forth between traditional hourly rate arrangements and alternative fee proposals based on the nature of the matter assigned.  The only real rule here is absolute flexibility.  The client should be given the option of deciding which fee approach they feel is best for them at the outset of assigning a matter.

Outside counsel  should be open always to adjustments in the fees as a case or matter proceeds.  Circumstances change, cases can take unexpected twists and turns, and an in – house legal department should never, never feel locked into an unfavorable fee agreement after circumstances material change.  Setting legal fees is NOT an adversarial process between outside counsel and general counsel;  rather, it is a collaborative one.

4.   Re-Thinking Hourly Fee Engagements To Provide More Value – Some clients still prefer engaging outside counsel by way of a traditional hourly fee deal.  At the same time, however, in addition to the extras discussed above, they are also looking for value from outside counsel even under these engagements.  We have re-packaged our hourly fee engagements with legal departments, and re-thought how they should operate.

Our clients have begun to regularly see “No Charge” line items in their invoices.  Under our re-vamped hourly rate system, clients are not charged for routine letters and phone calls, and  charged only for substantive work which moves a matter forward.  In that way, a client feels like it is paying only for value received, not merely a ticking clock.

All of these pillars serve the same goals:  First, these features encourage clients to reach out to outside counsel on non-assigned matters, and feel like they are partnering together to serve the common goal – the client’s interests, without necessarily worrying about cost.  Second, these features provide value to clients on the matters which are formally assigned to outside counsel.

To put these advantages to work for your in-house legal department or office of general counsel, reach me at chaddick@dmclaw.com or 717-731-4800.