Category: General Counsel / In-House Counsel

“Nature is pleased with simplicity. And nature is no dummy.”
― Isaac Newton

Above all things, clients do not want headaches.  They certainly don’t want headaches from their outside lawyers.  After all, outside lawyers are supposed to fix headaches, not cause them.  So amid an increasingly roiling sea of alternative fee arrangements, the simplest alternatives may stand out as the most appealing to legal departments who engage outside counsel for litigated and non-litigated matters.

And, believe it or not, some legal departments are reticent to  dispense with the hourly fee altogether, fearing that they may well be trading one gamble with outside counsel  for another:  a flat fee, for example, can under the right circumstances be a worse deal for a client than a high hourly rate, i.e., the bad faith or coverage case that is dismissed early, or settled within 60 days.

Enter the hourly fee with caps concept, an arrangement which not only provides simplicity, but allows legal departments to have their cake and eat it too.  Under the arrangement, outside counsel is engaged under a traditional hourly arrangement, but a cap is agreed to and put into place.  The cap can either be a single cap for the entire engagement, or it can be broken down into separate caps  for each phase of a case.  Caps ensure that the legal department has cost control over the matters it refers out to counsel.  It provides some muscle to legal project management, and not merely lip service.

If a legal department sends out a matter which outside counsel gets dismissed at the pleading stage, or resolves within a couple of months, the client gets the benefit of that speed, efficiency, and reduced expense — it pays only the hourly fee for the minimal amount of work.  At the same time, should a matter take a more protracted course, the client still has the cost control and budget certainty which either an overall fee cap, or phased fee caps,  provide.

One caveat:  as with all alternative fee arrangements, both the legal department and outside counsel must have a level of trust and goodwill which allows for adjustment and renegotiation of the fee mid-course, should their be a sufficiently large and unforeseen change in circumstances to warrant doing so.  The adjustments, however, can only be made if the client is agreeable to doing so, and should be the rare exception to the arrangement, rather than the rule.

For more information on how to put fee caps to work for your legal department to reduce costs and fine tune legal project management budgeting, reach me at chaddick@dmclaw.com or 717-731-4800.

It is a dangerous thing for a lawyer to put his fate, even partially, in the hands of his client – the lawyer is used to having it the other way around.  For centuries, lawyers have always set their value, and disclaimed the risk of a bad result, placing it squarely on the shoulders of their customers.  (I do not chose and use the word “customers” lightly.  Clients, especially legal departments,  are in this day and age customers in the truest sense of the word:  discerning buyers with pricing power.  Those lawyers who fail to approach clients as customers risk being left behind.)

The billable hour arrangement swims hard against this tide of modern reality, and is faltering against the strength of the current.  Hourly rate engagements seek to dictate value to the customer in a top-down manner, and in  an age when customers have the capability and desire to assess and decide value for themselves, and use that data to hire outside law firms.

As lawyers read this, especially older ones, they are likely to feel a tightness in their throats and to see their own knuckles whitening.  The thought of sending a bill out to a client and giving the client the power of even partial veto over that bill is to them rather like paying the cable TV  company based on whether the viewer liked what she watched, and how much she liked it.  Preposterous, right?

Wrong.  They day has arrived when lawyers, including old ones and very good ones, must face the reality that clients want and expect to have far greater influence on how they compensate their outside law firms, and how that compensation should be linked to something other than merely the time expended.

There are at least two reasons to do so.  First, legal departments are already  exercising such control, with auditing departments and third party auditing vendors poring over and oftentimes unilaterally adjusting invoices.  And second, those lawyers not willing to cede this power to their customers are going to be either passed over on the legal departments panel lists, are removed from the lists altogether.  Lawyers have no choice; and to believe they do have a choice is to risk extinction.

The Nuts And Bolts of Client Value Adjustments

There are a number a ways to place greater value control in the hands of the legal departments who engage outside counsel.  The two most prominent ones at this stage of the game, however, are holdbacks, and value adjustments.

Under the holdback system, a percentage (usually in the range of 10%-25% or 30%) of the total fee paid to the outside firm , whether via hourly arrangement or an alternative, is held back until either a specific case goal is reached, or the conclusion of the matter.  The client then has the authority to pay some, all, or none of the holdback to the outside law firm, based on the value the client believes it received.

The value adjustment method is similar, but not identical, to the holdback method.  Under the value adjustment approach, clients are given authority over any invoice to adjust an invoice downward or upward by an agreed upon percentage (again usually 10%-25% or 30%) based on the value it feels it received  during the period covered by the invoice.

Why Give A Client So Much Pricing Power?

Outside law firms who have been compensated for decades by the billable hour simply don’t have their interests sufficiently aligned with those of their clients.  Where the client wants fast, efficient and inexpensive, the outside law firm compensated hourly has interests which, while not diametrically opposed to speed, efficiency, and cost-consciousness, are sufficiently opposed to those goals to  have led legal departments to question the arrangement, and to move toward something better.

Holdbacks and client value adjustments allow lawyers and clients to realign their interests in the same general direction, to jointly shoulder the risks of poor performance and bad results, and to restore the feeling that the legal department and the outside lawyer are in the same boat, and rowing in the same direction.

When I started practicing law more than a quarter century ago, law departments at insurance companies and corporations only cared about one “W” when they engaged outside law firms – the “What.”  What results were delivered?  What was the outcome?  What was the verdict?  What deal was negotiated to settle?

The days of the single “W” are long gone, however, and now, General Counsel and the legal departments they shepherd are looking for answers to four  W’s (and one H) — who, what, when, why, and how.   The outside lawyers and firms which answer all of those questions most to the OGC’s liking are the lawyers and firms who will continue to garner business and new assignments.

Results still matter, of course.  But they no longer matter in an absolute vacuum:  a good result delivered by overstaffing (who), delivered too late (when),  delivered  inefficiently or against the client’s  larger mission (why, how) will simply not be considered a good result.

Good outside lawyers and firms keep an eye on all of these elements – and strive to provide value from  all 360 degrees:

• Legal Project Management (LPM) – including action plan, budgeting, and forecasting;
• Continual analysis, communication, and refinement in a dialogue with the client about changing goals and needs;
• Flexibility, including in agreeing to alternative fee deals at the beginning of a matter, and even to modify the arrangements should circumstances change;
• Demonstrating an understanding of the Legal Department’s goals, the company’s goals which they serve, and attempting to align legal representation with those goals.
• Innovation, helping your client see a need for new models and arrangements before they may see the need.
• Getting to the best result sooner, cheaper, better, and more efficiently.

The modern, outside law firm can survive on providing an excellent What anymore — they must also satisfy the legal departments for whom they work by meeting or exceeding expectations as to  Who, Why, When and How as well.

From Legal Project Management (LPM) to the arrival of Legal Operations Officers at Legal Departments, insurers have become far more discerning and discriminating buyers of legal services than ever before.  Technology allows for any number of measurements of the performance of outside law firms, and therefore comparison of outside law firms.

Should this data be kept secret? Not if the insurer truly wishes to incentivize outside lawyers become the kind of lawyers the metrics are designed to create in the first place.

There are concerns, of course, about disclosing proprietary data, and information regarding other firms.  These issues, however, are easily addressed by 1.) providing metrics outputs to lawyers and law firms, not the methodologies and 2.) showing the outside lawyer or firm how it stacks up against averages, or par, as opposed to providing data on other lawyers or firms.

For an insurer to measure the data and not use it to influence outside lawyers toward the benchmarks the insurer is aiming for is to use but half of the tool.

The metrics themselves are as diverse as the objectives, but some of the more popular ones are:

• Cycle Time  – how long a case takes from assignment to closing
• Return on Investment – how much exposure was eliminated or reduced in exchange for payment of legal fees to defend a claim.  (This can also be an effective marketing tool for a law firm:  I was able to demonstrate to a large national insurer that over the course of several years that for every dollar they invested in legal fees,  my firm was able to eliminate six dollars in corporate contingent exposure.)
• Leverage  – similar to ROI, a measure of dollars spent in relation to dollars at stake. Designed to prevent lawyers from killing flies with sledgehammers.
• Overall Grade – somewhat subjective, but a great overall metric which allows General Counsel to grade how their outside lawyers are doing

We will delve into metrics in more detail in a future post.  In the meantime, remember that what can be measured can be used to steer outside lawyers in the direction the insurer wants to go.   Good outside lawyers will neither mind being measured, nor adjusting their performance to suit the insurer’s needs.

CJH