Control Outside Legal Costs By Building Fee Caps Into Outside Representation

feecap

It’s no secret that the biggest fear any in-house legal department has with engaging outside law firms in handling matters, especially litigation matters, is the fear that there is no way to know when the billing will end, and how high it will be when it gets there. This can commonly be referred to as The Runaway Train Syndrome.  Every in-house lawyer or general counsel reading this is nodding in agreement.  They have met the enemy, and it is outside law firms charging exclusively by the hour, with no objective or external controls ensuring proportionality between the price paid, the result delivered, and the timeliness with which the result was delivered.

The concept of fee caps, and the notion that there is always, up front, a known end in sight, is not only the perfect antidote to Runaway Train Syndrome, it is also the Swiss knife of legal fees.  Fee caps are so universally useful, in fact, that they can be put to use in billing arrangements  ranging from traditional billable hour fee arrangements, to newer, alternative fee offerings to give those who pay outside law firms the ultimate in cost-certainty.

Set an overall fee cap on top of a billable hour arrangement, for example.  Immediately, the outside law firm’s disincentive to accelerate an outcome disappears.  The incentive has aligned much better with that of the client – to deliver the requested outcome within budget, and within a reasonable time.  In this type of arrangements, the fee cap can be as simple as an overall matter total fee cap, or an annual fee cap, subject to an overall cap on the number of months or years a matter can be charged.

Fee caps can also  be used in alternative  billing arrangements to give the client some measure of clarity as to when a matter might reasonably  be concluded, and what the total project cost is going to be.  A good number of insurance clients I work with are using flat monthly fee agreements to retain me, and those fee agreements are always subject to an overall cap on the number of months for which they will be obligated to pay the flat fee.

Fee caps also do not eliminate flexibility to accommodate unforeseen circumstances as an assignment proceeds.  Both sides should remain free to re-negotiate caps upwards or downwards as case circumstances change.

If you are not already using fee caps to accelerate outcomes and reduce your outside legal expense, you should give them a try to see how much cost-control they can deliver.

CJH

 

 

What Two Roofing Companies Taught Me About Pricing Legal Services

Roofers On The Roof.

My wife and I recently downsized into a house we love, except for the roof we had to replace.  What ensued as I sought estimates from two roofing companies was a signal lesson to me about what clients want from their service providers, including law firms.  I was put in the rare position of calling the shots — I was for the purposes of this roofing job, the client.  What power.

Here’s how it went:

Company A’s estimator was a no-nonsense guy, who did a thorough tour of the roof and handed me a simple, one page estimate for X.   On the spot.

This number — X — was fairly close in my mind to what I would have to reasonably pay for a new roof.  I’d rather get the new roof for nothing, of course, but X made sense to me on a gut level.  It felt like a fair price to pay for what I was getting.

Company B’s estimator, on the other hand,  was nice also,  but a little more polished.  He handed me a glossy brochure after looking the roof over,  and said he would email me his estimate after he got back to his office and “did some satellite measurements” of the roof surface area.  A day later I got an estimate.  For 2X.

I didn’t like 2X as much as I liked X.  Company A got the job because Company A’s pricing made more sense to me.  It was lower, yes, and that certainly didn’t hurt, but a bid can become so low that it is no longer credible.  This bid was not so low.  This bid was  credible.

And thus, here is what the endeavors of laying shingles and hanging a shingle have in common, and what I learned from the experience:

  1. Some roofers (and some lawyers) will price their services based on what they think they can get away with — the highest possible number  which gives them what they perceive is a chance at the business.
  2. The more successful roofers (and lawyers) price their products and services at a level which is very close to the client’s perceived value of the result to be delivered.  The price is not directly or necessarily linked inexorably with the amount of time it  takes to produce the result, but rather the result itself.

The lesson I share here  is a mildly damning indictment  of the  billable hour to the extent that the billable hour creates disunion between price and result.  The billable hour is a wonderful tool for lawyers who want to maximize what they can get out of a client.  Value-based pricing, on the other hand, is the better tool for lawyers who are trying to price their services  to match the client’s perception of the value they are receiving.

Which pricing model do you think the clients prefer?

With the exception of the legal and consulting fields, customers largely pay for outcomes, not inputs.  This outcome-based pricing has made its way into how lawyers charge for their services.   Jim Savina, General Counsel of Kraft Heinz Co., said the following about the billable hour  in an interview earlier this week on Law360.com:

I have to think there is a better way to correlate price paid with value delivered, while aligning incentives to outcomes. I want my firms to be thorough and conscientious, but I never want them to spend five hours doing what they could do in one. The billable hour rewards them for doing so. I would rather reward firms for delivering the outcome at a rate that would be three times their billable rate. I have to think firms have access to data they could mine to develop those types of “win-win” arrangements in lots of areas.

And I would rather pay, and I did pay,  a roofing company the value of what that company did for me, as opposed to what the company thought it could get away with charging me.  That is the essence of pricing based on value,  which sophisticated clients will continue to demand.

 

Monday Morning Wakeup Call: A Note No Law Firm Has Ever Sent To An Insurance Company Client (Until Now…)

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The following is a true account — only names have been withheld to protect the identities of the parties.  My identity is left in, because — well, because I’m the guy who writes this blog, and because I’m trying to sneak a pat in on my own back, maybe.  Indulge me for three minutes.

There is a demand in the client marketplace for law firms to get beyond the billable hour.  But there is also fear and  trepidation of the unknown, on both sides.  Cutting edge law firms must, therefore offer not only  innovative pricing alternatives, but also metrics and data with those alternatives, to show the client that it is benefitting from the new arrangement.  Even beyond that, the law firm must show the client how much it is benefitting compared with the old way of doing things.

So without further adieu, here is an actual email which left my office last Friday afternoon.  On the surface, it is a routine update to an insurer I represent about the metrics of an alternative fee program we developed and implemented to align with their business goals.   But read on nevertheless, there is news here :

Hello All,

The most recent metrics on our flat fee program with you are showing us you are currently realizing about an 8-10% savings on all open matters, compared to the traditional hourly arrangement. We’d actually like to see you do a little better than that, and get you closer to 15% and higher.

So please get ready to read something no law firm has ever written to you before….Beginning next month we are cutting the flat monthly fee payment on all open matters by $125 to make sure the flat monthly fee program delivers better value to you, and moves us closer to  hitting that benchmark of at least 15% in reduced outside  legal expense.

You do not have to do anything on your end. You will simply see the reduced payment on your next round of invoices. And remember, the more you utilize the arrangement, the more cost control you are going to have over your outside legal expense. We will continually monitor and feed back the data and make sure you are receiving value in the alternative monthly flat fee program.

Thank you, as always, for your business.

CJ

This actually happened last Friday, and as it did, three things occurred to me about delivering value and better pricing models to corporate clients in an increasingly competitive business environment:

  1. Lawyers must make a leap.  Nothing is fatal.  Nothing is irreversible.  Everything is adjustable.  You will never remove 100% of the variables, and if you wait for that point to get started, you will simply never start, and  clients will be working with law firms which have started.
  2. Measure What You Are Doing.  This does not require floors and floors of mainframes and data analytics personnel.  Track a few items:  what your client is paying under an alternative fee deal, and what your client would have paid had the engagement been hourly,  for example.  Compare those two numbers, and… Presto!  You are now in the analytics business.
  3. Share What You Measure With Your Client.  If your alternative fee arrangements are helping your clients improve their bottom  line and helping them meet their goals, you would be foolish not to give yourself the free advertising you get by sharing that data.  And if the numbers aren’t working out, the only way you are going to adjust it and keep a happy client is to show them the data to discuss making an adjustment about which both sides feel good.

Let me close by asking the question I am certain you would like to ask me right now:   are you some kind of idiot?  Losing money on a client as it is, and making a decision to lose it faster? That’s very, very, bad business.

I am NOT a philanthropist, and despite what my kids might tell you, I do not believe myself to be stupid.  So what am I really doing here?  Think big picture for a minute  and let’s  revisit the most important win-win sentence of the note I sent:

“And remember, the more you utilize the arrangement, the more cost control you are going to have over your outside legal expense.”

Clients will not do business with you unless you are helping them with their bottom line.  It is written nowhere, however,  that this exercise  has to be is a zero sum game with one winner, and one loser.  In today’s business environment, lawyers and law firms have to find ways to create two winners, starting always with the client, and working outward from there.

It can be done.

 

Dickie, McCamey & Chilcote’s Insurance Law Practice Group Named One of the Nation’s Best for 2018

U.S. News Best Law Firms

Dickie, McCamey & Chilcote, P.C. received six national practice area rankings in the 2018 “Best Law Firms” list published by U.S. News & World Report and Best Lawyers®, which included the firm’s Insurance Law Practice Group.   The  firm’s inclusion in these rankings reflects the high level of respect a firm has earned from leading lawyers and clients in the same communities and practice areas for its ability, professionalism, and integrity.

The U.S. News – Best Lawyers “Best Law Firms” rankings are based on a rigorous evaluation process that includes the collection of evaluations from clients, peer review from leading attorneys in their field, and review of additional information provided by law firms as part of the formal submission process. Clients and peers evaluated firms based on the following criteria:  responsiveness, understanding of a business and its needs, cost-effectiveness, integrity, and civility, as well as whether they would refer a matter to the firm and/or consider the firm a worthy competitor.

About Best Lawyers®
Best Lawyers is the oldest and most respected peer-review publication in the legal profession. A listing in Best Lawyers is widely regarded by both clients and legal professionals as a significant honor, conferred on a lawyer by his or her peers. Our lists of outstanding attorneys are compiled by conducting exhaustive peer-review surveys in which tens of thousands of leading lawyers confidentially evaluate their professional peers. Lawyers are not permitted to pay any fee to participate in or be included on our lists.

About Dickie, McCamey & Chilcote, P.C.
Dickie, McCamey & Chilcote, P.C. is a nationally-recognized law firm providing comprehensive legal expertise in a multitude of practice areas. Headquartered in Pittsburgh, Pennsylvania, and founded more than 100 years ago, the firm serves industry-leading clients across the country from offices throughout the mid-Atlantic region in Pennsylvania, Delaware, New Jersey, New York, North Carolina, Ohio, South Carolina, West Virginia, the Southwestern region of California, and the Rocky Mountain region of Colorado.

CJ Haddick is the Director In Charge of the firm’s Harrisburg, Pa., office, and he heads Harrisburg’s Insurance Law Practice Group.  Reach him at chaddick@dmclaw.com or 717-731-4800. 

Flat – Rate, Quick – Turnaround Insurance Coverage Opinions: An Idea Whose Time Has Come

efficiency

Once upon a time an insurance executive who asked me to prepare a coverage opinion and a draft declaratory judgment complaint sheepishly asked me, “Can I get this in two to three weeks?”  I don’t get this question anymore.

Why?  Because in most cases the quickest line between an insurance executive and the coverage opinion he or she needs is a direct request to oftentimes-overworked in-house lawyers.  Seen as the lesser of two evils, the in- house route is perceived as slightly less costly in terms of both time and money.

A frequently expressed theme at www.badfaithadvisor.com  is that the market for outside legal services is changing in ways not even considered a few short years ago.  Insurers, to the extent there is budget or allowance for outside legal services at all, want the outputs faster and cheaper than ever before.  Legal problems are not only legal problems any longer — they are business problems.  And part of the business problem is obtaining  what is purchased from law firms quicker, and at lower cost.

Changing products and services must meet the changing conditions, or outside law firms will lose their usefulness.  Enter into the marketplace the fixed-cost, fixed delivery date insurance coverage opinion.   It is proving to be extremely popular with clients,  who find it to be an even  cheaper and better alternative than to having the work done in-house.

Innovation is not necessarily invention:  it is simply aligning supply with changing demand, and the fixed-fee coverage opinion does this with its pricing model, and with a guaranteed delivery date of usually as little as three to five business days.  Depending on the complexity and the coverage issue, and the volume of materials to be reviewed,  a client is proposed a single price for a complete coverage opinion and a guaranteed delivery date.  Priority 24 and 48 hour options are also available, also at a quoted, fixed fee.

Under the arrangement, the client is given dual cost control:  control over the financial cost of obtaining and opinion, and perhaps as importantly, control over the cost of time it takes to obtain it.  The life force of Perceived Value is breathed back into a transaction which, at a routine hourly rate arrangement, was and is flagging in the marketplace.

If you don’t have access to outside law firms who can deliver insurance coverage, case evaluation,  or other legal opinions to you in a matter of days for a quoted price, you will improve your efficiencies, and solve both business and legal problems, as soon as you do.

For more information on taking advantage of fixed fee, guaranteed-on-time coverage, case analysis, and legal opinions, contact me at chaddick@dmclaw.com or 717-731-4800.

 

 

 

 

Alternative Fee Program Data Shows As Program Matures, Clients Realize Savings On Outside Legal Expense

efficiency

Here is an actual set of alternative fee numbers I’ve just happily provided to update one of the insurance clients I represent, demonstrating that an alternative fee program is saving them money on outside legal expense.  Real money.

Listed below are data for seven insurance related  cases I am handling under a monthly flat fee program (with a cap on the number of months the flat fee can be charged, so as to encourage efficiency).  First a look at the numbers, and then a few quick observations.   Only the case names below are changed to protect identities.  The numbers are 100% actual  and show actual flat fees paid by the client versus what they would have paid under an hourly rate agreement.  Green numbers in the Net Diff. column represent savings to the client.

Case            Hourly Fees      Flat Fees       Net Diff.

Smith        $17,218.50       $25,350.00       $8,131.50

Jones         $30,433.00        $13,650.00     -$16,783.00

Ajax           $2,212.50         $2,775.00         $562.50

King          $4,781.00          $1,950.00       -$2,831.00

Queen       $2,157.50         $895.00            -$1,262.50

Western   $4,074.50         $2,925.00         -$1,149.50

Atlantic   $351.00            $2,775.00        $2,424.00

Total         $61,228.00     $50,320.00     -$10,908.00

Client Savings:            -17.8%

Before the observations, a caveat:  This data, at any given time, is a snapshot in the life of an assignment, and/or group of assignments.  The data changes, but as the assignments mature in terms of their life cycle, a clear picture emerges:

  • Overall the client savings in this alternative fee program approaches 20%.  As the data set increases, the savings  ratio will stay relatively stable, but the real dollars saved in outside legal expense will grow, and grow, and grow.  A company with a million dollars a year  in outside legal expense based on hourly engagements would spend only $821,846.21, a savings of nearly $200,000.00.
  • The insurance clients are “winning” more fee agreements than they are not “winning.”  This is a sign that the alternative fee program is rightly priced so that it is both 1.) an real financial benefit for the client, and 2.) not a financial hardship for the outside law firm.
  • The program retains extreme flexibility, as each assignment is quoted independently (although the quotes generally do cluster closely for similar type cases) and either side retains the right to seek adjustment as the matter proceeds.  Clients also reserve the right to request the traditional billable hour arrangement for any case which they feel does not suit the alternative fee program.
  • There are and there will be outliers in any alternative fee program.  But as you can see from the data, the outliers are rare — in the two cases with  more than a $5,000.00 difference between what the client paid and what the client would have paid, one benefitted the client, and one benefitted the law firm, but the client benefitted twice as much as the law firm when the two outliers are aggregated.  Win-win-win.
  • The program provides simultaneous double benefit to the participating client:  1.) the client gets the benefit of outside counsel with local knowledge and expertise;  and 2.) the client secures this quality at less than hourly rate pricing.

I cannot think of any CEO’s, CFO’s or any other XXO’s who would not like their General Counsel to approach them with an immediate simple way to give their outside legal expense a 20% haircut, while at the same time retaining the right to assign any matter under a flat fee or traditional billable hour arrangement.

I also cannot think of a General Counsel for whom I have ever worked who would not want to take the alternative fee arrangement mechanism I’ve  outlined above for a spin, if it meant retaining the desired law firm at reduced cost.  There is literally nothing to lose except 20% off your outside legal expense budget.

CJH

 

Re-Purposing The Free Initial Consultation For The Benefit of Insurers and Corporate Clients

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Alternative fee arrangements are out of the bag by now.  They are being tried and used by insurers as part of ongoing efforts to bring cost-certainty to outside legal fees.  Badfaithadvisor.com has a complete survey of alternative fee options here.

But that is not the end of the leverage in favor of  insurers and corporate clients.  And to that end,  I am going to let you all in on a very big secret.  Not only that, I am going to invite — no — I’m going to dare, you to take advantage of it, and here it is:   I would rather my clients and prospects talk to me for free about matters of concern to them ,  than to let them  talk to any of my competitors.  Under any terms.

And so, the free initial consultation, long a staple of the plaintiff’s bar, has been co-opted and re-purposed for my insurance company and other corporate clients.

Insurance and corporate clients, and prospective clients who are interested in testing the waters, are given  free initial consultations of anywhere from 30 minutes to 2 hours (and sometimes more)  to review documents, and to discuss cases they are considering assigning to outside counsel.  But I offer the same thing to the same clients and the same prospects who are actually looking to AVOID sending a matter to outside counsel, too.  This provides value to them in the form of an informal first or second opinion which will give them early clarity on a matter, and peace of mind on potential action plans for handling those claims or matters.

The free initial document review / consultation is a win – win for clients and prospects.  If they do decide to retain me, on either en alternative or conventional fee basis, they have familiarized me with the matter they will be assigning and brought me up to speed at no cost to them, thereby reducing their overall legal expense on the matter.   If they decide to keep the matter in-house, they have received the value of an outside look for free, and I have hopefully created good will my clients will remember when the next matter comes up for consideration.

There are and will always be major coverage matters and bet-the-company litigation which insurers and corporate clients on which clients will seek outside representation.  Free initial consultations on both these matters and matters which clients never assign to outside counsel is another way to provide value to clients in business environments encouraging the limitation and reduction of outside legal expense.

C.J. Haddick

In-House Legal Departments / Outside Counsel – New Year’s Resolutions

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As I look back over a year’s worth of posts, I can see that efficiency and cost certainty in the use of outside counsel by insurers is a common theme.  2017, I predict, will bring more of the same for insurance companies and their in house legal departments:  an institutional imperative to control costs and to gain cost certainty, in the matters they refer to outside law firms.  With that in mind, we take a quick look at some new year’s resolutions, and see whether there is any way to line up the resolutions of in house legal departments and outside law firms.

Resolution:  Know The Alternative Fee Options

The duty of outside firms to offer, and in house legal departments to utilize, alternative fee arrangements to continue efficiency in operations requires familiarity by both sides with the large variety of alternative fee tools available.  A complete review of some of the most common options appears on this resource page.

Alternative fee options are the language of efficiency in the engagement outside law firms, the coin of the realm for lean and effective operation in the years ahead.  It pays both insurers and outside law firms to be conversant in this language, and to communicate with each other in this language.

Resolution: Utilize Legal Project Management (LPM)

There has traditionally been an inverse relationship between insurers’ in house counsel affinity for LPM, and outside law firms’ competence and ability to provide it.  As insurers resolve again to control cost with effective LPM in 2017, competitive and responsive outside law firms must learn to use LPM effectively.  This requires repetitive use of LPM and case budgeting, and refining the process with each successive use.  It requires the reasonable cost projection of a legal matter, so the client can make informed decisions.

LPM projection and budgeting enable in house legal departments to make strategic decisions about which matters to fight, and which matters to resolve, and more importantly, when to do so.  LPM provides in house legal departments with important dashboard items, and they will increasingly expect outside law firms to provide these services as part of working for the insurer in 2017 and beyond.

Resolution:  Big Data Feedback

In a closely related resolution, in house legal departments at insurance companies will continue to expect more and useful data from outside law firms as to the value provided and the relationship of that value to the amount and type of the legal services billed.  Outside law firms must therefore continue to develop metrics tailored to each individual client to provide the client the data it needs and wants to make assessments as to whether matters are run efficiently, and outside law firms are providing value.

Outside firms which do not keep pace with the need to collect and feed back big data to clients on these issues will continue to lag in 2017 and beyond, and the pressure to keep up by providing requested data, and interpretation will be on the rise.

Resolution:  Cooperation and Collaboration, Not Conflict and Contention

The legal landscape is a challenging one now, and it is likely to continue to be so.  Outside law firms comfortable with the traditional hourly arrangement are oftentimes slow to modernize, and this failure creates a tension between a client and their outside lawyers on whether the fit is right, and whether the billable hour is in the best interests of the client.

Outside law firms must overcome such tension, and begin to view themselves as collaborators and business partners of the insurance in house legal departments they represent.  Alternative Fee Arrangements, LPM, and the aggregation and use of data to feedback to the clients are three primary vehicles for such positive change in 2017, and going forward .

 

Adapt or Die

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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.

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.