GC’s: Are You Demanding Fee Options From Outside Counsel?

For many years the arrangement was understood — a negotiated hourly rate would cover the assignments from General Counsels at Insurance Companies and other Corporations to their outside lawyers.  The seismic shift in legal departments to emphasis on speed, efficiency, and cost-effectiveness has obliterated that status quo, for the most part.

Some outside firms have slowly, glacially, begun to shift to alternative fee arrangements.  But as I have written in the past, this shift is not likely enough to keep pace with what  in-house legal departments are searching for:  the nimble ability to select the right fee arrangement for each and every case which gets assigned to outside firms.   Having a single, alternative fee proposal is barely better than the hourly rate concept it replaces.

How can outside lawyers offer more? By letting the clients, the law departments and general counsel we serve pick the arrangement.  This can be done either by a.)  offering the client a list of several alternative fee options; b.)  listening to the client to hear about what they have been using and what they like (that is what good service is all about):  or c.) collaborating somewhere between these two approaches to tailor an arrangement that works in a particular case for both the law department and the outside lawyer.

There is no magic to it.  It is simply a matter of demanding options from outside lawyers so that clients are comfortable that with cost control over the assignment, and the alignment of the clients interests and outside counsel’s interests.

 

 

What Happened to “What” – Law Departments and the Advent of the Four W’s

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.

 

Dollarizing Your Value to Legal Departments: Return on Investment

In an earlier post, I commented on some metrics used by insurance and other in house legal departments used to measure the value of outside law firms engaged to represent them in litigated matters, e.g., insurance coverage or bad faith litigation, the latter of which has at risk real corporate dollars.

I’ve received a thoughtful question or two from lawyers who were interested in how I went about demonstrating to my clients (and prospective clients) what kind of return they could expect in exchange for every dollar of legal fees  they invested in our firm to defending them.  I’ve referred to this metric as Return on Investment (ROI).

It’s somewhat of a subjective exercise up front, which involves making an educated estimate of the insurer’s reasonable exposure at the  start of the case.  You don’t need to actually DO the estimation at the start of the case, because the ROI calculation cannot be done and fed back to the client until the case has ended,  and both the final case outcome and total legal fees are known.  The initial exposure assessment is the only subjectivity in the process; all the rest of the numbers are hard data.

So, here’s a quick and dirty ROI calculation, which can be used for a single case, or aggregated to account for a number of completed cases.

For any case, let

a=the initial, reasonable worst case exposure for client at case outset

b=the final payout, if any; and

c= the amount of legal fees incurred to arrive at the final result

 The ROI calculation is simply:

(a-b)/c.

What Do The Numbers Tell Your Clients About Value?

This calculation is a ratio, which expresses the relationship between the company’s investment in legal fees and the reduction or elimination in the contingent corporate exposure which the fees produced.   In terms of quality or value, a reasonable initial target might be a 3:1 to 4:1 ratio.  5:1 and above are good benchmarks, as a general proposition.  But there is a caveat:  a 5:1 ratio is not satisfactory if your clients average ROI from outside firms is, for example 8:1.

And you may never  get data about your competitors.  The solution?  Shoot for as high a ratio as possible, and work to keep it high.  You will know how well you are doing by the number of repeat engagements you are given.

Originally, I simply used the plaintiff’s initial settlement demand as reasonable worst case exposure, but was quickly educated by clients, and by experience, that a plaintiff’s opening number cannot always, or even usually, be considered reasonable.  I also quicly learned that using such unreasonably high demands to plug into the equation led to ratios which were unreliably flattering, and as a result, not useful to discerning clients.

Return on investment (ROI) can only be used as marketing feedback if the numbers are reasonably reliable, and viewed as such by your clients.

Alternative Fee Arrangements, Revisited

CAMP HILL, Jan. 27 – We addressed some of the flexibility provided by alternative fee arrangements in a prior post.   We are adding to that a resource page surveying some of the many emerging alternative fee arrangements we are offering to existing and prospective clients.  Please feel free to dig in and explore the many options available.

Good outside counsel view alternative fee ideas as starting points, not destinations.  Legal fee agreements can be as diverse and inventive as the lawyers and clients involved.  Reach out any time to me chaddick@dmclaw.com or 717-731-4800 for more information.

Legal Departments: Are You Sharing Your Metrics With Outside Counsel?

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

GCs: How Would YOU Like To Compensate Your Outside Law Firms?

Good lawyers can be bad listeners when it comes to legal fees.  Under ever-increasing pressure to fold more efficiency into the hiring and use of outside law firms, General Counsel are looking for alternatives to a running meter, which counter-incentivizes what clients want most – fast, cost-effective results.  Did I mention fast?   The best and most flexible law firms and lawyers are the ones who are responsive to that.

I’ve handled all kinds of cases, including litigation, under alternative fee arrangements (AFA’s) for years.  Generally, however, they have been arrangements lawyers  have designed and my clients have haltingly approved, or reluctantly agreed to try.   But even that model – the lawyer proposing to the client, amidst the ever – increasing speed of the rate of change in the hiring and use of outside legal counsel, may not be adequate responsiveness to a client’s needs.

What would the ideal fee arrangement be for an insurer’s in-house legal department to have an outside lawyer perform a coverage opinion?  Handle a bad faith case?  Perform a claims file review to do some bad faith preventative maintenance?  What would that look like to General Counsel’s Office?

GC’s and in-house lawyers, what is the best outside counsel fee arrangement for your company ?  That is the question to be asking, and good outside lawyers and law firms will be very interested in the answer.  Email us at  chaddick@dmclaw.com  and describe  YOUR ideal fee arrangement.   None of the responses will be shared unless you would like us to do so.

Looking for ideas on AFA’s?  Stay tuned for the posting of our AFA Resource Page, discussing any number of AFA options for both litigated and non litigated matters.  The options are virtually limitless.   These options can serve either as a pre-packaged deliverable fee arrangement, or a jumping off point to tailor an arrangement to meet your needs.

Best,

CJH

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