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.

 

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Re-Pricing Subrogation Litigation For The Benefit of Clients

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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

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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

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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

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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.

Desk Clearing: Efficiently Using Outside Counsel to Evaluate, Negotiate, and Close Claims

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Decades of the billable hour have left insurance company and other commercial legal departments gun-shy about using outside counsel as a resource. Outside counsel is often thought of as far too expensive and inflexible.  But that is changing, and offices of general counsel should be aware of the change to position their departments to take advantage of it.

The “small” matter, or the matter not in litigation but percolating,  are two of the largest drains of psychic energy for the in-house legal department.  Nevertheless, legal departments are loathe to refer such matters out, fearing the cost of doing so cannot possibly be justified.  This is no longer true — there is a way.

Outside counsel should have a pricing structure in place to allow, even  encourage, the referral of the small and the percolating matter, either one at a time or in block assignments.  Flat rate pricing, block pricing, and other cost-favorable arrangements are now available, permitting  legal departments to send pesky matters out for quick evaluation, and where appropriate, negotiation and conclusion.

Closed matters.  That is the goal of every law department of every insurer and corporation.  But all too often in the past,  sending a small or percolating matter out to counsel was the farthest thing from leading to a closed matter, in the minds of general counsel.  It was the opposite of getting a matter closed — it was instead seen as  the  opening a matter, and the start of having to pay for the privilege of keeping it open.

Outside law firms for too long have been seen as matter  “gators” — elongators and prolongators;  instead, they should be seen as truncators and terminators.  Legal departments should have the ability to take a look at the stacks of small unresolved matters on their desks, and be incentivized to send the stacks to outside counsel with instructions to dispose of them quickly, efficiently, and inexpensively.   And outside counsel should know how to do that.

If you do not have an outside firm who can perform that service for your legal department, it is not because there are no outside firms who can do it.  It is only because you haven’t yet located the right outside firm.  Hire fewer elongators, and more terminators.

 

Are You Getting Enough Extras From Your Outside Counsel?

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For insurance company legal departments, the retention of outside counsel is now done very much in a buyer’s market, perhaps more so than any time in history, and  certainly more than any other time in the twenty five years I have practiced law.  Tasked by their management teams with delivering better results faster and for less, legal departments have become discerning and discriminating buyers.

Good outside law firms worthy of hiring do not rage against this development — they accept and embrace it, and craft what they offer to fit the needs of the clients they want to continue to serve. If your outside lawyers aren’t offering you the following services regularly, you are probably not taking advantage of the enormous buying power you now enjoy.  This buying power entitles you to things like:

  • regular courtesy calls from outside counsel to make sure the service they are delivering meets with your expectations of that service, including the billing process;
  • seamless access to your outside counsel via phone, email, text messaging so that you do not have to wait either to ask a question or make an assignment;
  • several hours per week of no-charge access and client support for quick legal questions, even a request for a minor bit of research or document review (any outside lawyer who does not recognize that this is the least he or she can do for a good client does not appreciate the value of your business).
  • regular offers to provide no-cost continuing education your legal departments and claims staff, either via in person lunch and learns, or  via webinar, whichever you, not they, prefer.
  • regular no-cost updates on significant legal rulings and industry developments, so that you can 1.) stay abreast of the legal landscape at no cost to you; and 2.)  ensure that your outside counsel is current as to the same landscape; and
  • regular offers to discuss and collaborate on alternative billing programs, so that legal departments can ensure they are getting outside counsel legal services in the most efficient manner possible.
  • ‘NO-CHARGE” invoice entries for  minor phone calls and emails on simple questions or requests –  your outside lawyers should encourage you to contact them, not discourage you.

As we said above, it is a buyers’ market for in-house legal departments.  Many outside firms who have enjoyed the comfort of the status quo for decades have been caught unaware, and have not responded to legal climate change .  But there are good outside law firms who are none too aware of the sea change in the marketplace, and who are crafting their representation to recognize that fact by providing no-cost extras to their clients.

For more information on providing your legal department the benefits of  extra services and client support at no additional cost , reach me at chaddick@dmclaw.com or 717-731-4800.