The prevailing wisdom among the Association of Corporate Counsel’s newest class of Value Champions is that hourly billing for legal services is dead, technology is on the rise, and predictability is a priority. Among the 2013 champs are Bank of America, Office Depot Inc., and Nike Inc.
The annual competition is a component of ACC's ongoing Value Challenge, which the organization created to recognize law departments and law firms that have cut legal costs without cutting quality. This year’s honorees include eight law departments and four law department/law firm collaborations that made noteworthy use of value-focused approaches to legal management.
A common trend among the honorees was realizing savings by ratcheting up reliance on alternative fee arrangements, although Catherine Moynihan, the ACC’s director of legal management, suggested “value-based fees” is a more apt term.
“We try to not marginalize them by calling them alternative fee arrangements,” she said.
Representatives from the 2013 champs said that billing by quality of work, rather than by time spent on a project, has been better for legal departments and outside counsel alike. Since 2011, Healthcare Insurance Reciprocal of Canada (HIROC) and its outside legal counsel, Borden Ladner Gervais, have foregone hourly compensation for a model in which compensation comprises a base fee, plus a performance fee determined by a number of “value criteria,” like process management, responsiveness, predictable costs, and final results. The team was honored by ACC for achieving predictability and pay for performance in a long-term client/firm arrangement.
The partnership’s process for dealing with malpractice claims demonstrates how the new fee system creates value. HIROC anticipates the number of malpractice claims they’re likely to see in a given time frame and the severity of those claims, based on past data. Then they look at past invoices and data from BRG to assess a fair fee. Michael Boyce, the claims vice president at HIROC, said the system works especially well because the firm and company have worked together for 25 years and trust each other.
“We have been very forthright in giving them our numbers, and they have been in turn forthright in giving us the number of hours and type of work that has been done,” Boyce said. And BRG is happy with the new arrangement. “The incentive is to spend less time rather than more time,” said BLG partner John Morris of the new model. “If we do it efficiently and well, we get more money.”
Bank of America has also successfully increased its use of alternative fee arrangements, said Lani Quarmby, the bank’s associate general counsel and senior vice president. The bank now uses AFAs for 80 percent of litigation matters. The move to a more detail-oriented, communication-heavy billing model has helped BoA to streamline the number of firms it uses, from using more than 700 law firms in 2010 to only 30 today.
Like Boyce, Quarmby noted that new fee arrangements were better for both in-house clients and their outside law firms because it requires closer relationships.
“It’s definitely improved communication between in-house and outside counsel,” she said.
“The biggest myth out there is that companies are looking for fixed fees to reduce spending,” said Michael Caplan, chief operating officer of the office of general counsel at Marsh & McClellan Companies. Marsh & McClellan reduced outside legal spending by 54 percent in four years, but Caplan said the company isn’t trying to skimp on legal services. “We’re looking to better understand what the matter is about,” he said. He added that they regularly give bonuses to firms that meet set goals.
Several of the Value Champions agreed that ensuring pricing predictability is key to efficient legal departments. Elisa Garcia, general counsel at Office Depot, said she worked “to build a crystal ball for the business units so they could project legal costs.” More than half of outside counsel spending for Office Depot now operates on value-based fees, and the company has reduced its legal spend by 30 percent.
And the key to predictability is technology, said Lucy Fato, deputy general counsel at Marsh & McLennan. Her company achieved success with the help of Sky Analytics, a vendor that benchmarks company spending with that of its peers.
“Being able to collect data and starting to have metrics and setting goals for ourselves . . . made a big difference,” she said.
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