Efficiencies for Your Bottom Line

Efficiencies for Your Bottom Line: Five Steps to Reducing Costs in the Next 6 Months

Panelists:

• Joy Saphia, Huron (Moderator)
• Mary Pape, Director of Global Complex Litigation, Dell
• Gary Nelson, Medtronic
• Ellen Rosenthal, Chief Counsel, Pfizer Legal Alliance
• Lani Miller, Litigation Department, Bank of America

[These are my notes from LegalTech NY 2011.  Since I’m publishing them as soon as possible after the end of a session, they may contain the occasional typographical or grammatical error.  Please excuse those. To the extent I’ve made any editorial comments, I’ve shown those in brackets.]

NOTES:

• Dell — they have created a system of online auctions in which tasks are unbundled and put out for bid by outside counsel. This is particularly useful for non-litigation work. (They also use it for class action administrators and eDiscovery service providers.) In addition, it allows Dell departments to have access to a wider range of counsel at better price points than they could negotiate by themselves. The psychology of the auction often encourages service providers to offer better rates.
• Medtronic — they hired Huron to help them create a system for managing costs. They have formed a network of preferred providers that includes the outside counsel with whom they regularly work.
• Pfizer Legal Alliance — Pfizer sets flat ANNUAL fees with 18 preferred law firms. These tend to be firms with multiple high quality practice areas. The Alliance system allows these firms to grow their relationship with Pfizer in a natural way. This Alliance accounts for 75% of Pfizer’s legal work. (They don’t include certain local counsel work.) Each firm receives 1/12 of their annual fee each month, regardless of actual costs. This means that Pfizer lawyers are relieved of the burden of reviewing and approving monthly bills. At the end of the year, there is a bonus process to reward superior performance. The Alliance system includes narrative feedback and opportunities to evaluate the teamwork between client and counsel, as well as the quality of the work product. This is a 360 degree process — Pfizer lawyers rate each of the firms; each firm rates Pfizer and each other to assess quality of work and quality of collaboration. The Pfizer Legal Alliance is jointly governed by Pfizer lawyers and outside counsel.
• Bank of America — is moving from 100s of firms to just 30 to handle defensive litigation. (They haven’t included corporate/transactional work yet.) They also have put in place some alternative fee arrangements with their outside counsel.
• 1st Step to Reducing Costs: Identify who does the work — Who is doing the work? Should it be done internally or externally> Who should be doing the work?
• 2nd Step: Assign (and pay for) external matters based on the value of the work
• 3rd Step: For work sent outside, unbundle tasks and reasssign as appropriate.
• 4th Step: Find the Right Firm — the right law firm staffing leads to the right rates.
• 5th Step: Leverage Your Experience & Data — Use what you’ve learned to negotiate rates an evaluate alternative arrangements such as fixed fees
• Managing Outside Counsel — improper management can lead to unnecessary costs. Dell stays closely involved with their matters — they often attend depositions and hearings. Bank of America has created a database of subject matter experts across the country. These are the outside counsel they rely on. Most of Bank of America’s high volume low risk cases are handled on a fixed fee basis by 13 of the their 30 preferred firms. This caps the costs for the Bank and encourages firms to improve efficiencies.
• Firms Don’t Always Behave Rationally — Pfizer anticipated that their law firms would revise their internal processes immediately to accommodate the new flat fees. Instead, many retained their hourly billing mentality and processes, and then came back to Pfizer when the law firm exceeded its budget. Pfizer said that meeting the budget was the responsibility of the law firm. Further, while Pfizer may recommend use of its preferred providers, it ultimately is the choice of the law firm since hiring excessively expensive service providers will cut into the law firm’s margins.
• Flexible Fixed Fees — Pfizer builds some flexibility into its fixed fee arrangements to take account of fluctuations in case load. If a firm ends up handling more work than expected, the fixed fee will be adjusted accordingly.
• Unbundling Services — Dell has unbundled eDiscovery, document review, research work, appellate work. With respect to research, for example, Dell may give research to a particular subject matter expert even though that expert’s firm is not handling the entire the matter.
• eBilling Data — Initially Medtronic used eBilling as an invoice processing machine. Over time, they have learned to use the eBilling system for data mining. They can now determine law firm staffing efficiency, whether the work is dispersed too widely, etc. This allows Medtronic to have a productive conversation with outside counsel to help improve efficiency and reduce costs.
• How Pfizer Sets Annual Fees — Pfizer uses a combination of a bottoms approach (asking each Pfizer practice group to say what they expect to spend in the following year) plus a top-down approach whereby Pfizer determines at a strategic level which firms it wants to encourage by giving them more work. In addition, they are in regular conversation with their outside counsel.

I had to ask the panel: Given how much time and effort in-house lawyers spend monitoring and arguing about outside counsel bills, why wouldn’t every company’s legal department want to follow the Pfizer approach? After some slightly rueful laughter on the part of the panel (and audience), one panelist said they felt they needed more eBilling data before they would feel confident enough to move to a fixed annual fee system. At this point Ellen Rosenthal of Pfizer interjected and said that while they had some financial data before starting the program, it really began on the strength of a strategic and pragmatic decision on the part of their General Counsel who was convinced that the hourly billing system was not working for Pfizer and that they needed a better way. In other words, the main prerequisite for this is COURAGE.

What’s the proof of the system? After Pfizer and Wyeth merged, the workload of the combined in-house legal department was much larger than that of the Pfizer lawyers pre-merger. Despite this, their legal expenditures have declined by 15%.