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%.

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Alternative Fees and Value [LegalTech 2011]

Leveraging Technology to Achieve Quality and Competitive Excellence. This session is focused on how lawyers provide “value” to their clients. The presenters are Brad Blickstein (Principal, Blickstein Group, Inc,) and Kimberly Townsan (Senior Manager, Legal Administration, United Technology Corporation).

[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:

  • Value, Like Beauty is in the Eye of the Beholder — The ONLY beholder that matters is the client. The key for outside counsel is to focus on delivering to the client the outcome desired by the client. Don’t focus on the means of production. The panelists quoted David Cambria of Aon who once said that when you hire a gunslinger, you don’t pay by the bullet.
  • ACC Value Challenge — Every firm that is interested in providing value to clients should study the ACC Value Challenge. The panelist recommended the blog post exchange on the ACC website between Seyfarth Shaw and Wolverine.
  • Leveraging Data — How can we use data to more effectively price and bill for legal services and manage outside counsel? These are the challenges that clients and their lawyers face. Seyfarth Shaw, as a preferred provider to United Technologies Corporation (UTC), spent considerable partner time and effort to review their matters and accurately price the work they were proposing to provide to UTC. (As part of this effort, they examined and revised their work processes.) UTC believes that each provider needs to determine its own costs and margins and then make a proposal; this is preferable to the client dictating the AFA.
  • UTC’s Experience with AFAs — UTC started requiring alternative fee arrangements (AFAs) with intellectual property work, but are now asking for it for more types of matters. At this time, approximately 50% of their matters are priced on an AFA basis. They are trying to reach a balance whereby both UTC and its law firms prosper. Their experience is that firms tend to start the AFA conversation by proposing a price based on a historical average. However, these prices often prove to be unreliable. UTC prefers to set a banded price. This sets a cap on the ultimate price, plus it gives outside counsel an incentive to improve efficiency and thereby improve margins. UTC has coupled these AFAs with detailed arrangements concerning what UTC will or will not pay for and which preferred providers UTC wants their outside counsel to use.
  • How Do Clients Evaluate Outside Counsel? — AON has a series of detailed lawyer dashboards that show how outside counsel have performed with respect to a number of criteria determined by AON that cover everything from efficiency to quality of advice received. UTC analyzes several areas of outside counsel performance including the extent to which counsel provide sufficient review and comment time to UTC lawyers, and whether outside counsel treat senior UTC personnel differently than junior UTC personnel.
  • Process and Efficiency — How can we leverage technology and process to improve efficiency and get more “bank for the buck”? UTC works with its preferred legal providers to ensure both eBilling by outside counsel and the efficient payment of bills by UTC.
  • Knowledge Transfer Inefficiencies and Matter Management — UTC has 270 lawyers in-house posted around the world. These lawyers supervise thousands of matters. UTC implemented matter management in the late 1990s, but it was initially for housing information on legal costs rather than a means for actually managing their various matters. Since then, UTC has been looking for ways to integrate outside counsel in the matter management system (LT Online) rather than making the UTC lawyers work with different extranets provided by every outside firm. UTC tried to minimize “rework,” which involves taking information from outside counsel and reworking it so it can be added it to UTC’s matter management and knowledge repositories. They have 30 US firms that access their matter management system directly. This accounts for about 85% of UTC’s US docket. UTC provides training to their outside counsel to ensure they can use the system efficiently. The system includes staffing information, legal documents, matter updates, etc. The matter management system is not intended to capture all matter information, just critical information about each matter. UTC’s experience is that providing matter management system access to outside counsel has greatly diminished the need to rework data from these lawyers. In Townsan’s view, this is one of the best efficiency enhancers they have.
  • How Legal Project Management and Quality Programs Help — applying quality improvement techniques (e.g., lean six sigma) may involve significant investment of time, money and effort on the part of a firm and may not always be absolutely necessary. However, every firm can benefit from creating project plans or doing after action reviews. (Interestingly, very few members of the audience said that their firms did either.) Consider using a battery of tools to cut your costs, and then price matters so that the law firm improves its effective hourly rate (its margin), while reducing the client’s overall expenditure.
  • Is the Recent Focus on AFAs a Fad or the New Normal? — In Townsan’s view, the AFAs introduce reliability and predictability into their budgeting process. This keeps the legal department and finance department happy since both of them hate surprises (especially unpleasant financial surprises). Further, during times of corporate belt-tightening, companies remain contractually bound to comply with their AFA arrangements. By contrast, they can always trim the number of hours they are willing to pay for. As a result, she thinks that AFAs are here to stay. Blickstein, on the other hand, is a bit more cynical about this. He believes that once the economic pressure is off, firms (and inside counsel) will revert to the familiarity and relative comfort of hourly billing. He noted that we’ve been talking about the importance for AFAs for decades, but they haven’t yet become the norm. Nonetheless, he observed that any firm that finds ways to provide its work product more efficiently at a thoughtful price will always flourish.
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Using KM in Fixed Fee Pricing

Knowledge Management in the Legal Profession is the subject of the Ark Group’s conference I’m attending in New York City. Here are my notes.

Toby Brown is involved in Client Teams, Alternative Fee Arrangements and Knowledge Management at Fulbright & Jaworski LLP. He’s also a recovering economist. This presentation focuses on the strong role KM can play in establishing fixed fee arrangements (AFAs) within firms.

#1. Analyzing billing data rarely reveals what you need.

Analyzing time and billing records tends to provide limited useful data because until now billing practices have focused on creating a narrative a client will accept and have not been about providing data that help the firm understand the phase, task or type of work involved. Further, going back in time more than two or three years won’t be useful since approaches to legal practice have changed dramatically and continue to change. For example, today it is rare to deploy enormous teams of associates on matters. Finally, Toby’s analysis of the data from similar matters did not reveal the existence of easily identifiable budgets or even strong trends. In fact, he found that the greatest influence on fees came from the specific facts and circumstances of a each matter.

#2. Firms need more knowledge about their work; KM can help provide this.

KM approaches to aggregating knowledge, coupled with improved approaches to creating billing narratives, can help build a knowledge store that is suitable for analysis. Toby believes that KM tools for collaboration, search and analysis. This will help the firm gather the necessary data, which will allow the firm to establish prices with greater certainty. Toby uses Redwood Analytics to analyze data and create a pricing model for a particular matter. Use KM practices to learn from your experience of analyzing the data and creating models. What worked? Where were the proposed prices wildly wrong? What should we change?

#3. KM can have a strong role in monitoring variance of cost to budget.

Toby says this is the “hot thing” on his project list. He is focused on trying to figure out how to provide more effective monitoring, coupled with an early warning system to partners so that they know when they are about to exceed the agreed budget.

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What Clients Want

Today I was fortunate to listen in on a series of fascinating conversations held by in-house counsel gathered at the Practising Law Institute’s Corporate Counsel Institute 2010. The conversations ranged from the risks of social media to the impact of the recession on corporate America. (If you’d like to see my notes on these PLI sessions, take a look at my Twitter stream or search for the Twitter hashtag #PLI on September 22.) As one of a small handful of law firm attorneys present, it felt a bit like being a fly on the wall.  In fact, it was a golden opportunity to learn more about what clients want.

Of all the sessions, one of the liveliest concerned “Innovative Law Department Billing Arrangements.” The moderator, Susan Hackett of the Association of Corporate Counsel, did a superb job of framing the discussion and ensuring high value content. The panelists, Kerry Kotouc from Wal-Mart and Lynn Easterling of Cisco, provided many examples of how focused, savvy in-house lawyers can create a productive new working relationship and better fee arrangements with their outside counsel.

There has been some recent commentary on the perceived failure of alternative fee arrangements to gain traction. Susan Hackett unambiguously exhorted in-house counsel to step up and take leadership in this area. She acknowledged that many in-house lawyers opt for discounts because they don’t know where to begin to create a better alternative fee structure. Another complicating factor in her view was that in-house counsel waited for law firms to take the lead and then, because many were treating this as a zero-sum game, assumed that if the law firm proposed the arrangement it must improperly favor the firm and be to the client’s disadvantage. She encouraged everyone in the room to find ways to structure their interactions with outside counsel as a win-win game based on a long-term relationship rather than the “speed dating” encouraged by the currently popular request for proposal approach.

During the course of the alternative fee arrangements session, the audience answered several survey questions.  The answers revealed that while many are aware of alternative billing and alternative staffing structures, not enough considered themselves to be entirely comfortable with these concepts in practice.  Clearly we all need further education and experience.  Another of the questions asked the extent to which in-house counsel were looking to knowledge management and collaboration to improve performance.  For the purposes of this question, KM meant more than having a brief bank or collection of model documents. To the surprise of the moderator, approximately half of the respondents said they were focused on this issue. (Apparently other  groups of in-house counsel report a much smaller focus on KM and collaboration.) Finally, one of the most interesting survey questions asked what the audience thought was most important to in-house clients with respect to billing practices.  55% of the participants said that the most important issue was predictable, controlled costs.

That’s what clients want.

[Photo Credit: Tracy Olson]

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