By Ron Peppe and David G. Briscoe Note: Part 1of this article ran in the November/December issue of Report To Legal Management.

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1 E DITOR James Wilber CONTRIBUTING EDITORS Ward Bower William F. Brennan Consultant David G. Briscoe Senior Consultant Thomas S. Clay James D. Cotterman Report to Legal Management O U R 3 1 S T Y E A R Strategize This! Prepare Now for When Procurement Analysts Come Knocking on the Law Department s Door Part 2 By Ron Peppe and David G. Briscoe Note: Part 1of this article ran in the November/December issue of Report To Legal Management. January 2005 Volume 32, Number 4 Daniel J. DiLucchio, Jr. Virginia Grant Consultant Marci M. Krufka Senior Consultant Charles A. Maddock Alan R. Olson Richard C. Reed Senior Advisor Larry R. Richard MANAGING EDITOR Susan D. Sjostrom Selecting an Ebilling Vendor The marketplace has quickly become crowded with ebilling vendors. (See page 9 for listing of vendors and websites.) Understanding the differences between each vendor s system can be difficult, but is key as you seek to find a solution that both adheres to your corporate IT standards and also meets the needs of the legal department. Some of the key areas to consider include: Implementation of An Ebilling System This phase of the project is hard work, but your ebilling vendor can assist greatly in applying best practices. Even though most of the law firms you use are already submitting legal bills electronically for other clients, each implementation is a little different. An internal legal department person must be designated as responsible to ensure IT, legal, and outside counsel are all working together to ensure success. The death of most technology projects is an extended pilot. Avoid one if possible by planning well from the beginning. Commit to a vendor, test the system out with one law firm for a month or two, and then aggressively roll out the system to all law firms. Our experience suggests the most effective approach is to mandate the submission of legal invoices electronically as a condition of Ron Peppe working with your business. If your ebilling system only has 80 percent of your historical spending data, analysis of that data has an 80 percent chance of being accurate. A recent national survey of law firms provides some interesting insight into their thinking about ebilling software: 63 percent see a trend towards clients requiring ebilling; 31 percent say they get paid faster when a client institutes ebilling; and 78 percent say they are either in favor or somewhat in favor of ebilling Inside This Issue David Briscoe continued on page 5 Latest Survey Shows Healthy Increases in Corporate Counsel Compensation Getting the Best Out of Your Global Law Firm Managing the Law Firm Relationship

2 Strategize continued from cover Even though 21 percent of law firms surveyed say ebilling systems will allow clients to put pressure on them to lower rates, overall market acceptance of the systems by law firms is very high. Applying Strategic Sourcing Principles to Ebilling Data Interpreting data and building metrics is not a core competency of most CLOs, but to stay ahead of the sourcing curve, some will want to begin evaluating billing data on their own. It generally takes about six to nine months worth of ebilling data to begin performing a valid statistical analysis. Prior to accumulating that much data, work is focused on identifying how the information needs to be categorized and sliced for future analysis. Interpreting economic benchmark data can be a daunting task. We suggest using a threepronged approach to mining your ebilling data. Performance Management. Defining the metrics by which outside counsel will be measured. Essentially this is the development of a Performance Scorecard that rates law firm performance against peers and industry data. Measurements may include: client satisfaction ratings, matter outcome ratings, compliance with billing guidelines, and diversity. (See Performance Scorecard, opposite, for an example.) Relationship Management. Defining how these new expectations and ratings are communicated to outside counsel is critical. Long-term law firm relationships must be handled with care, especially with lawyers who have developed a deep understanding of your business. Most law firms want to exceed client expectations. Biannual meetings held with outside Best Practices in Relationship Management Traditional strategic sourcing exercises are designed to disrupt historic vendor/customer relationships. For almost all legal services, a highly aggressive, best price approach is detrimental. We have found the following best practices valuable in re-structuring law firm relationships: Avoid imposing administrative burdens that add no significant value. Allow sufficient flexibility to allow in-house lawyers to exercise professional judgment to engage other law firms or outside counsel when it is in the best interests of the company to do so. Involve each in-house supervising lawyer in developing contacts and ongoing professional relationships with attorneys in the primary provider law firms. Establish published target zones for distribution of legal work to the primary provider law firms. Publish the Performance Scorecard measurements at least quarterly. Provide each in-house lawyer with an ongoing report of his/her law firm s individual Performance Scorecard results. counsel to address performance issues good and bad are an effective setting in which to review their Performance Scorecard. (See Best Practices in Relationship Management, above.) Fiscal Accountability. Law firms know that an hourly billing model is not always in the best interests of a client. Some law firms are highly creative and willing to share risk with clients when they are provided with accurate information and incentives. (See Creative Fee Arrangements with Outside Counsel, page 6.) Fiscal Performance Scorecard On a scale of 1 to 10 accountability is about managing the portfolio of legal work in an economic manner that is fair to both law firms and corporations. Developing a Performance Scorecard Measuring the performance of a law firm or lawyer is a blend of both art and science. It should be quantitative in its measurements and comparisons on economic metrics, and qualitative on issues such as technical expertise and responsiveness. Tracking satisfaction with the outcome of matters being handled by the firm is essential. Key measurement criteria include performance, relationship and fiscal accountability. Criteria Does the lawyer adhere to Outside Counsel billing guidelines? Does the lawyer staff matters appropriately? Is the lawyer efficient and cost conscious? Is the lawyer responsive to requests via telephone and electronic mail? Is the lawyer skillful and technically competent? Does the lawyer communicate clearly and effectively? Rate the lawyer s negotiating skills. Rate the lawyer s issue-spotting skills. Rate the lawyer s judgment. Was the budget provided accurate? How desirable was the matter s outcome to our business? Report to Legal Management January

3 Creative Fee Arrangements with Outside Counsel Creativity is not a typical lawyer personality trait. However, there are examples of law firms and legal departments working together creatively to produce an outcome that benefits all parties: Great Products Corp. (an uncreative name change to protect privacy) was accused of manufacturing and selling a defective product. The financial implication of replacing the product at full cost would be enormous. A trial and potential jury award would be even more expensive and publicly damaging to the brand name. The legal department and the business unit developed a strategy to minimize the financial exposure, prevent the matter from going to court, and minimize publicity. Working with finance, the legal department determined a settlement that fell between $X and $Y would be the best resolution, and that outside counsel would be given incentives to achieve this objective. The settlement target zone was broken down into three equal amounts, denominated zones A, B, and C. (A being the lowest figure, C being the highest desired settlement amount.) The agreed-upon fee arrangement (in simplified terms) worked like this: The company would pay standard hourly rates through the negotiation and legal proceedings process. Law firm and legal department agreed the cost of legal services to get to settlement would not exceed $Z. A bonus would be set aside and awarded to the law firm based on which zone the size of the settlement fell into: - If the settlement fell into zone A, the firm would receive 100 percent of the bonus pool. - If the settlement fell into zone B, the firm would receive 75 percent of the bonus pool. - If the settlement fell into zone C, the firm would receive 50 percent of the bonus pool. - If the settlement exceeded the target zone C, 20 percent of $Z would be set aside in an escrow account and managed by the company. Final disposition of the matter would dictate the amount of escrow to which the law firm would be entitled. Using these three criteria, CLOs can begin to identify new strategies for the delivery of legal services to clients. Phase 1 Three to six months of billing data The data can still be pretty thin at this stage of the process, depending on how quickly the legal department was able to bring all law firms onto the ebilling system. The primary objectives for this phase are highlighted in the chart below. The primary questions to ask at this phase are: Which law firms are not participating and why? How can we get as close as possible to 100 percent participation? Are we tracking legal work at the right level of detail? Should we be using task-based billing? How accurate are the lawyers at coding time entries? Begin classifying the types of work being purchased from outside counsel into Strategic, Important and Commodity categories. Create additional categories if necessary. Beyond economics and billings, what other areas should we be measuring? (for example, performance evaluations, matter outcomes, budget-to-actual compliance) Develop a law firm (or lawyer) Performance Scorecard. What criteria will they be measured by and what are acceptable norms of performance? (See Performance Scorecard, on page 5.) Performance Scorecards should be based on a 100-point system. Each of the criteria identified in the sidebar would have four potential selections by evaluator: excellent, strong, average, and poor. Depending on the number of criteria in the Performance Scorecard, Phase 1 Three to Six Months of Billing Data Performance Management Relationship Management Fiscal Accountability Begin to develop the criteria by which firms will be measured. (The Performance Scorecard) Develop benchmarks that are specific to the type of legal work your company is buying. Law firms that are having difficulty getting paid through the new system will need immediate attention. Discuss time entries and expenses that are consistently being rejected for payment. Set expectation about the Performance Scorecard. Identify any egregious outliers on hourly rates or fee-to-expense ratios. Make sure Billing Guidelines are clear. Modify as necessary. Define baseline billing rates for work being purchased. 6 January 2005 Report to Legal Management

4 each choice would have an associated number of points. Lawyers who do not score within an acceptable norm in any individual area would be notified and if improvement was not made, the opportunity for future legal work would not be forthcoming. Are our billing guidelines clear and being followed sufficiently? Where are billing guidelines consistently not being followed? What changes are necessary? How can we use the ebilling system to create business intelligence? The legal department can deliver value back to the enterprise by identifying new product and channel initiatives, production plants, business units, sales regions, and/or sales practices that are generating legal costs. By including this type of data in the ebilling system, trends and patterns may be traced back to original causes. Phase 2 Six to 18 months worth of billing data The data is now rich enough to begin evaluating individual law firm and lawyer performance.the primary objective still is to be asking questions and understanding in much greater detail what services are being purchased. Differences in how law firms provide that service (primarily, staffing levels) will begin to be noticed. Note the primary goals in the chart below. Questions to be investigated include: Why do law firm staffing practices differ so radically? Are we triaging our legal work into the following categories and then assessing if it is being sent to the right type of law firm? High Value/High Risk/Strategic Work: critical to the success of the business or provides the business with a competitive advantage. Important Work: important to handle but will not necessarily provide the business with a competitive advantage within the industry. Repetitive/Commodity Work: legal issues which can be handled by many different providers at competitive billing rates and/or with alternative fee arrangements. Why are some law firm s expenseto-fee ratios so much higher than others? Are we satisfied with our matter outcomes in light of a lawyer s hourly rate? Which lawyers (or law firms) really are our superstars? Have the discounted hourly rates we negotiated really saved us money? Do we have legal work that lends itself to non-hourly pricing? What are the characteristics of that legal work? How much of it do we have? How do matter life cycles differ, both by legal category and by law firm within legal categories? Are the hourly rates we are being charged competitive with the marketplace? Are the firms we use diverse racially as well as demographically (gender and age)? Are younger lawyers involved in our matters and learning our business? Phase 3 Eighteen months of billing data and beyond At this point, the sourcing committee should be prepared to identify and recommend new sourcing strategies. Relationships with outside counsel may become stressed as legal work shifts and winners and losers develop. Sourcing professionals may become actively involved in communicating with law firms delivering commodity legal services.the primary goals are laid out in the chart on page 8. Questions the sourcing committee should be asking include: Should we be doing more or less legal work internally? The data may suggest hiring more lawyers in certain practice areas would be a valid way to reduce the overall legal spending. The reverse may also prove true. What types of legal work lend themselves to competitive bidding on a legal auction site? (We have seen certain phases of intellectual property, immigration, and litigation successfully bid on these sites. See ebay Special Two-for-One Patent Applications?, page 8.) Deliver the law firm s Performance Scorecard. In-house counsel should review the Scorecard with outside counsel. Identify specific areas for improvement. If performance is not Phase 2 Six to Eighteen Months of Billing Data Performance Management Relationship Management Fiscal Accountability Present initial Performance Scorecard reports to all key outside counsel law firms. Attorneys should take the lead in meeting outside counsel and reviewing results of Performance Scorecard. Assess law firm performance to law firm price. Benchmark against industry data and ebilling vendor data if available. Identify all third-party services (court reporters, litigation management) and negotiate bulk discounts for your law firms. Report to Legal Management January

5 Phase 3 Eighteen Months of Billing Data and Beyond Performance Management Relationship Management Fiscal Accountability Sharpen Performance Management Scorecard to include ratings of individual lawyers. Identify any trends within the business where legal threats and risks are developing. Sourcing professionals may begin to be included in performance meetings with outside counsel. Law firms providing commodity legal services have greater contact with sourcing professionals. Identify opportunities to reduce the overall percentage of hourly billing arrangements. Consider online auctions for discrete types of commodity legal work. Align commodity legal work with law firms staffed and structured to deliver it. Develop RFPs for in-house training services from outside counsel. Evaluate potential of using professional research companies versus law firms. Evaluate internal staffing structure and assess cost effectiveness of increasing/decreasing staff size. meeting expectations, discuss the potential of that work moving to other law firms. Challenge the hourly pricing model at every turn. Actively seek fair and reasonable ways to price services in a manner that promotes efficiency. Become Sourcing Savvy Good information collected from electronic billing systems will make CLOs better informed about the legal services their client needs. It will assist the CLO in assessing internal staffing requirements and it will make her a better-informed purchaser of legal services. As long as an hourly pricing model is allowed to dominate the marketplace, efficiency in the delivery of legal services will remain elusive. Negotiating discounted hourly rates with law firms may create the illusion of savings, but in reality puts no meaningful pressure on firms to think in terms of efficiency. The underlying principles of strategic sourcing are sound, and when a sourcing analysis is being driven and led by the legal department, such a strategy toward cutting legal costs can prove valuable. Sourcing professionals only represent a threat to the legal department if it ignores the trends. Too many CLOs don t have the information they need to manage the function properly. Those who continue to rely on instinct to justify budgets and increases in staffing requests are vulnerable. Some of the largest legal departments already have experience with convergence and Request for Proposals. Today s marketplace and technology tools provide to legal departments of all sizes the ability to become savvier ebay Special Two-for-One Patent Applications? Legal auction sites are still a controversial way to acquire legal services. Sourcing professionals often make the mistake of trying to force this model onto legal in a one size fits all approach. But despite several false starts during the dot-com boom, chunks of legal work are finding their way onto the internet for competitive bidding. Repetitive and commodity legal services are leading the way. Currently, insurance companies are the most active buyers of legal work via the web. The process is relatively simple and works like this: 1. Spend analysis is performed by either the auction site or the legal services buyer. 2. Adeal is structured. Principle factors include volume, payment schedule, distribution risk, outlier risk, engagement duration, practice area, geographical coverage, and success criteria. 3. Competitive bidding for the legal work drives the fixed fee down and forces the law firm to earn its profit through performance. 4. After reviewing final proposals a winning bidder is awarded the work. 8 January 2005 Report to Legal Management

6 consumers of legal services. Shaking up long-term and trusted relationships with outside counsel will be uncomfortable. However, law firms that are truly delivering great service and doing so in an efficient manner will only stand out further when the electronic billing data is analyzed. What does this mean in the real world? For Joan (introduced in Part One of this article), it meant that although legal costs were still higher than the CEO would like, she was able to show him, in real time, a much clearer picture of where the legal money was being spent, and what Ebilling Vendors steps she was taking to control the costs. She also was developing a more satisfying relationship with her preferred outside counsel. Some of her outside counsel relationships changed, but the others realized that in a business setting, the enduring relationships are ones in which both parties work to provide better value to each other. For Amy, it meant a promotion and a bonus, not to mention a career-long commitment to ACC. Vendor Product Website Bottomline Technologies Legal Exchange DataCert ShareDoc Examen Legal Precision Serengeti Tracker TyMetrix TyMetrix David Briscoe is a senior consultant with, Inc.He consults to legal departments on benchmarking, outside counsel management and technology, with special expertise in ebilling data analysis. He can be reached at dgbriscoe@altmanweil.com or (610) Ron Peppe is the vice president, law and communications, for the Association of Corporate Counsel and is the former general counsel for Canam Steel Corporation, an international manufacturing and construction company. He can be reached at peppe@acca.com. Reprinted with permission of the authors and the Association of Corporate Counsel as it originally appeared: Ron Peppe and David G. Briscoe, Strategize This!: Prepare Now for When Procurement Analysts Come Knocking on the Legal Department s Door, ACC Docket 22, no. 9 (October 2004); Copyright 2004, Ron Peppe, David G. Briscoe, and the Association of Corporate Counsel. All rights reserved. If you are interested in joining ACC, please go to call , ext. 360, or membership@acca.com. Report to Legal Management January