Using Value-Based Fees to Strengthen Client-Firm Relationships:

Transcription

1 Using Value-Based Fees to Strengthen Client-Firm Relationships Using Value-Based Fees to Strengthen Client-Firm Relationships: Steven Greenspan United Technologies Corporation Boston, MA William Garcia Eagle Key LLP Washington, DC

2 Using Value-Based Fees to Strengthen Client- Firm Relationships April 2013

3 Today Our goal: Bust myths, provide solutions, offer insight... So that you can effectively use value-based fee structures Our game plan: Review 6 popular myths Myth Busters: Case studies and insights Hands-on tools to help you get started today Meet our team of Myth Busters Seyfarth Shaw LLP

4 Myth Buster Team Bill Garcia Principal, Chief Legal Officer Eagle Key Consulting LLC Steven Greenspan Associate General Counsel for Litigation United Technologies Corporation Kate Perrelli Partner, National Chair, Litigation Seyfarth Shaw

5 Facts and Stats Corporate counsel estimate 20.9% of litigation spending is under an value-based fee Source: BTI Litigation Outlook 2013 Litigation is the most common practice area in which clients employ value-based fees; 41.1% of clients use value-based fees for litigation work more than double any other practice area Source: BTI Premium Practices Forecast % of general counsel and chief legal officers want to increase the percent of their budgets spent on valuebased fees Source: Jim Hassett, Founder, LegalBizDev.com Seyfarth Shaw LLP

6 ALTERNATIVE FEE BENCHMARKS ALM Law Department Metrics Benchmarking Survey % % % % %* % est * 2010 change in calculation methodology from matter level to vendor level 5

7 ALTERNATIVE FEE BENCHMARKS Inside Counsel 2010 Annual Law Department Operations Survey %* % est 6

8 Value-based fees take different forms Type Fixed fee per deliverable Capped fee Flat fee per period Portfolio fixed fee Incentives and success fees Pure contingency Description Affixes an all in price for a distinct piece of work A ceiling on what the client will pay the firm for a particular piece of work Typically covers categories of services, e.g. advice and counsel, during a specified period A broader application of the fixed fee approach for a large group of matters, often over a multiyear term Aligns interests by tying a portion of law firm compensation to outcomes Law firm compensation depends entirely upon achieving certain outcomes Copyright 2011 Association of Corporate Counsel

9 Six Common Myths Worth Busting Litigation work doesn t fit the value mold. Value-based work is an hourly rate in disguise. Alternative fee arrangements sacrifice quality. Alternative fees damage long-term relationships with outside counsel. I lack data needed to make an informed pricing decision. I m too busy to entertain new processes in the face of a suit Seyfarth Shaw LLP

10 Myths from the Audience Audience Participation Time! Myths we are missing? Questions about process or implementation? Seyfarth Shaw LLP

11 Tales from the Front -- UTC How the UTC team busted the myths Litigation work doesn t fit the value mold. Value-based work is an hourly rate in disguise. Alternative fee arrangements sacrifice quality. Alternative fees damage long-term relationships with outside counsel. I lack data needed to make an informed pricing decision. I m too busy to entertain new processes in the face of a suit Seyfarth Shaw LLP

12 Conventional Reasons for Myth Litigation path is unpredictable, so you can only price by the hour I only want to pay for the tasks actually performed Any fee deal other than hourly could result in windfall for client or lawyer My lawyer is honorable and trustworthy, he doesn t need to be incentivized to be more efficient or to achieve a better result

13 How Do You Define Value? Does lowest price = best value? Components of value: price, risk, exposure? Other factors? Does every buy decision involve a value proposition, or is value ever irrelevant? Do you need to sacrifice quality to get better value? Would you hire somebody to paint your house using hourly rates? Is litigation different than house painting?

14 Fee Arrangement Must be Designed to Deliver Value to Client In litigation, does an hourly fee engagement deliver value? Increasing the price based solely on increasing hours is inconsistent with efficiency Clients don t buy hours; we buy a service Seller should shoulder all effects of its management inefficiencies; hourly rates shift costs of inefficiencies entirely to client Fee arrangement must be designed to achieve better results Fee arrangement must also be designed to achieve business objective

15 Alternative Fee Agreements in Litigation Should Align Interests of Client and Lawyer Hourly rates always a WIN for lawyers, regardless of WIN/LOSS for client We need to employ a WIN-WIN model Success fees promote the WIN/WIN model Should lawyer share in the downside, if they are going to share in the upside? Protect against true unknowns, that could not have been factored into the deal

16 Tales from the front A law firm view Examples of value-based work at Seyfarth Complex commercial litigation Employment litigation portfolios Global trademark protection Copyright 2012 Seyfarth Shaw LLP

17 Tales from the Front A Law Firm View How Seyfarth busted myths on a recent matter Litigation work doesn t fit the value mold. Value-based work is an hourly rate in disguise. Alternative fee arrangements sacrifice quality. Alternative fees damage long-term relationships with outside counsel. I lack data needed to make an informed pricing decision. I m too busy to entertain new processes in the face of a suit Seyfarth Shaw LLP

18 Success Fee and Flat Fee by Phase Approach Case Study Type of Case: Complex Commercial Contract Dispute Fee Arrangement: 4 defined phases with flat fee for each phase Billing Arrangement: 80% of each phase paid at phase end. 20% Hold Back Success Bucket Holdback Payment: 0 to 20%++ plus at conclusion 17 Copyright 2012 Seyfarth Shaw LLP

19 Advantages Eliminated surprises on fees Encouraged outside counsel to share in the risk of litigation Encouraged client and outside counsel to assess legal and business risks at the outset by discussing and defining Success Encouraged client and counsel to have value discussion at the outset and at the conclusion 18 Copyright 2012 Seyfarth Shaw LLP

20 Why It Worked Sufficient time spent on what success meant to in house counsel, business leads, and outside counsel Assessment of outcome was accurate Client did not feel that value was compromised by flat fee rather than an hourly arrangement 19 Copyright 2012 Seyfarth Shaw LLP

21 How the ACC Value Champions busted myths Litigation work doesn t fit the value mold. Value-based work is an hourly rate in disguise. Alternative fee arrangements sacrifice quality. Alternative fees damage long-term relationships with outside counsel. I lack data needed to make an informed pricing decision. I m too busy to entertain new processes in the face of a suit. 20 Copyright 2012 Seyfarth Shaw LLP

22 How value-based fees strengthen client-firm relationships They provide predictability and eliminate surprises They demand advance planning, and create conversations about goals, expectations and what constitutes value They create transparency and greater opportunities for communications on progress toward outcomes In short, they are a tangible method to build greater mutual trust. 21 Copyright 2012 Seyfarth Shaw LLP

23 Questions and discussion 22 Copyright 2012 Seyfarth Shaw LLP

24 Tools you can use Handout: Questions you should anticipate from the law firm Questions you should ask the law firm Questions on AFA s for outside counsel AFA decision tree White paper on how these efforts build stronger clientfirm relationships Seyfarth Shaw LLP

25 Using Value-Based Fees to Strengthen Client- Firm Relationships April 2013

26 Using Value-Based Fees to Strengthen Client-Firm Relationships The Miracles (and the Myths) of the Alternative Fee: Steven Greenspan United Technologies Corporation Boston, MA William Garcia Eagle Key LLP Washington, DC

27 The Miracles (and the Myths) of the Alternative Fee Kate Perrelli, Partner, National Chair, Litigation, Seyfarth Shaw LLP 2013 Seyfarth Shaw LLP Is it time for the law profession to bury the billable hour beast? Once the standard for how things got done when it came to practicing law, billing by the hour was popular because it was simple and flexible. Apply it to any situation, track your time, pay as we go, settle up on the back end, live happily ever after. Now, the billable hour has become a fairly ripe target in many legal circles. It has been vilified as an antiquated practice, burned in effigy by some for fanning the flames of inefficient legal service delivery. Picture the hordes of angry villager-lawyers rising up to charge the castle of the billable hour beast, in the name of quality counsel, cost management and all that is good! To be sure, there are problems with the billable hour model. In many situations, it does not promote efficiency; it does not encourage strong planning; it can be misused as the 'easy way out.' However, it also appears that the billable hour has become a go-to metaphor for deeper symptoms of mistrust -- the lack of collaboration, transparency or predictability -- that can deteriorate or destroy otherwise healthy relationships between clients and their outside counsel. At our firm, we have not abandoned the use of the billable hour, but instead have embraced other approaches that apply to a vast range of evolving client needs. Our client service model incorporates Lean Six Sigma tools and process improvement methodologies into the delivery of legal services, and this approach has helped us to implement a variety of successful alternative, or value-based, fee arrangements. These arrangements have created predictable and more cost-efficient results at the matter or portfolio level. We also have found that the process to establish fee-based arrangements has yielded a far more powerful benefit -- the ability for us to develop and strengthen client-firm relationships that extend far beyond the parameters of any single engagement. In this article, we will explode a few myths and outline some strategies and solutions on how to best use alternative fee arrangements, and demonstrate how some data-driven business practices can lead to stronger, more productive relationships between inhouse clients and their outside counsel. The Ups and Downs of Fee Structures It is perhaps implicit that the structure of the fee needs to match or adapt to the situation at hand. However, as the use of fee-based arrangements continues to grow, a handful of structures are emerging as the most popular or useful. They include variations on fixed, or flat fees, based on phase, case or portfolio; retainers; cuff and collars ; and success fees. We have utilized all of these options, depending upon client needs. The most successful arrangement will be the one that best matches client goals. A basic capped fee, for instance, could certainly provide predictability, but the client could pay more than it should if too high a ceiling is determined. It also may not set the right motivation for law firm efficiencies. While not applicable to all situations, the success fee (also called a performance-based holdback) is worth pointing out. A flat fee is established, with a pre-determined amount or formula for additional compensation for meeting/exceeding pre-defined outcomes or success metrics. This model exemplifies how fee structures can create a win-win situation by connecting law firm compensation to outcomes, aligning client-firm incentives and rewarding efficiency. It also can accommodate changes and flexibility v v.1

28 Miracles (and Myths) of Alternative Fees Page 2 of 6 As part of its Value Challenge effort, the Association of Corporate Counsel (ACC) has published a Value- Based Fee Primer that provides a good overview of alternative, or value-based, fee structures. It includes the excerpted chart that appears at the end of this article; the full document is available at: We have used some key Lean Six Sigma concepts and tools to collect data and develop a strong roadmap for planning alternative fee engagements. We found three key Lean concepts -- root-cause analysis, Voice of the Client and process mapping -- to be powerful planning tools. They have tremendous appeal to us because they are strong concepts, easy to understand, and versatile to use. These are tools that can be used in the simplest of ways-- using the back of napkin, sticky notes and flip charts -- to strategize, organize and prioritize. They can also be used in sophisticated, robust and systemic ways to reengineer legal processes and plot out complex engagements. We have found them to be effective in helping to identify the most appropriate fee structure for a given situation. Getting to the Root/s of the Problem When a repetitive problem is detected in a process, there are several tools to help hone in and evaluate the cause. These root cause analysis tools can be used individually, but are more effective when facilitated with a team. We have found from multiple experiences that the use of these tools are valuable in problem-solving, but they also encourage active dialog and create a teambuilding environment. For example, we have used one root cause analysis tool, written as y=f(x) and pronounced as Y as a function of X, when we conduct seminars and workshops on structuring alternative fees with groups of in-house attorneys and outside counsel. In teaching the tool, we start with a preliminary exercise to get to the root of a fairly universal problem that participants confront. Our partially tongue-in-cheek exercise is to find the root cause of Why are legal fees too high? Inevitably, as participants drill down into the possible reasons, they nearly always identify the role of communications as key factor in both controlling costs and creating successful client-firm relationships. This sets the stage for more specific conversations on goals, outcomes, priorities, as discussed later in the Voice of the Client. Mapping Legal Processes One of the great mysteries and myths in the legal profession centers on the archetype of the artisan attorney. Basically, this claims that each matter is entirely unique and that successful results, and therefore strong client relationships, are based purely on the individual attorney s approach to his or her art. Because each case is unique, according to the myth, the final outcome cannot be predicted; thus, the best route is to pay by time incurred. While we all pride ourselves on the personal stamp we bring to our work, we also recognize at our firm that many, if not most, legal matters or projects, lend themselves to a defined process, and thus to a defined fee structure. Based on these two intertwined premises, we have worked for more than six years to apply the core methodologies of Lean Six Sigma to the delivery of legal services. For example, using the Lean Six Sigma concept of process mapping, we have defined and catalogued more than 110 various legal processes -- from single-plaintiff employment litigation and real estate financing to commercial and class-action litigation. Process mapping serves multiple purposes. It helps drive better data collection and engagement planning, work assignment and resource management. When we map legal service delivery from beginning to end, we identify steps that deliver the right results and identify where we need to modify or re-engineer the process often using best practices, knowledge management or a technology solution. Even the most complex projects or engagements will have phases, sections or tasked that can be mapped v v.1 2

29 Miracles (and Myths) of Alternative Fees Page 3 of 6 Process mapping has helped our teams within the law firm more accurately identify what the work will cost; and as a result, it allows us to provide more specificity and transparency about costs and pricing with clients. We have also used process mapping to create stronger collaboration and teamwork opportunities with clients. Joint process mapping sessions with clients have proven to build stronger client relationships. We use these sessions to help define business outcomes that support our client s strategic goals. Frequently, the client s own internal steps in key process areas are defined and incorporated into an overall plan that more clearly defines roles and responsibilities -- and thus greater efficiencies -- between the client and outside counsel. Listening to the Voice of the Client Process mapping works in tandem with another core Lean Six Sigma concept, Voice of the Client, that we have adapted to legal practice. The Voice of the Client includes the early dialog to listen and set goals, manage mutual expectations, identify challenges and plan the work, all of which contribute to determining what form of alternative fee structure would apply best. The Voice of the Client also includes a step, called Lessons Learned, the bookend client-firm dialog that occurs at the conclusion of the project, matter or engagement. These conversations focus specifically on what worked well and what could be, could have been, done better. By their nature, they also create an open forum for addressing larger relationship issues of expectations, communications and trust. Some alternative fee options, like the use of a success fee or bonus, create a financial incentive and help ensure the Lessons Learned conversation takes place. While many attorneys instinctively apply these practices to their individual client relationships, we also have worked to institutionalize Lessons Learned practices at a firm-wide level. For example, we conduct periodic scorecard surveys on key dimensions of client service (responsiveness, budget management, quality of counsel, communications, overall satisfaction) with rotating groups of as many as 250 clients at a time. This feedback is shared with the individual client s relationship partners; our firm leadership also uses the aggregate data to spot trends, address specific issues and help us shape future client service efforts. The Willingness to Succeed From our experience, we have found that a successful fee-based engagement ultimately depends on the willingness of both client and outside counsel to: Collaboratively define scope, priorities and metrics -- based on the client s desired outcome or output, cost, timing. Share more information -- not only in the planning process, but in the ongoing management and progress of an engagement. Balance risk with reward by ensuring that both sides have skin in the game. Provide candid feedback during, and at the conclusion of, the project, matter or engagement. Even some of our most skeptical clients have later reported that the investment of time and energy in upfront planning was not only beneficial, but absolutely critical to yield substantive downstream efficiencies and results. Furthermore, we have seen both immediate and longer-term benefits in shifting the client-firm relationship much more strongly to one of collaboration and partnership v v.1 3

30 Miracles (and Myths) of Alternative Fees Page 4 of 6 04/ v v.1 4

31 v v.1 Addendum Comparison of Typical Fee Structures Excerpted from ACC Value-Based Fee Primer 2010 Association of Corporate Counsel

32 Miracles (and Myths) of Alternative Fees Page 6 of v v.1 6

33 Using Value-Based Fees to Strengthen Client-Firm Relationships Handout for Attendees: Starting a Value-Based Discussion Steven Greenspan United Technologies Corporation Boston, MA William Garcia Eagle Key LLP Washington, DC

34 HANDOUT FOR ATTENDEES: STARTING A VALUE-BASED DISCUSSION Questions you should anticipate from the law firm: How pivotal is this engagement in terms of the company's business goals and strategies? Routine? A one-off? Critical? More urgent than strategically important? As it applies to the matter or engagement at hand, what takes highest priority -- the outcome (e.g. A trial victory), timing (a quick settlement), or ensuring cost-efficiency? How would you define value in this effort? What criteria will help you determine if fees are in line with the outcome you receive from our services? What work has been done to date? From a service level, what are your expectations on how this matter will be handled? For example, how closely do you want to be involved, how in-depth and frequent should our communications be? What have been some of your specific pain points in working with outside counsel generally or on similar matters? What has been your experience with any form of alternative fee structure? Have you had greater/lesser success with one form (e.g. a success fee) than another? Would it be helpful to go over the various forms of alt fee structures and the best applications for the different kinds of structures? What resources might be available within and outside your legal department that we could tap into? Is there one point of contact within the legal department that could help us navigate your organizations, as necessary? Are there resources (e.g. consultants) outside the organization might be worth considering? What perspective could they provide? Seyfarth Shaw LLP 1

35 Questions you should ask the law firm: Please provide a detailed discussion on what work, if any, your firm has previously done in the areas described above relevant to the Company s legal needs. What special talents and expertise do you have, and over and above what other top tier firms possess in this regard? Please provide a detailed alternative billing plan or set of plans or options that you would propose as to how to provide services other than on an hourly basis limited (e.g., a flat fee or success fee). If you are proposing a fee structure other than a flat fee, please also include the billing rates for any proposed members. What types of reporting do you offer regarding fees? How do you utilize technology to enhance value for your clients? What processes and technologies has your firm invested in recently which have increased the productivity of your lawyers and paralegals and/or reduced your internal costs in ways that have benefited your clients? What are examples of metrics you use to evaluate your firm s performance? Which alternative fee arrangements do you believe are most successful for clients? Which metrics do you think are most effective for performance-based fee arrangements? What do you believe is a best practice for relationship management? How do you integrate continuous improvement into your approach? Do you utilize project management in your delivery of services? What is your approach to matter management? How does your firm deal with instances where it exceeds an agreed budget amount? Seyfarth Shaw LLP 2

36 Checklist for AFA discussion with outside counsel: Has outside counsel engaged in AFAs previously? What types of AFAs has outside counsel used? What percentage of the firm s matters are handled as AFAs? Has the proposed lead counsel for our matter used AFAs? What types, and in what percentage of lead counsel s matters? What kinds of experience has outside counsel had with AFAs? Successful? Unsuccessful? As perceived by the firm? As perceived by the client? Why were outside counsel s previous AFAs perceived to be successful or unsuccessful? By the firm? By the client? Is outside counsel able to provide client referrals for us to speak to? Is outside counsel willing to engage in an AFA for this matter? If not, why not? If so, what kind of AFA matter would your firm recommend? Does outside counsel have historical data available reflecting average costs for this type of matter? For the matter as a whole? For specified projected phases of the matter? Is outside counsel willing to share such data? Does outside counsel recommend that any particular factors be used for determination of success in a success fee arrangement? If so, why would those factors be appropriate? Seyfarth Shaw LLP 3

37 Using Value-Based Fees to Strengthen Client-Firm Relationships AFA Decision Tree: Value Based Fee Arrangement Steven Greenspan United Technologies Corporation Boston, MA William Garcia Eagle Key LLP Washington, DC

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