A Tsunami of Change: Reshaping the Legal Industry

Transcription

1 May 19-22, 2014, Toronto ON Canada A Tsunami of Change: Reshaping the Legal Industry Presented by Kent M. Zimmermann LI44 5/22/2014 3:30 PM - 4:30 PM The handouts and presentations attached are copyright and trademark protected and provided for individual use only.

2 A Tsunami of Change: Reshaping the Legal Industry Kent M. Zimmermann May 22, 2014 Introduction The industrial revolution is coming to the legal industry about 200 years late. 1

3 Topics We Will Cover Legal Process Outsourcers Who uses them? For what? Why? How are they performing? Topics We Will Cover AFAs + Pricing Strategies Which firms are embracing AFAs? Which types of AFAs are they using? To what extent are firms hiring pricing directors? What is the role of a pricing director? 2

4 Legal Process Outsourcers Examples of firms that work with LPOs Akin Allen & Overy Cravath Debevoise DLA Piper Goodwin Kirkland Milbank Paul Weiss Skadden Simpson Thatcher Slaughter & May 3

5 Sought-After Clients Work With LPOs Penetration by just one LPO, Integreon All of the top 10 investment banks in the world Nine of the top 10 pharmaceutical companies in the world 15 of the top 20 life sciences companies in the US Six of the top 10 high technology companies in the US Actavis American Express Bristol Myers-Squibb Cisco Coca-Cola Eaton Corporation GE JP Morgan Chase Mass Mutual Microsoft Netflix Oracle Pfizer Philip Morris United Technologies Willis LPO Market Size and Performance* $1.1B in sales in 2012 Grew at average of 32% in each of the last three years Significant savings reported 95% of General Counsel report savings of 30% or more Law firms report average savings of 20%; 75% report savings of 30% or more *According to the 2012 Legal Outsourcing Market Global Study, Published by the LPO Program 4

6 INTRODUCTION TO LPO LPO has emerged as a key capability for attorneys to drive efficiencies, predict process outcomes and control cost. Type of Services Appeal Front Office Typically data-intensive legal tasks performed by fee-earners such as, Due Diligence, Document Review, E- Discovery, IP, Contract Drafting & Management, Research, Compliance, etc. Built in QA and Process Measurement. Per unit and Per project pricing assurance. Lower cost labor and all-in cost. Unprecedented security. Middle Office Back Office Business Development, Business Intelligence, Client/Matter Intake, Conflict Management, Pitch Support, etc. Billing, Data Entry, Indexing, IT, HR, etc. Process Definition and Measurement. Precedent Management. Billing analytics tools. Repeated process and volume enables efficiency. Abundant and low cost offshore labor LPO Advantages Over Traditional Law Firms Lower cost Access to low-cost labor Experience hiring and managing low-cost labor Higher quality Benefits of scale Use of six sigma and other processes 5

7 Substantive Legal Litigation Document review E-Discovery Legal research IP portfolio enforcement General Practice Due diligence Contract abstraction, review, management Business research IP portfolio review and management Industry Dynamics Driving Change As lawyers move up the value chain, there is a growing need for intelligent legal outsourcing solutions that support them and transform the way lawyers work. Yesterday Today Future? Strategic Counsel Technical & Subject Matter Expertise Day-to-Day Matters Process Driven / Volume Intensive Outside Counsel In-House Counsel Outside Counsel In-House Counsel LPO Outside Counsel In-House Counsel LPO 6

8 Benefits for Law Firms LPOs allow firms to Follow the market s lead on work allocation, resulting in lower cost and higher quality work product Protect or improve the firm s margins Other Reduce the firm s fixed costs Equivalent of flex-staffing based on client Allow the firm to further constrain capacity To focus more on clients that will pay full rates and use the firm for its strengths Provide better work experience for associates To attract and retain strongest incoming associate talent Brand benefits AFAs + Corresponding Pricing Trends 7

9 Examples of Firms That Embrace Use of AFAs in Marketing Arnold & Porter Crowell & Morning Dechert Goodwin Kirkland Mayer Brown Morgan Lewis O Melveny Orrick Paul Hastings Reed Smith Sidley Wilmer Vinson & Elkins Kirkland and Wilmer Arguably, one of the factors that has helped Kirkland adapt to and ultimately thrive in a changed economic climate is its longtime embrace of alternative fees. For more than two decades, while many other firms resisted any move away from the billable hour, Kirkland has taken cases under contingency, fixed-fee, holdback/success fee, and other non-traditional arrangements. The American Lawyer Magazine, January 1, 2012 Wilmer has also been proactive and innovative in responding to the new economic realities. It has become an enthusiastic proponent of alternative fee arrangements The American Lawyer Magazine, January 1,

10 Goodwin* One of the most important elements [is] to understand what it actually takes to do things that we do. How much does it cost us in terms of hours to do a motion to dismiss, to take a deposition? If everyone enters their time properly then you can match it against budget and identify the minute things go out of whack. We d ultimately be able to look and say, Is the right person doing this job? Could it be done just as well and cheaper by a paralegal? Would it be done better by someone senior? The best approach for Goodwin is to rely on data-mining tools that analyze information the firm currently has instead of pushing for real-time data collection by attorneys as they bill time on matters. The data should help with proper budgeting and staffing. *ALM 2013 AFA Survey Baker & McKenzie* We help set the price in a proposal, help get the price, help our fee earners manage the price through project management, and then review how effective the pricing approach taken has been on a long term basis for both our client and our firm. We are building a whole infrastructure in our firm with pricing do s and don ts. Over the last 18 months, the biggest change in the legal pricing field is a greater emphasis on project management and how we deliver services. Law firm clients are now looking for demonstrable value and efficiency, and we should not shy away from this challenge. - Stuart Dodds, Director of Global Pricing, Baker & McKenzie * Hasset, Jim, Legal Pricing in Transition,

11 Akin Gump and Mayer Brown* I like to walk the client through a whole list of questions. Sometimes, they won t immediately understand what their own price sensitivity is. My job is to get them thinking about what matters most to them. I can be seen as an internal consultant to lawyers in the firm, and also to the clients. Toby Brown, Director of Pricing, Akin Gump I find it hard to see how major firms could not organize themselves this way. What we do fits in somewhere in between finance and business development. It s at the same time both numbers driven and creative. Michael Byrd, Assistant Director of Pricing Strategy and Analytics, Mayer Brown * Hasset, Jim, Legal Pricing in Transition, 2012 Winston* The partners are encouraged to reach out to us for assistance with requests for alternative fee arrangements and budgets. Some partners were already very good at defining budgets and pricing strategies, while some were new to the concepts. We coach them through the process of defining a budget and identifying pricing options that align with their client s needs and expectations. In the two years since starting the formal initiative, we have made significant strides in providing the tools and techniques to support our lawyers and clients. Katherine Cain, Manager of Business Intelligence, Winston & Strawn * Hasset, Jim, Legal Pricing in Transition,

12 Fish & Richardson* We prefer to price on an AFA basis. To do that, my staff goes through a case and interviews the lead attorney about the details. Is it a judge whom we know well? How many patents are under litigation? What is the technology? How complex is it? As a result of inquires like this, we can put together a litigation budget and use it as a guide for pricing. By asking the right questions, we can predict which cases will be more difficult to handle. We think that [the AFAs we propose] improve aspects of the lawyer/client relationship. Fixed fees allow lawyers and clients to focus on the merits of the case so that they can reach the best result, without the same level of concern in the traditional hourly fee arrangement Kurt Gliztenstein, partner, patent litigator, Head of AFA Group, Fish & Richardson *Hasset, Jim, Legal Pricing in Transition, 2012 Cravath* For reasonable periods of time during the life of a lawsuit, say three months at a time, I should identify the client s objectives, measure, calculate, build in a contingency and come back with a price. Once the price has been agreed upon, the billable hour should be irrelevant. The client will no longer be surprised by a whopper bill and met by the standard (albeit true) explanation that litigation is unpredictable. [W]e should periodically revisit the price. The point should not be to achieve a gotcha for me or the client. The point is to devise a rational system that puts the incentives where they should be. *Chesler, Evan, Killing the Billable Hour, Forbes, December 25,

13 Cravath* This does leave one big issue. How does the client know that I won t cut my efforts to the bone in order to avoid losing money (or, for that matter, to avoid an early victory)? clients should hire lawyers they trust. Quality insurance should come in the form of a success fee. If I win, I should be rewarded. That s not only fair, it places the incentive where it belongs. It doesn t suffer from the soft idea that effort, even unsuccessful effort, should get an A. Winning is what deserves an A. * Chesler, Evan, Killing the Billable Hour, Forbes, December 25, 2008 Crowell & Moring* One way firms strive to remain competitive is through alternative fees or as [Crowell & Moring Chair Kent] Gardiner calls it, "value-based billing." Clients increasingly are demanding that Crowell share in the risk. You have to master expense management and innovative pricing while continuing to attract new client relationships and expanding on existing ones," Gardiner said. "The new definition of solid success is the firms that manage that equation well. * Revenues Up at Top Washington Firms, National Law Journal, September 30,

14 Hourly Rates Not Dead Yet, But AFAs Growing* Percent of all fees billed off the billable hour 2011: 16% 2012: 17% 2013: 19% Equal to approximately $13B in legal work billed in form of AFAs by Am Law 100 in 2013 *Citibank/Hildebrandt 2013 Client Advisory Increasing Emphasis on Service Delivery Cost* In the good old days when lawyers did not have to worry about how much things cost, [setting the right price] was relatively straightforward. But now that so many clients are demanding efficiency, the work must be done differently. That will inevitably change the cost of delivering a quality service, and ultimately its price. In our experience, the approach that works best is to start with just-in-time training for a small group of influential partners who are open to change. We introduce LPM [legal project management] basics very quickly and then get them to immediately apply key concepts to actual matters. The focus is on changing behavior to produce tangible results Case by case, matter by matter, the firm begins building its experience in LPM and AFAs, and gradually changes the way it meets the needs of its clients. * Hasset, Jim, Legal Pricing in Transition,

15 ALM s 2013 AFA Survey Real drivers of the AFA movement are executives and procurement departments charged with reducing legal spending using the same tools they use to buy office equipment 46% of law firms that track future AFA pricing use accounting software to do the job; 38% use matter-management software; 18% use e-billing software; 12% use other systems AFAs are used predominantly by large companies with more than 10,000 employees (44% of respondents ) ALM s 2013 AFA Survey Half of the respondents participated in reverse auctions in 2012 Litigation is the activity which is most often targeted by legal departments for AFAs 82% of 206 law departments surveyed use AFAs 50% of law departments saw increases in AFA use in the last year Clients want AFAs for predictability (87%), cost control (68%), increased efficiency (45%), and risk sharing (35%) 14

16 ALM s 2013 AFA Survey Favored AFA models are the same for law firms and clients, in order: Flat fees Blended rates Capped fees There is a generational gap: younger attorneys embrace AFAs more than older attorneys Types of AFA Arrangements Most Used* Blended rate: agreed rate for all attorneys, encourages efficient allocation of resources in staffing Capped fee: limits total cost [but prevents firm from exceeding 100% realization] Contingency: highest risk/reward potential for firm Defense contingency: encourages firm to limit damages by giving firm percentage of better than expected result Flat fee: firm assumes the risk of inefficient service delivery Flat fee with shared savings: flat fee, firm still tracks hours, if hourly fees are less expensive at end of matter, savings split with client Holdback: agreed percent held back, paid only if a particular result reached; encourages client and firm to agree and quantify desired result Phased fee: risk shared equally by firm and client for pricing of matters by phase *ALM 2013 AFA Survey 15

17 ALM s 2012 Pricing Survey 67% of responding firms indicated that they had a pricing officer 50% of the respondents report that this function is less than 2 years old 30% of pricing officers have been at their firms 10 years or more, which means that they have evolved from another role into this recently created position. 50 of the Am Law 200 have pricing directors* including Baker & McKenzie, Dechert, Reed Smith, Goodwin, O Melveny and V&E *According to Toby Brown, Director of Pricing and Analytics, Akin Gump ALM s 2012 Pricing Survey 43% regard financial analysis as the most important skill of the pricing officer Average of 55% of RFPs referred to the pricing officer 58% of firms with pricing officers have project management function within the pricing department 11% of firms give the pricing officer final authority in pricing a matter 16

18 Trend Toward Centralizing Pricing Authority It is an accelerating trend and best practice to centralize approvals discounts and AFAs to one partner or to a small, nimble and highly responsive pricing committee Trend Toward Centralizing Pricing Authority Additional best practices: Track pricing to use results of past pricing models as predictive of future performance based on matter type Disciplined and close management on a monthly (or weekly) basis of all approved AFAs against approved budget for the matter Lower service delivery cost by optimizing resource allocation/matter staffing to protect or improve margins on AFAs Use of AFAs other than capped fees, such as holdbacks and flat fees with shared cost savings, can put the firm in a position to exceed 100% realization with efficient work allocation, expense controls and overall tight management 17

19 Six Critical Strategies in Law Firm Pricing* 1. Effective pricing strategies are aligned with the vision in the firm s strategic plan, its financial goals and are specific to individual practice, matter type, and prior performance using AFAs for previous similar matters. 2. Find out what AFAs are in place and what is working and what isn t. Pricing director becomes centralized source for performance of alternative pricing models. Tracking and analyzing price and cost data is critical. *Adapted from Susan Hackett s Six Critical Strategies Used by Law Firm Pricing Directors, Corporate Counsel Magazine, September 27, Six Critical Strategies in Law Firm Pricing* 3. Connect pricing with cost. Optimize costs to deliver services to more competitively price while, at the same time, protecting and ideally increasing margins. 4. Stay away from bright-line rules and firm-wide policies. The most effective pricing strategies are bespoke and connect price with cost, work allocation, project management and matter management. *Adapted from Susan Hackett s Six Critical Strategies Used by Law Firm Pricing Directors, Corporate Counsel Magazine, September 27,

20 Six Critical Strategies in Law Firm Pricing* 5. Shift thinking in the firm from thinking of hours and revenue to revenue and profit, based on fees charged less cost to deliver services; hold partners accountable, including through compensation, for the results of pricing decisions on their matters. 6. Involve clients in the pricing conversation; pivot to a participatory pricing model in which pricing decisions are made with client input, balance against cost estimates based on historic pricing data for previous similar matters. *Adapted from Susan Hackett s Six Critical Strategies Used by Law Firm Pricing Directors, Corporate Counsel Magazine, September 27, Thank you. Kent Zimmermann [email protected] 19