welcome association of corporate counsel – louisiana chapter february 26, 2010 | baton rouge,...
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Welcome
Association of Corporate Counsel – Louisiana Chapter
February 26, 2010 | Baton Rouge, Louisiana | CLE Program
LOUISIANA CHAPTER
Build a Better Mousetrap
Creative and Alternative Fee Structures
Writing and Soliciting RFPs for Legal Services
Introduction
Dan Schwarzenbach
Traditional Models
Traditional Models
Traditional Hourly Rates
Tiered Volume Discounts
Blended Hourly Rates
Traditional Hourly Rates
Based on the costs of providing an hour of legal services
Generally determined by the classification (i.e. attorney; paralegal, etc.) and years of experience
Overhead is another factor
Often the perception is that there is no incentive to work efficiently
More hours worked produces greater revenue for the firm
Tiered Volume Discounts
Annual agreement based on the volume of business
Percentage discount increases as volume of work increases
Peaks out at some maximum percentage of discount
Blended Hourly Rates
Can be applied to timekeeper classifications and/or timekeeper years of experience
Classifications Partners; non-partner attorneys;
non-attorneys All attorneys; non-attorneys All timekeepers
Years of experience More than 25 15 to 24 5 to 14 Less than 5 Non-attorneys
Partnering Model
Is your law firm at risk by putting some “skin” in the game?
Partnering Agreement
A three year agreement providing: Predictability of annual legal
expenditures
Pre-determined allocation of work by appropriate levels of experience
Discounts based on quantity of work and certainty of cash flows
“Cuff and collar” to limit both parties absolute exposure
Overage/underage rolled into future periods
Staffing allocations can differ by practice area
Partnering Agreement
Predictability - levels the monthly payment to an agreed upon amount based on estimated needs of the client
Allocation of work – assures the proper level of experience for each task based upon a pre-determined model for each practice area
Discounts – provides discounts from the first hour worked based on client’s estimate of work needed
Partnering Agreement
“Cuff and collar” – limits the exposure of both parties by establishing upper and lower boundaries should actual work be substantially different from estimated work
Overage/underage – allows the flexibility of spreading variances between actual and estimated to the next year
Staffing allocations – considers experience requirements based on each particular practice area
Partnering Agreement
Other benefits and advantages
Provides one blended billing rate for all work based on the agreed upon staffing models and appropriate discounts
Sets billing rates for a three year period avoiding the need to address rates each year
Places the responsibility for engaging and paying outside counsel on the law firm partner
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Labor Fees
Litigation Fees
Corporate Fees
Typical Legal Fee Annual Spread
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Labor Fees
Litigation Fees
Corporate Fees
Partnering Model Annual Spread
Level Billing
Predictability
Flexibility
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Partnering Model Cuff and Collar
5%“Cuff”
5%“Collar”
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1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Cuff and Collar Over/Under
8%?8%?
Firm issues client a 3% rebate, or rolls difference into next year calculation.
Client issues firm a 3% payment, or rolls difference into next year
calculation, divide by 12and pays the 3% over time.
8%?8%?
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1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Labor Fees
Litigation Fees
Corporate Fees
Unanticipated Merger
Excess Fees
Roll intoNext Year of Agreement
Divide by 12,budget for and pay in
2011
Unanticipated Events?
Alternative Pricing Models
Alternative Pricing
Sellers’ market vs. buyers’ market 2010 and beyond will be a buyers’ market
for legal services
Use of fixed or project pricing is commonplace in Europe and Asia
Most industries undergo pricing evolution motivated by a downturn in the economy
Alternative Pricing
Clients think: Means to lower total fee
spend
Law Firms think: Potential for a premium
The Challenge Balancing both
interests/needs
Alternative Pricing Client Concerns Addressed by Alternative or Creative
Pricing
Lack of predictability
Perceived value Too often the client views the results received as a poor value,
especially in view of rapidly increasing hourly billing rates.
What is critically important to the client? Widening gap between rates charged and the client’s perception of
value received Value assessments, performance evaluations, service agreements,
etc.
Overall price
Surprise Factor In-house compensation tied to outside counsel budgets?
Alternative Pricing
Categories
Hourly rates With or without discounts
Hourly rates Premium based on results
Project or Fixed Fee Pricing
Full Contingent Pricing
Alternative Pricing
Alternative Pricing / Common Practice
Hourly rates With or without discounts
Variations Fee Caps Unitary or Blended Rates Volume Threshold Discounts Staffing restriction
Alternative Pricing
These four are not new, nor are they real alternatives.
They are the dominant, short-term pricing trends, driven by the buyers’ market.
The challenge is, they don’t address the driving priorities of most clients, and they aren’t balancing law firm/client interest.
Alternative Pricing
Hourly rates With discount or premium based on
results
Variations Busted deal rates / success fee Ad hoc discounts / premiums Criterion Bonus Non Criterion Bonus
Alternative Pricing
Project or Fixed Fee Pricing
Variations Menu pricing
Consumer pricing / wills, divorces Project pricing Retainers Portfolio pricing
Commit in advance to do a stream of work for a set period of time
Alternative Pricing
Full Contingent Pricing
Variations Percentage of result Percentage of deal
Which Systems Show the Most Growth?
Hourly rates with non-criterion bonuses
Payment of a bonus, and the amount, is entirely at the discretion and satisfaction of the client
Tends to work only with entrepreneurial clients
Long term growth potential, but with highly limited application
Menu pricing (consumer level: divorce, wills, estate closing)
Preset price for each piece of work
Increasing use, but primarily at consumer level of profession
Advantage is that it provides predictability and allows for shopping services by clients, but works best for commodity services
Which Systems Show the Most Growth
Project Pricing
Fixed price is developed for a project, after investigation by firm and discussion with client
Doesn’t work well on small projects that can’t justify investigation time
Provides predictability, allows client to shop, provides premiums by law firm (if managed well)
Critical elements
Case assumptions
Change orders
Which Systems Show the Most Growth
Portfolio pricing
Similar to project pricing
Spans multiple legal matters over a period of time for a set price
Again, case assumptions and change orders are critical to success
Which Systems Are Preferred?
No single system is right for everyone
Fixed or project pricing is the system most clients are expressing the most long term interest
This is the system which most companies buys goods and services
Provides price, value, and predictability
Only works if we acknowledge there are some elements we can’t control (plaintiffs’ counsel for example) and those elements may change price
Trends and Examples
Trends and Examples Realign relationship between in-house and
outside counsel
Billable hour still reigns supreme
Altman Weil 1-10% of revenue for 1000 law firms surveyed
came from alternative fees
Legalbill Co. Less than 2% of matters worldwide
FMC
8 in-house lawyers $4.6 billion in revenue Outsource most legal work Use performance-based pay 20% of every invoice is “at risk” Firms get paid between zero and 200% of the at-risk
amount Dependent on performance Standard multipliers are adjusted for performance
against budget
“I don’t buy hours. I buy results.” Jeffrey Carr, General Counsel
ACES Litigation Model
ACES Litigation Model Client must define the success criteria
If success is achieved, a bonus is paid to the firm
Client and firm develop a case/matter budget
Activities in the matter are grouped into four to five major activity categories corresponding to the UTBMS codes for litigation
For each activity a “target budget” is developed
Normally, the target for the initial case assessment is $15K and for appeal is $0
The aggregate of the activity targets is the total matter target
ACES Litigation Model Within each activity grouping, the firm bills the client at its normal hourly rates
(subject to the client’s billing policies and procedures)
Until the target is reached for any particular activity group, the client pays the firm a percentage (normally 80%) of the billed fees
The unpaid fees (normally 20%) are placed in a success “bucket”
If success is reached, a bonus is paid.
The bonus consists of the amount in the bucket plus a multiplier
The amount of the multiplier depends upon the point in time when success is achieved and normally is 100% (early stages before substantial expenses incurred), 75% (pleadings), 50% (discovery), or 25% (trial & appeal)
This declining multiplier has the effect of paying higher effective hourly rates for early success and lower rates as a matter drags on before resolution
ACES Litigation Model
A second level bonus is paid by adding 1% to the bucket multiplier for each 1% of total matter target saving
In other words, if the firm had expended only 40% of the total matter target, there would be an additional 60 percentage points added to the applicable bonus multiplier.
Conversely, if the total matter target is exceeded, this becomes a point-for-point penalty, reducing the bucket multiplier by 1% for each percentage point of total matter excess
A third level bonus/penalty may be used to reflect the deviation from the expected value of the case (based on a mutually agreed decision tree) for any settlement or judgment
Budget targets are flexible and will be revised to reflect unanticipated events; however, the firm must identify its baseline assumptions and these must be agreed in advance
Cisco
All firms know Cisco Systems works on a fixed-fee basis Monthly flat fees for bundles of matters Incentive-based fees
Company pays extra for successful results National Firms working with Cisco
Morgan Lewis Fenwick & West Baker Botts Weil Gotshal
On why he switched to flat fees: “I’d be trying to create efficiencies and limit the scope of the work being done while law firms would be totally committed to success on the legal merits without giving any thought to my costs.” Mark Chandler, General Counsel, Cisco
Clorox and Pfizer
Bid out entire portfolios of work
Major M&A deals Flat fee to Morrison & Foerster to represent
Clorox in its $913 million buyout of Burt’s Bees
Labor and Employment Pre-set fixed monthly fee to Jackson & Lewis to
handle all of Pfizer’s labor and employment work
Bartlitt Beck
Clients pay the firm a pre-set flat monthly fee Hold back 20-40%
If the case goes south, client keeps the holdback
If there is a successful result, the firm gets a bonus up to 5X – or more – of the holdback
Trends and Examples
A top 15, New York based, international law firm will generate almost half its revenue this year from alternative pricing Primarily fixed price work, spanning
litigation and transactional
At least 10 of the Top 20 firms in the US have advanced programs underway
Commonplace among London firms
Trends and Examples
“Never has so little been accomplished by so many for so
long.”Winston Churchill
Challenges
Alternative arrangements only work if law firms become more efficient at handling matters and clients offer some upside potential
Law firms who want to partner with clients need to take on some of the price risk
In-house counsel and outside lawyers must monitor matters closely Use “shadow billing” by tracking timekeeper hours on
matters subject to alternative arrangements Share information Permits the firm to compare actual time with the amount it’s
charging
Challenges
“Alternative fees arrangements take a lot more engagement than many in-house counsel like..” Jeffrey Carr, General Counsel, FMC
“Potential clients are generally very receptive to the idea, but they don’t always accept it…” Jeffrey Healy, Partner, Tucker Ellis
“One of the challenges is showing people how to do it…” Frederick Krebs, President, Association of Corporate
Counsel
Networking Luncheon