Achieve Maximum Added Value by Tailoring Your Fee Arrangements to Meet Your Needs
“[Our General Counsel] is the only guy at IBM with an unlimited budget… and he always exceeds it.”
“Of course, general counsel recognize that all businesses, including law firms, must make a profit but, given the pressures they currently face, getting “the most bang for the buck” is an imperative.”
Which of the quotes above reflects your experience in the General Counsel’s office, or as an outside corporate lawyer? The first quote comes from IBM CEO Frank T. Cary, during the economic boom of the early 1980s. The second observation is taken from a 2013 report on corporate client expectations. Times have changed. Chances are excellent that if you’re in corporate practice today, you’re feeling substantial pressure to cut costs and increase process controls.
Adding value is today’s top priority
Modern corporate clients won’t accept reduced service in the name of economy. While 78.5% of responding General Counsel report receiving a fee reduction from their outside counsel, less than 10% of them chose firms based on the lowest cost. Corporate counsel are looking for more than just discounts. They want value for their legal spend. According to professional services marketing strategist Michael B. Rynowecer, of BTI Consulting Group:
“Delivering value overtook cost control as corporate counsel’s most important goal in 2013. In 2014, more CLOs have joined the march. Fully 41% of corporate counsel look to add more value to their business in 2014; up from 32% in 2013.”
BTI’s data indicates that more than twice as many Chief Legal Officers (41%) made “adding value” their top priority as focused on cost control (18%).
What does what does it mean to add value?
As Mr. Rynowecer points out, adding value means more than just doing one’s job well. That is simply giving expected value: “Doing what you were hired to do is not value-added to clients. CLOs are thinking about getting products to market faster, anticipating regulatory hurdles, improving IP protection and getting deals done faster with improved diligence. You add value when you help your client achieve these objectives.”
The insistence on added value mirrors the expanded role of the modern CLO. He or she was once treated as a legal technician and little else. No longer. Today’s successful CLO is a fully integrated part of the management effort. Martin Collins, General Counsel to Silicon Valley’s Novellus, Inc., explained a CEO’s perspective this way:
“I don’t need someone to tell me what the laws are. I need a wartime consigliore. I’m in a competitive business. I’m trying to hire people. You are not helping me. If you are just repeating the law as it’s written down by outside counsel, you are not doing your job.”
Traditionally, the General Counsel was reactive, solving existing legal problems. Today’s CLO is proactive, sitting in at the beginning of product development and planning meetings. As Mr. Collins puts it:
“[T]he total amount of calories it’s going to take you and I to solve this problem, if you don’t bring me in the beginning, is going to be greater than the total amount of calories it’s going to take me to solve it [if you do]. I’ll still have to solve it after we have it.”
As always, General Counsel advises on legal issues. But the successful CLO also weighs in on business matters, contract administration, risk management, dispute prevention and resolution, and even security. General Counsel was once viewed as a “deal killer” who said “you can’t” more often than “you can.” The effective CLO now focuses on finding ways to get deals done, on legally and commercially acceptable terms.
The budget-conscious General Counsel
The transformation of the General Counsel from legal technician to business advisor accompanied another significant shift. Traditionally, the legal budget was sacrosanct. But economic pressure has forced CLOs to do more with less, and led to greater scrutiny of spending.
Much more work is being brought in-house, and budgets for outside counsel are being slashed. Sprint-Nextel CLO Charlie Wunsch, for example, uses outside counsel only for their special expertise or for temporary spikes in staffing needs.
Mr. Wunsch routinely seeks discounts and alternate fee arrangements (“AFAs”) from outside counsel, refusing to work with firms that don’t offer them. He is hardly alone in this. The ACC/Serengeti Managing Outside Counsel Survey reveals that 62.1% of corporate counsel use some form of AFA to achieve the dual goals of predictability and control.
Value-Added Service, Cost Control, and the Role of ADR
The use of, alternative dispute resolution mechanisms like mediation, arbitration and deal facilitation has become a regular feature of most General Counsel’s cost-control efforts. As Brian Rauer, General Counsel to the New York Metro Better Business Bureau, put it in an in interview with the editors of The Metropolitan Corporate Counsel:
“Forward-thinking in-house counsel are … avoiding unnecessary conflict escalation. The potential financial benefits are self-evident, while additional benefits may accrue down the road… a well-designed and trusted dispute resolution program may significantly decrease the perceived – and actual – need for litigation. You may realize strengthened business relationships coupled with an enhanced reputation.”
The additional benefits of ADR – decreased conflict, trust, an enhanced reputation and strengthened business relationships – contribute directly to value-added service, by getting deals done faster and with less friction.
Crafting the AFA
The appropriateness of a given legal fee structure depends on the surrounding circumstances and economic incentives. AFAs are “alternative” to hourly billing. Ironically, hourly billing was originally “alternative” to the once-standard (but unpredictable) practice of lawyers determining the fee at the close of a case. Business clients wanted some metric to determine value, and chose time spent.
Each billing method has obvious pluses and minuses:
Hourly billing rewards thoroughness, but incentivizes sloth, unnecessary work, overstaffing, climbing rates, and straightforward fraud. It discourages settlement.
Discounted rates can save money, and are welcomed by General Counsel. But they can also intensify the negative temptations of hourly billing, since more hours will need to be spent to generate the same billings.
Flat fees are predictable and incentivize a quick resolution, but if they are set too low, they discourage work. Also, they require a thorough knowledge of the scope of the task to set properly. Asymmetric information can be a big disadvantage in negotiating them.
But repetitive tasks – where the effort needed is known, or is at least predictable within a narrow range, should be done on a flat fee, according to David G. Melman, Chief Legal Officer at First Rehabilitation Life Insurance Company of America. They might as well be. Repeat clients would naturally balk at a wide variation in fees for a familiar service.
Contingencies motivate counsel to work efficiently, share risk, and promote settlement, but discourage counsel from taking marginal cases, cost clients a healthy chunk of an eventual recovery and interfere with needed cash flow.
AFA’s are here to stay. CLOs responding to the Altman Weil survey report that they saved an average of 23.9% by using AFA’s in 2013, and they are unlikely to forgo those savings. Savvy corporate counsel will therefore plan for them in each case, well before they have to be negotiated. What are the client’s goals? What fee structure best incentivizes the proper service of those goals? How can counsel best achieve those goals while obtaining a reasonable economic return?
Often, the answer will lie in some creative combination of billing methods, such as a minimum fee plus flat fees for completion of various projects, coupled with bonuses for faster resolution and/or better-than-expected outcomes. Ideally, an AFA will:
- Be predictable, to allow budgeting.
- Reward service, success and efficiency.
- Share risk.
- Be responsive to the parties’ needs.
- Be negotiated on a case by case basis.
Finally, Tara Martin, deputy general counsel for Travelex The Americas Inc., firmly believes that ‘AFAs will only succeed when… both the company and the law firm are satisfied with the overall bill.”
Alternative Fee Arrangements in Corporate ADR.
The latest broad academic research on corporate use of ADR reaffirms that corporate counsel continue to lead, with almost 70% expecting to use ADR either before, after, or in place of litigation.
Over 98% of corporate counsel report using mediation, and over 85% report using arbitration. The primary motivations for using them are to save time and money. These goals are logical for cost-conscious CLOs who want to add value by closing deals quickly.
Although they will generally spend much less time on a corporate client’s case than outside counsel, ADR neutrals usually bill hourly, and their rates rival or exceed those of experienced lawyers – which most of them are. It makes sense for neutrals pursuing corporate business to build something like AFAs. This is beginning to happen.
For example, the American Arbitration Association recently offered fixed fees ($850) for low-value two-party commercial mediations lasting less than a day. The hearing would be expedited. In addition to the hearing, the mediator will engage in a pre-hearing telephone conference and review written submissions.
It remains to be seen whether the AAAs new one-size-fits-all initiative will work. Participants are being asked to accept reduced service, because it is cheap. The program does not seem to add value. And underpaid mediators have insufficient incentive to pursue settlement. The best way for them to maximize their return would be to quit at the first sign of resistance, declaring an impasse. If that happens, the fee paid becomes a pure cost.
The Agency for Dispute Resolution’s Streamline Settle also uses a flat fee AFA, but is substantially different in that:
- It is intended to clear a bundle of previously dormant cases, freeing up money and resources. It thus adds value.
- It is tailored for each client, meaning that the incentives are calibrated to the necessary effort.
- Any case not settled is not counted as part the bundle agreed upon. The fixed fee is both predictable and guaranteed.
In an era of increasingly complex legal issues and convoluted disputes, the modern CLO must accept nothing less than excellence, which means “value added.” Getting excellent performance, whether from outside counsel or from dispute resolution specialists, means using AFAs –carefully crafted economic incentives that meet everyone’s needs and give all a chance to thrive.
By Scott Van Soye