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Maximizing the Value and Effectiveness of Your Outside Counsel Relationships Chris R. Sackett Brian S. Mc. Cormac Brown. Winick 666 Grand Avenue, Suite 2000 Des Moines, IA 50309 -2510 E-mail: [email protected] com [email protected] com
The Eternal Tension Between In-House and Outside Counsel • In-house counsel is overloaded with work • Outside counsel is always looking for more work • In-house counsel cannot spend money and outside counsel cannot live without it – Problems exacerbated by recent economic downturn • Increased demands for in-house lawyers to “in source” work • Increased demands for outside counsel to generate work and increase productivity • Solution – Deeper relationships – Better communication – Focus on value
Why Use Outside Counsel? • • • Overloaded Prompt turnaround needed Expertise – – • Insufficient support – – • Litigation Major transactions Special engagement – – – • • Specialized areas of law Geographic Outside in-house counsel Family leave Cover temporary increase in legal work Reputation Insurance Policy
What Does In-House Counsel Hate About Working with Outside Counsel • • • Poor Communication/Unresponsive Quality Not Timely Doesn’t Understand Business Lack of Project Management Skills Failure to Focus on Risk/Benefit, Value and Budget
What Does In-House Counsel Hate MOST About Working with Outside Counsel • Cost – Lack of value – Surprise – Overcharging – Inefficient staffing – Learning on company’s dime – Reliance on billable hour/refusal to offer alternative billing
What Does Outside Counsel “Like Least” About Working With In-House Counsel? • • Nothing Last minute delegation Lack of explanation of business goals Lack of information Unresponsive in-house counsel Barriers to communicating with non-legal personnel Unrealistic budgets Lack of communication after the work is done *Bottom Line – while these issues may frustrate outside counsel, it’s within their control to fix them – COMMUNICATION.
What’s Wrong With the Billable Hour? • "Both in-house and outside counsel hate the billable hour. It hurts relationships. " Joseph K. West, associate general counsel of Wal-Mart • Clients don’t buy lawyer hours. They buy solutions to legal problems. • Imperfect proxy for the actual value of work. • Creates incentives for outside counsel to be inefficient, particularly in highly leveraged firms • Keeping track of time and processing bills is time consuming and requires law firm overhead.
What’s Right With the Billable Hour? • Gives firms an easy way to track lawyer productivity • Provides clients with a detailed list of services – Generally preferable to flat fee invoice description for “services rendered” • Accountability for time spent • Allows clients to track and internalize outside counsel costs through task coding
Why Has the Billable Hour Survived So Long • Billable rates are tied to the reputational capital of a firm. • Increased internalization of commodity work that would lend itself to alternative billing • Work being outsourced is often complex • Difficulty of estimating alternative fee arrangements
Alternative Fee Arrangements • Result-based fee/contingency fee – Pros • For Clients – Only pay for success – May allow clients to pursue legal remedy that would not be feasible under billable hour system • For the Firm: – Provides incentive to maximize efficiency in work and staffing – Cons: • For Clients – If successful result with little effort, client may pay more than it would have on an hourly basis – Firm’s incentive to minimize lawyer time may have negative impact on quality of work and thoroughness • For the Firm: – Firm assumes the risk of an unsuccessful result – If firm achieves successful result with little effort, client may feel it overpaid
Alternative Fee Arrangements • Fixed/Flat Fee – Pros • For Clients – Precision in budgeting – Can provide economical way to handle commodity or large blocks of work • For the Firm – Precision in budgeting – Can provide firm large chunks of work to keep lawyers busy – Good for strengthening relationship between client and firm – Cons • For Clients – Firm has no incentive to invest time or top personnel in matter to assure top-quality work – Unforeseen circumstances can lead to conflict – Increased communication/monitoring required • For the Firm – – Risk of losing money Difficult and time-consuming to estimate budgets for flat fee work Can be viewed negatively within the firm (“loss leader”) Increased communication/monitoring required
Alternative Fee Arrangements • Capped Fee – Pros • For Clients – Certainty of maximum fee – Shifts some financial risk to firm • For the Firm – No financial benefit for firm vs. standard billable hour work. Can help secure work from clients with strict budgetary concerns – Cons • For Clients – Firm has no incentive to invest time or top personnel in matter to assure top-quality work – Unforeseen circumstances can lead to conflict – Increased communication/monitoring required • For the Firm – – Risk of losing money Difficult and time-consuming to estimate budgets for flat fee work Can be viewed negatively within the firm (“loss leader”) Increased communication/monitoring required
Alternative Fee Arrangements • Volume Discount – Pros • For Clients – Lower rate – Incentive to strengthen relationship and increase work with firm • For the Firm – Likely to receive increased workload from client – Good will – Cons • For Clients – Still a billable hour system so inefficiency concerns remain – Top attorneys at firm may avoid discounted work – Discounted work may receive less priority at firm than full rate work • For the Firm – Less revenue for time worked – Other clients may learn of discount and lead to further rate erosion
Alternative Fee Arrangements • Blended Hourly Rate – Pros • For Clients – Likely discount off of senior partner rates – Client may pay lower overall fee • For the Firm – Easy to negotiate and administer – Encourages delegation – Cons • For Clients – Inefficiencies of billable work – Likely to increase work done by inexperienced attorneys – Potential for lower quality and increased time worked • For the Firm – Negative impact on profitability if not managed carefully
The Future • Convergence – Clients are likely to continue to reduce the number of firms they work with • Strengthen relationships with top providers • Increase familiarity with business and understanding of objectives • Increased Demands for Discounted Rates and Alternative Billing Arrangements
The Future • Increased use of technology to allow more efficient interaction between in-house and outside counsel • Increased pressure on in-house counsel to do more legal work • Increase in number of in-house lawyers and “rental” of outside in-house counsel • Increased emphasis on project management and accurate budgeting
Conclusions/Universal Truths • Outside counsel must know and understand their clients, their clients' business and industry, and their clients' objectives. • Deepening relationships and understanding between outside counsel and in-house counsel always brings value. • Outside counsel must learn to think and act more like inhouse counsel - focusing on project management, communication, predictability, budgeting and value. • Alternative billing arrangements can and should be considered as a win-win alternative, where appropriate.
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