16 Pro Te: Solutio16 Pro Te: Solutio

Pro Te: Solutio 17

YYou cannot turn on the television or radio or read any newspaper publication these days without hearing about the financial crisis and recession that the United States currently faces. The S&P 500, generally considered the benchmark for U.S. equities, under-went an annual drop in 2008 unprecedented since 1937.1 In the cur-rent economy, we must deal with issues such as the highest contraction rates in manufacturing and the lowest consumer confidence levels experienced in 26 years.2 U.S. companies cut 250,000 private sector jobs in November 2008, according to the ADP National Employ-ment Report,3 and profits for companies in the S&P 500 were down 7.4 percent in the third quarter of 2008.4 As you well know, the list goes on and on.

As companies across the country are evaluating and implementing various budgetary plans and cuts in order to stay afloat during this crisis, corporate legal departments cannot avoid the crunch. Corpora-tions have always viewed their legal departments as cost centers, and in light of these tough economic times, 75 percent of corporations have actually cut their legal department budgets for 2009.5 At the same time, 71 percent of the NLJ 250 law firms have raised their hourly billable rates for 2009.6 Therefore, corporate legal departments

must demonstrate value to the leadership of their companies, and in-house counsel must show that they are actively managing costs. Maintaining the status quo simply will not work anymore, and the argument that “legal departments are different” just will not fly. Cor-porate legal departments absolutely must reduce costs allocated to outside counsel, increase the predictability of costs, ensure that out-side counsel’s objectives correspond to the company’s objectives, and obtain better value of services from their outside counsel.

So, how are you, as in-house counsel to “Company-X,” going to achieve these goals and meet the demands of corporate leadership? You know that you must do something and that you must make changes, but what exactly should you do? What changes should you make? In order to help you with these difficult issues and decisions, we have assembled a roundtable of individuals to discuss possible solutions and ways to meet these goals. They will suggest that the consideration of alternative fee arrangements and the use of re-gional and mid-size firms is a great starting point. In order to provide several perspectives on the question, our panel consists of two in-house attorneys, a consultant to both in-house and outside counsel, and one attorney with our firm.

Times are Tough — how can

AlternAtive Fee arrangemenTs help solve The problem?

A

roundtAble discussion

le

Times are Tough — how canAlternAtive Fee

arrangemenTs help solve The problem?

You cannot turn on the television or radio or read any must demonstrate value to the leadership of their companies, andin-

newspaper publication these days without hearing about thefinancial

house counsel must show that they are actively managing costs.

crisis and recession that the United States currently faces. TheS&P

Maintaining the status quo simply will not work anymore, and the

500, generally considered the benchmark for U.S. equities, under- argument that “legal departments are different” just will not fly. Cor-

went an annual drop in 2008 unprecedented since 1937.1 In thecur-

porate legal departments absolutely must reduce costs allocated to

rent economy, we must deal with issues such as the highestcontraction

outside counsel, increase the predictability of costs, ensure thatout-

rates in manufacturing and the lowest consumer confidence levels side counsel’s objectives correspond to the company’s objectives,and

experienced in 26 years.2 U.S. companies cut 250,000 privatesector

obtain better value of services from their outsidecounsel.

jobs in November 2008, according to the ADP National Employ- So, how are you, as in-house counsel to “Company-X,” going to

ment Report,3 and profits for companies in the S&P 500 weredown

achieve these goals and meet the demands of corporateleadership?

7.4 percent in the third quarter of 2008.4 As you well know, the list You know that you must do something and that you must make

goes on andon.

changes, but what exactly should you do? What changes shouldyou

As companies across the country are evaluating andimplementing

make? In order to help you with these difficult issues anddecisions,

various budgetary plans and cuts in order to stay afloat during this we have assembled a roundtable of individuals to discuss possible

crisis, corporate legal departments cannot avoid the crunch.Corpora-

solutions and ways to meet these goals. They will suggest that the

tions have always viewed their legal departments as cost centers,and

consideration of alternative fee arrangements and the use of re-

in light of these tough economic times, 75 percent of corporations gional and mid-size firms is a great starting point. In order to

have actually cut their legal department budgets for 2009.5 At the provide several perspectives on the question, our panel consists of

same time, 71 percent of the NLJ 250 law firms have raised their two in-house attorneys, a consultant to both in-house and outside

hourly billable rates for 2009.6 Therefore, corporate legaldepartments

counsel, and one attorney with our firm.

Pro Te:Solutio

17

18 Pro Te: Solutio

Roundtable Participants:

Marla Persky is the General Counsel of Boehringer Ingelheim, the largest privately

held pharmaceutical company in the world. Boehringer In-gelheim ranks fifteenth in rev-enues among the world’s leading pharmaceutical com-

panies and has seen year-over-year growth far exceeding the pharmaceutical industry in general. Boehringer focuses on branded and generic prescription medicines, consumer healthcare, chemicals, biopharmaceuticals and animal health products.

Lisa Warren is an Assistant General Counsel of Johnson & Johnson. The Johnson & John-

son companies offer the world’s broadest range of healthcare products, ranging from face wash to orthopedic products as well as a wide array of medi-

cal devices to over-the-counter and prescrip-tion drugs.

Pam Woldow is a principal of Altman Weil Inc. Her international practice focuses on

areas of strategic and opera-tional importance to both le-gal departments and law firms, focusing on improving the delivery of high-quality

and cost-effective legal services, selecting and managing outside counsel, convergence programs, litigation management, and all aspects of the counsel-client relationship. Altman Weil Inc. provides management consulting services exclusively to legal orga-nizations.

Charles Johnson is a member of Butler, Snow, O’Mara, Stevens & Cannada PLLC and is

the Co-Chair of the firm’s Pharmaceutical, Medical De-vice, and Healthcare Industry practice group. His practice consists primarily of the repre-

sentation of pharmaceutical companies, medical device companies, physician prac-tices, hospitals, and other healthcare provid-ers in various types of transactional and compliance matters. When Marla Persky was

working at Baxter Healthcare, Butler Snow and Baxter established a fixed fee arrange-ment whereby the firm loaned Charles to Baxter’s legal department to serve as the in-terim-counsel for one of its subsidiaries for a four-month period during 2000 and 2001.

Elizabeth Saxton: What actions, if any, has

your legal department or law firm taken in

the past to attempt to reduce costs and/or in-

crease the value of services provided? Have

these steps been successful?

Persky: Any in-house department has con-

trollable and uncontrollable costs. Employees

are a fixed cost. We control the fixed costs by

holding headcount flat, ruthlessly prioritiz-

ing what we do and do not manage so as to

focus our limited resources on the most stra-

tegic and value-added work for the organiza-

tion. Outside counsel fees are often not

controllable — we cannot prevent people

from suing us. Therefore, in working with

outside counsel, we have sought to obtain

preferential billing rates through a conver-

gence program that increases the volume of

work we give a smaller number of firms. This

concept has been successful to a point. We

are reducing the number of firms with which

we deal even further and looking for ways to

better align risks with rewards so that our

preferred provider firms share in the upsides

of our business while standing beside us to

endure the downsides as well. Alternative

billing arrangements will become the norm

for us, rather than the exception.

Warren: The primary areas of external legal

expense are outside counsel and discovery

fees and expenses. Our strategies to reduce

these spend-centers focus on developing stra-

tegic partnerships with our key firms, imple-

menting preferred pricing with our discovery

vendors, and promoting proactive negotia-

tions with both. In order to manage firm

fees, our team has implemented a compo-

nent-based alternative fee model that assigns

unit costs to the bulk of pre-trial work on a

matter-by-matter basis. We provide the firms

an incentive to come in under budget, and a

reconciliation process insures that the pro-

posals are not artificially inflated to “game”

the outcome. We also use an annual rate ap-

proval process, which allows us to negotiate

rates and tiered discounting arrangements

spanning all work completed by a firm in a

calendar year.

Discovery projects can be very substantial

for a given matter, and thus, each project in-

volving fees in excess of $50,000 requires a

Statement of Work (SOW). When possible,

we issue competitive bidding events for the

entire breadth of discovery services associated

with the project to gain efficiencies of scale.

The SOW gives visibility to costs up-front to

verify that the scope and cost of the discovery

project are warranted for favorable resolution

of the matter and also implements an ap-

proval process to approve increases.

Johnson: We have offered many different

cost-saving mechanisms to our clients in the

past, some of which Marla and Lisa just al-

luded to. For example, we have entered into

volume discount arrangements on an hourly

rate basis, fixed fee, and flat fee arrangements

in connection with transactions, corporate,

and general contract work.

We have also entered into arrangements

whereby we receive a flat fee per litigated

matter for the first 120 days after the client

tenders the matter to us. Our services under

this flat fee include those services normally

Roundtable Participants: working at Baxter Healthcare, Butler Snow tegic partnerships with our key firms, imple-

and Baxter established a fixed fee arrange- menting preferred pricing with our discoveryMarla Persky is the General Counsel ofment whereby the firm loaned Charles to

Boehringer Ingelheim, the largest privately vendors, and promoting proactive negotia-Baxter’s legal department to serve as thein-held pharmaceutical company tions with both. In order to manage firmterim-counsel for one of its subsidiaries forain the world. Boehringer In-four-month period during 2000 and 2001. fees, our team has implemented a compo-

gelheim ranks fifteenth in rev-nent-based alternative fee model thatassignsenues among the world’sunit costs to the bulk of pre-trial work on aleading pharmaceutical com-

panies and has seen year-over-year growthfar

matter-by-matter basis. We provide thefirmsexceeding the pharmaceutical industry in an incentive to come in under budget, anda

Elizabeth Saxton: What actions, if any, hasgeneral. Boehringer focuses on brandedand reconciliation process insures that the pro-your legal department or law firm taken ingeneric prescription medicines, consumer

posals are not artificially inflated to “game”healthcare, chemicals, biopharmaceuticals the past to attempt to reduce costs and/orin-

and animal healthproducts.

crease the value of services provided?Have

the outcome. We also use an annual rateap-proval process, which allows us tonegotiate

these steps beensuccessful?

Lisa Warren is an Assistant GeneralCounsel rates and tiered discounting arrangementsof Johnson & Johnson. The Johnson &John- son companies offer the

world’sspanning all work completed by a firm in aPersky: Any in-house department has con-

broadest range of healthcare calendaryear.

trollable and uncontrollable costs.Employeesproducts, ranging from face

Discovery projects can be verysubstantial

are a fixed cost. We control the fixed costsbywash to orthopedic products

for a given matter, and thus, each projectin-

as well as a wide array ofmedi-

holding headcount flat, ruthlessly prioritiz-

cal devices to over-the-counter andprescrip-

ing what we do and do not manage so as to volving fees in excess of $50,000 requiresa

tion drugs. Statement of Work (SOW). When possible,focus our limited resources on the moststra- we issue competitive bidding events for thePam Woldow is a principal of Altman Weil tegic and value-added work for theorganiza-Inc. Her international practice focuses on entire breadth of discovery services

associatedtion. Outside counsel fees are often not

areas of strategic and opera- with the project to gain efficiencies of scale.controllable — we cannot prevent peopletional importance to both le-

The SOW gives visibility to costs up-front tofrom suing us. Therefore, in working withgal departments and lawverify that the scope and cost of thediscoveryfirms, focusing on improving outside counsel, we have sought to obtain

the delivery of high-quality preferential billing rates through a conver- project are warranted for favorableresolution

and cost-effective legal services, selecting of the matter and also implements an ap-gence program that increases the volumeofand managing outside counsel,

convergenceproval process to approveincreases.

work we give a smaller number of firms.Thisprograms, litigation management, and allconcept has been successful to a point. Weaspects of the counsel-client relationship.

Johnson: We have offered many differentAltman Weil Inc. provides management are reducing the number of firms with which

consulting services exclusively to legalorga-

cost-saving mechanisms to our clients inthe

we deal even further and looking for waystonizations. past, some of which Marla and Lisa just al-better align risks with rewards so that our

Charles Johnson is a member of Butler,Snow,

preferred provider firms share in theupsides

luded to. For example, we have enteredinto

O’Mara, Stevens & Cannada PLLC and is volume discount arrangements on anhourly

of our business while standing beside us tothe Co-Chair of the firm’s rate basis, fixed fee, and flat fee

arrangementsendure the downsides as well. Alternative

Pharmaceutical, Medical De-in connection with transactions, corporate,billing arrangements will become the normvice, and Healthcare Industryand general contractwork.

practice group. His practice for us, rather than theexception.consists primarily of the

repre-We have also entered into arrangements

sentation of pharmaceutical companies, whereby we receive a flat fee per litigatedWarren: The primary areas of external legalmedical device companies, physician prac-

matter for the first 120 days after the clientexpense are outside counsel and discoverytices, hospitals, and other healthcareprovid- tenders the matter to us. Our services

underfees and expenses. Our strategies toreduce

ers in various types of transactional andthis flat fee include those services normallycompliance matters. When Marla Persky

wasthese spend-centers focus on developingstra-

18 Pro Te: Solutio

Pro Te: Solutio 19

performed at the outset of litigation, and if

we resolve a matter in the first 120 days of

representation, then the client will pay us an

early resolution bonus. Upon the termina-

tion of the initial 120 day period, the billing

arrangement transitions to our ordinary

hourly billing rates, but this preliminary flat

rate provides clients with the ability to con-

trol costs and accurately budget during the

early stages of a lawsuit. After this 120 day

period, the client usually has a better under-

standing of its exposure in the particular law-

suit and can then assess the pluses and

minuses of settlement. The early resolution

bonus provides us with a reward for reaching

a speedy resolution and at the same time still

provides the client with a great cost-savings

in the long run.

Saxton: What have been the primary impedi-

ments, if any, that you have seen or experi-

enced when trying to implement new legal

billing methods and concepts? Have you been

able to overcome these impediments, and if

so, how?

Warren: We use electronic billing to track

our alternative fees. The UTBMS codes used

for e-billing are a close-fit but do not match

our version of the pre-trial work breakdown

structure. After mapping the codes to our

template, we were able to use the current

UTBMS code set. However, we invested sig-

nificant effort to redefine the codes to match

the components we innumerate in our alter-

native fee template.

Persky: I hear the “it won’t work” excuse —

litigation isn’t controllable; we don’t know

how difficult the negotiation will be with the

other side; who knows how extensive the

government investigation will become. I sim-

ply don’t buy these arguments. Any business

person will tell you that they manage to a

budget despite the fact that business is rife

with unknowns — that is why you list upside

and downside potentials. We are insisting on

budgets for all matters — this requirement

helps drive billing arrangements towards

fixed fees, flat fees, and retainer agreements

for certain matters and categories of work. I

am still pushing the greater use of contin-

gency fees and modified contingency rela-

tionships. At the end of the day, the law firms

that trust us as their business partner and are

willing to explore new ways to handle their

billing structure will become our long-term

partners. There are a lot of firms out there

and thousands of good lawyers — one way to

differentiate a law firm from the masses is

creativity and fairness.

Johnson: When we first began implementing

new billing methods, many members of the

firm were concerned that these arrangements

would not work, and many of the excuses

that Marla just mentioned were used to try to

the primary areas of external legal expense are

outside counsel and discovery fees and expenses.

Our strategies to reduce these spend-centers

focus on developing strategic partnerships with

our key firms, implementing preferred pricing

with our discovery vendors, and

promoting proactive

negotiations

with both.— Warren

performed at the outset of litigation, and if ply don’t buy these arguments. Anybusiness

that trust us as their business partner andare

we resolve a matter in the first 120 days of person will tell you that they manage to a willing to explore new ways to handle their

representation, then the client will pay usan

budget despite the fact that business is rife billing structure will become our long-term

early resolution bonus. Upon the termina- with unknowns — that is why you listupside

partners. There are a lot of firms out there

tion of the initial 120 day period, the billing and downside potentials. We are insistingon

and thousands of good lawyers — one wayto

arrangement transitions to our ordinary budgets for all matters — this requirement differentiate a law firm from the masses is

hourly billing rates, but this preliminary flat helps drive billing arrangements towards creativity andfairness.

rate provides clients with the ability to con-

trol costs and accurately budget during the

early stages of a lawsuit. After this 120 day

period, the client usually has a betterunder-

t

he primary areas of external legal expense arestanding of its exposure in the particularlaw- outside counsel and discovery fees and

expenses.suit and can then assess the pluses andOur strategies to reduce these spend-centers

minuses of settlement. The early resolution

bonus provides us with a reward forreaching

focus on developing strategic partnerships with

a speedy resolution and at the same timestill

our key firms, implementing preferred pricingprovides the client with a great cost-savings

with our discovery vendors, andin the long run.

promoting proactive

Saxton: What have been the primaryimpedi-

negotiationsments, if any, that you have seen or experi- with both.enced when trying to implement new legal

— Warrenbilling methods and concepts? Have youbeenable to overcome these impediments, and if

so,how?

Warren: We use electronic billing to track

our alternative fees. The UTBMS codesusedfor e-billing are a close-fit but do not match

our version of the pre-trial work breakdown

structure. After mapping the codes to our

template, we were able to use the current

UTBMS code set. However, we investedsig-nificant effort to redefine the codes tomatchthe components we innumerate in our alter-

native feetemplate.

Persky: I hear the “it won’t work” excuse — fixed fees, flat fees, and retaineragreements

Johnson: When we first beganimplementing

litigation isn’t controllable; we don’t know for certain matters and categories of work. I new billing methods, many members of the

how difficult the negotiation will be with the am still pushing the greater use of contin- firm were concerned that thesearrangements

other side; who knows how extensive the gency fees and modified contingency rela- would not work, and many of the excuses

government investigation will become. Isim-

tionships. At the end of the day, the lawfirms

that Marla just mentioned were used to tryto

Pro Te:Solutio

19

stall the implementation process. However,

once we took the plunge and began using

them, both the firm and our clients have

been pleased with the results.

Saxton: Pam, what alternative fee arrange-

ments are you seeing law firms and corporate

legal departments use and for what type of

work are they using these alternative fee ar-

rangements?

Woldow: The term “alternative fee” is some-

times used rather loosely to refer to any fee

arrangement other than a firm’s standard

hourly rate. Alternative fees are generally de-

fined as fees that are not based in any way

on hourly billing. So, discounted hourly

rates and blended hourly rates are not alter-

native fees because they are still based on the

billable hour.

What alternative fee arrangements (AFAs)

accomplish are: 1) predictability of cost; 2)

budgeting and planning certainty; 3) billing

that reflects an assessment of the value of a

matter; and 4) more efficient lawyering.

There are many creative billing solutions,

but I’m seeing three types most often. These

are good places to start if an organization has

not used AFAs before.

Fixed fees are set fees for a group of matters

or tasks for a fixed period of time. For exam-

ple, Pfizer pays a fixed fee to a law firm to

handle all of its employment matters nation-

wide. No billable hours, no per-matter fees;

just one sum paid out monthly over the

course of the year. Cisco is now in the third

year of paying a fixed fee to one firm for all its

U.S. litigation. And, Goodyear is in the pro-

cess of selecting a firm to handle its U.S.

products liability disputes on a fixed fee basis.

Fixed fees are useful when the organization

knows it will have a relatively predictable and

steady number of matters year over year or

else defines the number of matters that will

be covered by the fixed fee.

Flat fees are set fees for given types of tasks

or matters. For example, an organization

might pay $2,500 for arbitrating a warranty

claim. Whether there are 10 or 10,000, the

cost will be based on a per matter basis, and

the company will know exactly how much

each matter will cost when it arises. Flat fees

are often used for discrete or finite matters

or tasks, such as filing a complaint. They

work well where the organization is not

able to predict the number of matters it

will face.

Contingency fees are used most typically

in the form of a base fee plus a success fee

determined by the outcome of the matter. In

the defense setting, this arrangement requires

the lawyer and the client to assess the poten-

tial legal exposure as part of the initial case

planning. They determine a specific dollar

amount that would represent a satisfactory

result. If the lawyer resolves the matter for

less than that number, the lawyer profits by

sharing in the savings. FMC uses this AFA

for its mass tort matters. Holdbacks are a

variation of this approach, where the legal

department defers payment of some portion

of the fee until the matter is resolved and the

results are known. The St. Joe Company and

CSX Corporation use the holdback method

and, depending on the performance of the

law firm, will pay the holdback or a multi-

plier of it depending on whether the law firm

met certain performance standards.

Saxton: Moving into 2009, it is apparent

that changes must be made in terms of how

corporate legal departments receive and pay

for legal services. Please discuss some alterna-

tive fee arrangements that you believe provide

for the greatest possibilities for reduced costs

and increased predictability.

Warren: Negotiating costs at a unit level al-

lows for greater granularity when formulat-

ing budgets. The ability to control and

monitor these costs requires time-relevant

data and analysis resources. In-house deci-

sion makers are more empowered to adjust

detailed assumptions rather than conglomer-

ated amounts, which may be inflated to pro-

tect against overspending.

Persky: As Pam just mentioned, I think that

fixed fees and flat fees are the easiest to imple-

ment. They guarantee a cash flow to the law

firm and give the client cost predictability.

Contingency fees are a way to assure that the

risk-reward ratio between a law firm and a

client is in sync. The key to effectively using

contingency fees in the corporate setting,

however, is to clearly define the meaning of a

“win.” It strikes me as odd that while clients

are downsizing, revising earnings estimates,

and looking for ways to reduce costs, law

firms are increasing their hourly rates. This

approach is not a sustainable business model

for law firms.

Saxton: In addition to alternative fee ar-

rangements, what other suggestions and

solutions do you have for corporate legal

departments that are attempting to reduce

costs?

Woldow: Altman Weil recently conducted a

Flash Survey of in-house corporate counsel

in November 2008 to determine how they

were addressing legal department budget

changes for 2009. From corporations of all

sizes and industries, we learned that 75% of

corporate legal departments will have their

20 Pro Te: Solutio

stall the implementation process. However, steady number of matters year over year or for the greatest possibilities for reducedcosts

once we took the plunge and began using else defines the number of matters that will and increasedpredictability.

them, both the firm and our clients have be covered by the fixedfee.

been pleased with theresults.

Flat fees are set fees for given types oftasks

Warren: Negotiating costs at a unit level al-

or matters. For example, an organization lows for greater granularity when formulat-

Saxton: Pam, what alternative fee arrange- might pay $2,500 for arbitrating a warranty ing budgets. The ability to control and

ments are you seeing law firms andcorporate

claim. Whether there are 10 or 10,000, the monitor these costs requires time-relevant

legal departments use and for what type of cost will be based on a per matter basis,and

data and analysis resources. In-house deci-

work are they using these alternative feear-

the company will know exactly how much sion makers are more empowered to adjust

rangements? each matter will cost when it arises. Flatfees

detailed assumptions rather thanconglomer-

are often used for discrete or finite matters ated amounts, which may be inflated to pro-

Woldow: The term “alternative fee” is some- or tasks, such as filing a complaint. They tect againstoverspending.

times used rather loosely to refer to any fee work well where the organization is not

arrangement other than a firm’s standard able to predict the number of matters it Persky: As Pam just mentioned, I think that

hourly rate. Alternative fees are generallyde-

will face. fixed fees and flat fees are the easiest toimple-

fined as fees that are not based in any way Contingency fees are used most typically ment. They guarantee a cash flow to thelaw

on hourly billing. So, discounted hourly in the form of a base fee plus a success fee firm and give the client cost predictability.

rates and blended hourly rates are notalter-

determined by the outcome of the matter. In Contingency fees are a way to assure thatthe

native fees because they are still based onthe

the defense setting, this arrangementrequires

risk-reward ratio between a law firm and a

billable hour. the lawyer and the client to assess thepoten-

client is in sync. The key to effectively using

What alternative fee arrangements(AFAs)

tial legal exposure as part of the initial case contingency fees in the corporate setting,

accomplish are: 1) predictability of cost; 2) planning. They determine a specific dollar however, is to clearly define the meaning ofa

budgeting and planning certainty; 3) billing amount that would represent a satisfactory “win.” It strikes me as odd that while clients

that reflects an assessment of the value ofa

result. If the lawyer resolves the matter for are downsizing, revising earningsestimates,

matter; and 4) more efficientlawyering.

less than that number, the lawyer profits by and looking for ways to reduce costs, law

There are many creative billing solutions, sharing in the savings. FMC uses this AFA firms are increasing their hourly rates. This

but I’m seeing three types most often.These

for its mass tort matters. Holdbacks are a approach is not a sustainable businessmodel

are good places to start if an organizationhas

variation of this approach, where the legal for law firms.

not used AFAsbefore.

department defers payment of some portion

Fixed fees are set fees for a group ofmatters

of the fee until the matter is resolved andthe

Saxton: In addition to alternative fee ar-

or tasks for a fixed period of time. Forexam-

results are known. The St. Joe Companyand

rangements, what other suggestions and

ple, Pfizer pays a fixed fee to a law firm to CSX Corporation use the holdback method solutions do you have for corporate legal

handle all of its employment matters nation- and, depending on the performance of the departments that are attempting to reduce

wide. No billable hours, no per-matter fees; law firm, will pay the holdback or a multi- costs?

just one sum paid out monthly over the plier of it depending on whether the law firm

course of the year. Cisco is now in the third met certain performancestandards.

Woldow: Altman Weil recently conducted a

year of paying a fixed fee to one firm for allits

Flash Survey of in-house corporate counsel

U.S. litigation. And, Goodyear is in the pro- Saxton: Moving into 2009, it is apparent in November 2008 to determine how they

cess of selecting a firm to handle its U.S. that changes must be made in terms of how were addressing legal department budget

products liability disputes on a fixed feebasis.

corporate legal departments receive andpay

changes for 2009. From corporations of all

Fixed fees are useful when the organization for legal services. Please discuss somealterna-

sizes and industries, we learned that 75%of

knows it will have a relatively predictableand

tive fee arrangements that you believeprovide

corporate legal departments will have their

20 Pro Te: Solutio

budgets cut in 2009. We then asked: If you

are facing a budget cut, or a smaller increase,

where/how will you make reductions? Corpo-

rate counsel rated their intended solutions

as follows:

One of the top three cost-savers identified

was to engage lower-priced counsel. Increas-

ingly, we are seeing companies consider small

or mid-size regional firms for many impor-

tant matters. Altman Weil’s clients tell us that

they can achieve a 20 percent saving just by

moving matters to appropriate regional firms

with demonstrated expertise but lower rates.

If they then negotiate alternative fees, they

achieve even greater savings.

Offshoring legal services has moved into

the mainstream and is another way to

achieve cost savings. Although so far it has

not been widely used, we see that changing.

In August of 2008, the ABA issued a signifi-

cant ethics opinion ratifying the use of off-

shore resources for legal services.7 The Wall

Street Journal reported recently that off-

shoring legal work is a major and growing

solution to controlling legal costs.8 Some

companies are using these services directly,

such as Sun Microsystems, for a variety of

legal services such as legal research, due

diligence, patent prosecution, patent illus-

tration, discovery document review, and

contract review. We also see companies call-

ing on their law firms to unbundle certain

tasks and send them offshore rather than

paying U.S. associate rates for the work.

Many companies have a greater comfort

level using U.S. trained and U.S. based at-

torneys and find that they can achieve simi-

lar cost savings by moving large blocks of

matters to regional firms. There can be chal-

lenges to off-shoring work, such as the time

differences, the need to assure confidential-

ity, and the markedly different way in which

work is accomplished.

Finally, if a legal department has not al-

ready done so, it can undertake a “conver-

gence” program to reduce the number of

outside firms it uses and leverage its outside

spending by concentrating it in fewer firms.

Convergences is a well-proven cost-saver: It

costs more to manage many firms, both in

terms of internal resources and time, and a

smaller cohort of preferred providers allows

better control and greater bargaining lever-

age as well.

Warren: Our outside attorneys are hired for

their legal talents and their skills in favorably

managing and resolving matters, not for their

fiscal acumen. For clients who are struggling

with a strategy, the first management step

may be to dedicate all or part of a resource

with experience in negotiating discounts/rate

increases, managing discovery scope, finan-

cially analyzing RFPs, and building a metrics

architecture for monitoring ongoing costs.

We have found that to be an invaluable tool

in architecting cost reduction strategies.

Implement a rate change request process.

Many firms increase rates without notifica-

tion resulting in spend which could be avoid-

ed through an up-front negotiation. Having

a negotiation insures that the firm will not

try to implement unfairly high rates because

they will likely police themselves as a result of

the client’s scrutiny.

Saxton: Is it possible to intertwine these

different solutions, or is it best to implement

just one solution at a time?

Woldow: As corporate counsel become more

comfortable with AFAs, they can and do

craft them to meet their specific needs. We

have seen numerous variations and combina-

tions. For example, if a company is just start-

ing to use AFAs, it is advisable to try them in

lower risk matters and use one of the three

principal approaches I mentioned earlier.

The effective use of AFAs is predicated on the

level of historical information a department

has on its legal spending, for example, what

types of matters, geographical span. The

more detailed that information, the better

the department will be able to know how

much it has spent previously on specific types

of matters. Armed with this historical per-

spective, it can negotiate fees that maintain

Pro Te: Solutio 21

OutsOurcing/Off-shOring

staff cOmp

paralegal head-cOunt

Year-end staff bOnuses

lawYer cOmp

Year-end lawYer bOnuses

staff head-cOunt

lawYer head-cOunt

delaY tech purchase

mOre afas

lOwer priced cOunsel fOr sOme wOrk

reduced training/events

bring mOre wOrk in-hOuse

12.6%

19.4%

21.4%

22.3%

29.1%

31.1%

31.1%

31.1%

35.0%

50.5%

53.4%

61.2%

65.0%

Corporate Counsel Budget Cut Solutions for 2009

budgets cut in 2009. We then asked: If you legal services such as legal research, due Warren: Our outside attorneys are hired for

are facing a budget cut, or a smallerincrease,

diligence, patent prosecution, patent illus- their legal talents and their skills infavorably

where/how will you make reductions?Corpo-

tration, discovery document review, and managing and resolving matters, not fortheir

rate counsel rated their intended solutions contract review. We also see companiescall-

fiscal acumen. For clients who arestruggling

asfollows:

ing on their law firms to unbundle certain with a strategy, the first management step

may be to dedicate all or part of a resource

Corporate Counsel Budget Cut Solutions for 2009 with experience in negotiatingdiscounts/rateincreases, managing discovery scope,finan-OutsOurcing/Off-shOring 12.6%

staff cOmp 19.4% cially analyzing RFPs, and building ametrics

paralegal head-cOunt 21.4% architecture for monitoring ongoing costs.

Year-end staff bOnuses 22.3% We have found that to be an invaluable tool

lawYer cOmp 29.1% in architecting cost reductionstrategies.Year-end lawYer bOnuses 31.1% Implement a rate change request

process.staff head-cOunt 31.1%Many firms increase rates without notifica-

lawYer head-cOunt 31.1%tion resulting in spend which could beavoid-delaY tech purchase 35.0%ed through an up-front negotiation. Having

mOre afas 50.5%

a negotiation insures that the firm will notlOwer priced cOunsel fOr sOme wOrk 53.4%

reduced training/events 61.2% try to implement unfairly high rates because

bring mOre wOrk in-hOuse 65.0% they will likely police themselves as a resultofthe client’sscrutiny.

One of the top three cost-saversidentified

tasks and send them offshore rather than

was to engage lower-priced counsel.Increas-

paying U.S. associate rates for the work. Saxton: Is it possible to intertwine these

ingly, we are seeing companies considersmall

Many companies have a greater comfort different solutions, or is it best to implement

or mid-size regional firms for many impor- level using U.S. trained and U.S. based at- just one solution at atime?

tant matters. Altman Weil’s clients tell usthat

torneys and find that they can achieve simi-

they can achieve a 20 percent saving justby

lar cost savings by moving large blocks of Woldow: As corporate counsel becomemore

moving matters to appropriate regionalfirms

matters to regional firms. There can bechal-

comfortable with AFAs, they can and do

with demonstrated expertise but lowerrates.

lenges to off-shoring work, such as the time craft them to meet their specific needs. We

If they then negotiate alternative fees, they differences, the need to assure confidential- have seen numerous variations andcombina-

achieve even greatersavings.

ity, and the markedly different way in which tions. For example, if a company is juststart-

Offshoring legal services has moved into work is accomplished. ing to use AFAs, it is advisable to try themin

the mainstream and is another way to Finally, if a legal department has not al- lower risk matters and use one of the three

achieve cost savings. Although so far it has ready done so, it can undertake a “conver- principal approaches I mentioned earlier.

not been widely used, we see thatchanging.

gence” program to reduce the number of The effective use of AFAs is predicated onthe

In August of 2008, the ABA issued a signifi- outside firms it uses and leverage itsoutside

level of historical information a department

cant ethics opinion ratifying the use of off- spending by concentrating it in fewer firms. has on its legal spending, for example,what

shore resources for legal services.7 TheWall

Convergences is a well-proven cost-saver:It

types of matters, geographical span. The

Street Journal reported recently that off- costs more to manage many firms, both in more detailed that information, the better

shoring legal work is a major and growing terms of internal resources and time, and a the department will be able to know how

solution to controlling legal costs.8 Some smaller cohort of preferred providers allows much it has spent previously on specifictypes

companies are using these servicesdirectly,

better control and greater bargaining lever- of matters. Armed with this historical per-

such as Sun Microsystems, for a variety of age aswell.

spective, it can negotiate fees that maintain

Pro Te:Solutio

21

22 Pro Te: Solutio

or reduce previous spending. But lack of ev-

ery data bit should not prevent a department

from using this powerful tool. We have seen

departments who maintained information in

paper spreadsheets achieve major savings.

Warren: Parallel path cost reduction experi-

ments using different strategies such as

capped fees or alternative fees are fine. How-

ever, because not much can be done without

a matter management and e-billing infra-

structure, this implementation should be

first priority.

Persky: I believe that a controlled, measur-

able, multifaceted approach will net the

greatest returns in the shortest period of

time.

Johnson: We have implemented more than

one alternative fee arrangement at once with

certain clients, depending on the types of

matters for which they seek our counsel, and

in all cases this multi-faceted approach has

been successful. In addition to the interest in

various AFA, we have also seen a trend to-

ward hiring mid-size and regional firms in

order to achieve even greater savings.

Saxton: Because alternative fee arrange-

ments and other cost-cutting solutions can

be a bit intimidating and difficult to grasp

for those who have never used them, please

discuss potential safeguards in alternative

fee arrangements.

Woldow: When using AFAs, it is important

to work with a law firm with which you en-

joy a trusting relationship and/or has used

AFAs successfully with other clients. AFAs

may require some tweaks or adjustments to

achieve the most workable solution, and it

helps to have both parties invested in preserv-

ing a positive relationship. For both parties, it

helps to define parameters for the engage-

ment, for example, number of anticipated

matters, time frame, and dollar amount

ranges involved in disputes. If the parame-

ters are exceeded or not met, the parties can

have a productive discussion about adjusting

the fee. The parameters also might carve out

unusual events that would remove the mat-

ter from the AFA.

We recommend that the parties establish

“look back windows”— set times for assess-

ing how the arrangement is working — always

understanding that they can open that dis-

cussion sooner if there is a need. Sometimes,

it behooves the parties to let six months to a

year elapse to allow sufficient time for the en-

tire book of business to develop. For example,

in the first year of Cisco’s fixed fee arrange-

ment for litigation, new matters were slow to

be filed and Cisco began to worry that it was

one of the top three cost-savers identified was to engage lower-priced counsel. Increasingly, we are

seeing companies consider small or mid-size region-al firms for many important matters. Altman Weil’s clients tell us that they can achieve a 20 percent sav-ing just by moving matters to appropriate regional

firms with demonstrated expertise but lower rates. If they then negotiate alternative fees, they achieve

even greater savings.— Woldow

or reduce previous spending. But lack ofev-

helps to have both parties invested inpreserv-

We recommend that the parties establish

ery data bit should not prevent adepartment

ing a positive relationship. For both parties,it

“look back windows”— set times forassess-

from using this powerful tool. We have seen helps to define parameters for the engage- ing how the arrangement is working —always

departments who maintained information in ment, for example, number of anticipated understanding that they can open that dis-

paper spreadsheets achieve majorsavings.

matters, time frame, and dollar amount cussion sooner if there is a need.Sometimes,

ranges involved in disputes. If the parame- it behooves the parties to let six months toa

Warren: Parallel path cost reduction experi- ters are exceeded or not met, the partiescan

year elapse to allow sufficient time for theen-

ments using different strategies such as

capped fees or alternative fees are fine.How-ever, because not much can be donewithout

o

ne of the top three cost-savers identified was toa matter management and e-billing infra-

structure, this implementation should be engage lower-priced counsel. Increasingly, we are

first priority. seeing companies consider small or mid-size region-

al firms for many important matters. Altman Weil’sPersky: I believe that a controlled, measur-

clients tell us that they can achieve a 20 percent sav-able, multifaceted approach will net the

ing just by moving matters to appropriate regionalgreatest returns in the shortest period of

firms with demonstrated expertise but lowertime.

rates. If they then negotiate

Johnson: We have implemented more than alternative fees, theyachieveone alternative fee arrangement at once

with even greatersavings.certain clients, depending on the types of — Woldow

matters for which they seek our counsel,andin all cases this multi-faceted approach has

been successful. In addition to the interestinvarious AFA, we have also seen a trend to-

ward hiring mid-size and regional firms in

order to achieve even greatersavings.

Saxton: Because alternative fee arrange-

ments and other cost-cutting solutions can

be a bit intimidating and difficult to grasp

for those who have never used them,pleasediscuss potential safeguards in alternative

feearrangements.

Woldow: When using AFAs, it is important

to work with a law firm with which you en-

joy a trusting relationship and/or has used have a productive discussion aboutadjusting

tire book of business to develop. Forexample,

AFAs successfully with other clients. AFAs the fee. The parameters also might carveout

in the first year of Cisco’s fixed fee arrange-

may require some tweaks or adjustments to unusual events that would remove the mat- ment for litigation, new matters were slowto

achieve the most workable solution, and it ter from the AFA. be filed and Cisco began to worry that itwas

22 Pro Te: Solutio

Pro Te: Solutio 23

paying too much. However, by the end of the

third quarter, the filings had reached the an-

ticipated point, and its outside firm was han-

dling exactly what the arrangement covered.

Both parties have been very pleased.

In addition, it can help to build in “col-

lars.” A collar is an understanding between

the legal department and the law firm that if

actual costs exceed a certain amount or per-

centage or fall short by that same amount,

then the parties agree to make a correction.

For example, if the number of matters cov-

ered by the AFA is 10% more than the de-

fined parameter, the firm would be entitled

to additional payment. Conversely, if there

are 10% fewer matters, the legal department

is due a refund or credit.

Johnson: I agree that the key to making AFAs

work for both the client and the law firm lies

in a strong working relationship between the

two parties — they must work together as a

team and be willing to look back and evalu-

ate the situation in order to determine if the

arrangement is beneficial to both parties.

We have entered into risk sharing and ad-

justment mechanisms similar to those that

Pam just discussed, and our clients have re-

sponded well as these arrangements allow us

and the client to share both the risk and the

reward of budgeting and performing the

work efficiently.

Warren: Training: We partner with our pro-

curement resources to train our outside

counsel on our alternative fee management

process. This training can be anything

from a one-on-one phone call to a WebEx.

Along with our alternative fee template,

we distribute a quick reference sheet to our

outside counsel, which outlines our recon-

ciliation process.

Stage Gate Reviews: Outside and in-house

counsels meet after the resolution of major

events, namely early case assessment, filing of

pleadings, filing and argument of dispositive

motions, and substantive discovery. These

meetings act as stage gate reviews to deter-

mine if spending is tracking in step with the

alternative fee. Many progressive firms have

taken the onus on themselves to provide cus-

tomized spend and projection reports for re-

view during these meetings. In all other cases,

our procurement resources are able to pull

real time billing data at any point during the

matter to match actuals with budget. This

provides the firm a progress report and high-

lights any critical areas that need review to

ensure the budgetary commitments accu-

rately reflect the work needed on the case.

Capping Liability: Many alternative fee ar-

rangements for long-range matters involve a

large peak of work that eventually settles into

a monthly repetitive set of tasks. Where war-

ranted, we cap fees for the firm to a monthly

or quarterly amount. This method provides

predictability to the business in terms of bud-

geting, and firms have the flexibility to allo-

cate funds as necessary to get the base work

complete. Any unforeseen work reverts to

pre-negotiated billable rates.

Persky: The goal is cost savings and predict-

ability. It is not putting the outside counsel

out of business. For a partnership to work, it

needs to work for both parties. The ability to

make midterm adjustments to alternative fee

arrangements when the truly unexpected oc-

curs is a good “safety net.”

Because of space limitations, we recognize

that we have not addressed all alternative fee

arrangements and cost-saving mechanisms

available. We understand the evolving nature

and importance of this topic and do expect,

if appropriate and useful, to produce subse-

quent articles on the subject. Thus, we wel-

come our readers to submit questions to us

or tell us about the mechanisms that they

have implemented and found useful, helpful,

successful, or unsuccessful, and we will share

this information anonymously with our oth-

er readers if the submitting reader so desires.

The billable hour may not be dead, but alter-

native billing arrangements are definitely go-

ing to continue to receive much attention in

the year to come.

1 Stanton, Elizabeth, “U.S. Stocks Post Biggest Post-Election Drop on Economic Concern,” November 5, 2008, available at <http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ahxDxARQcLBc>.2 Id.3 Hill, Catey, New York Daily News, “ADP National Em-ployment Report: Private Sector Loses 250,000 Jobs, Outlook Worse Than Expected,” December 3, 2008, available at <http://www.nydailynews.com/mon-ey/2008/12/03/2008-12-03_adp_national_employ-ment_report_private_s.html>. 4 See Stanton, supra note 1.5 The “Altman Weil Flash Survey on Law Department Cost Control,” conducted in November 2008, reports that 75% of law departments surveyed are facing budget cuts averaging 11.5% for 2009. The full survey is available at <http://www.altmanweil.com/index.cfm/fa/r.resource_detail/oid/d664b2c6-9978-4327-a66e-757972ebd091/resource/Altman_Weil_Flash_Survey_Law_Department_Cost_Control.cfm>.6 Jones, Leigh, The National Law Journal, “Law Firm Fees Defy Gravity, Annual Survey Shows,” December 8, 2008, available at <http://www.law.com/jsp/article.jsp?id=1202426547201&rss=newswire>.7 ABA Comm. on Ethics and Prof ’l Responsibility, For-mal Opinion 08-451 (Aug. 5, 2008).8 See Sheth, Nirah and Nathan Koppel, “When Times Get Tight, Even Lawyers Get Outsourced,” Wall Street Journal, November 26, 2008, available at <http://online.wsj.com/article/SB122765161306957779.html>.

Moderated by elizabeth Saxton

paying too much. However, by the end ofthe

Stage Gate Reviews: Outside andin-house

arrangements and cost-saving mechanisms

third quarter, the filings had reached the an- counsels meet after the resolution of major available. We understand the evolvingnature

ticipated point, and its outside firm washan-

events, namely early case assessment,filing of

and importance of this topic and do expect,

dling exactly what the arrangementcovered.

pleadings, filing and argument of dispositive if appropriate and useful, to produce subse-

Both parties have been verypleased.

motions, and substantive discovery. These quent articles on the subject. Thus, we wel-

In addition, it can help to build in “col- meetings act as stage gate reviews todeter-

come our readers to submit questions to us

lars.” A collar is an understanding between mine if spending is tracking in step with the or tell us about the mechanisms that they

the legal department and the law firm that if alternative fee. Many progressive firmshave

have implemented and found useful,helpful,

actual costs exceed a certain amount orper-

taken the onus on themselves to providecus-

successful, or unsuccessful, and we willshare

centage or fall short by that same amount, tomized spend and projection reports for re- this information anonymously with our oth-

then the parties agree to make a correction. view during these meetings. In all othercases,

er readers if the submitting reader sodesires.

For example, if the number of matters cov- our procurement resources are able to pull The billable hour may not be dead, butalter-

ered by the AFA is 10% more than the de- real time billing data at any point during the native billing arrangements are definitelygo-

fined parameter, the firm would be entitled matter to match actuals with budget. This ing to continue to receive much attention in

to additional payment. Conversely, if there provides the firm a progress report andhigh-

the year tocome.

are 10% fewer matters, the legaldepartment

lights any critical areas that need review to

1is due a refund or credit. ensure the budgetary commitments accu- Stanton, Elizabeth, “U.S. Stocks Post BiggestPost-Election Drop on Economic Concern,” November 5,

rately reflect the work needed on thecase.

2008, available at <http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ahxDxARQcLBc>.

Johnson: I agree that the key to makingAFAs

Capping Liability: Many alternative fee ar-2Id.

work for both the client and the law firm lies rangements for long-range matters involvea

3Hill, Catey, New York Daily News, “ADP National Em-ployment Report: Private Sector Loses 250,000Jobs,in a strong working relationship between

thelarge peak of work that eventually settlesinto

Outlook Worse Than Expected,” December 3,2008,available at <http://www.nydailynews.com/mon-two parties — they must work together as a a monthly repetitive set of tasks. Where

war- ey/2008/12/03/2008-12-03_adp_national_employ-team and be willing to look back and evalu- ranted, we cap fees for the firm to a

monthlyment_report_private_s.html>.

4See Stanton, supra note1.ate the situation in order to determine if the or quarterly amount. This method provides

5The “Altman Weil Flash Survey on LawDepartmentarrangement is beneficial to both parties. predictability to the business in terms of

bud-Cost Control,” conducted in November 2008, reportsthat 75% of law departments surveyed are facingbudgetWe have entered into risk sharing and ad- geting, and firms have the flexibility to allo- cuts averaging 11.5% for 2009. The full surveyisavailable at <http://www.altmanweil.com/index.cfm/justment mechanisms similar to those that cate funds as necessary to get the base

work fa/r.resource_detail/oid/d664b2c6-9978-4327-a66e-

Pam just discussed, and our clients havere-

complete. Any unforeseen work reverts to 757972ebd091/resource/Altman_Weil_Flash_Survey_Law_Department_Cost_Control.cfm>.

sponded well as these arrangements allowus

pre-negotiated billablerates. 6Jones, Leigh, The National Law Journal, “Law

FirmFees Defy Gravity, Annual Survey Shows,” December8,

and the client to share both the risk and the2008, available at<http://www.law.com/jsp/article.jsp?idreward of budgeting and performing the Persky: The goal is cost savings and

predict-=1202426547201&rss=newswire>.

7ABA Comm. on Ethics and Prof ’l Responsibility, For-work efficiently. ability. It is not putting the outside counselmal Opinion 08-451 (Aug. 5, 2008).

8out of business. For a partnership to work,it

See Sheth, Nirah and Nathan Koppel, “WhenTimesGet Tight, Even Lawyers Get Outsourced,” Wall

StreetWarren: Training: We partner with our pro- needs to work for both parties. The ability to Journal, November 26, 2008, available at <http://online.wsj.com/article/SB122765161306957779.html>.curement resources to train our outside make midterm adjustments to alternative

feecounsel on our alternative fee management arrangements when the truly unexpected

oc-process. This training can be anything curs is a good “safety

net.”from a one-on-one phone call to a WebEx.

Along with our alternative fee template,

we distribute a quick reference sheet to our

outside counsel, which outlines our recon- Because of space limitations, we recognize Moderatedbyciliation process. that we have not addressed all alternative

feeelizabeth Saxton

Pro Te:Solutio

23