Pricing it Out:Value Based Billing

October 24, 2014

Industry Realization Against Standard Rates

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YTD Demand (Hours Worked) Growth by Firm

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Value Billing Support Team

Jeff Sanok: ChairFinance Committee

Matt Laws: Sr. DirectorPractice Management

Jerry Murphy: Vice-Chair(Contingent Fee)

Kathy Kirmayer: Vice-Chair (Pricing)

Cliff Elgarten: (Contingent Fee)

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What In-House Counsel Requires

“Value” (based on in-house counsel’s

definition of “success”)

“Predictability”

“Creativity/multiple AFA/VBB options”“Transparen

cy”“Efficienc

y ”“Shared

interests/ shared risk”

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Client Steps Toward Value

• RFPs requiring AFAs

• Convergence Counsel Programs

• Use of Procurement Professionals by In-House Counsel

• Budgeting

• e-billing systems (with controls if over budget)

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Pricing and Practice Management: Expanded Role

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• Pricing• Budgets• Project Management• Knowledge Management• Client Status Reports

What is value-based billing?

Any fee arrangement in which you…

(examples to come)

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Mutual Benefits of VBB Pricing• Benefits to Clients

• Cost savings• Price certainty of legal spend• Ease of invoice review & payments• Risk sharing: aligned interests with the firm• Bottom Line = Value

• Benefits to Firms• Typically firms receive an increased volume of work from current

clients• New clients• Communication often increases with the client providing a

strengthened relationship 9

What is not value-based billing?

• Rate discounts• Blended rates• Not to exceed fee caps• Mere budgets• Even “flat fees” as some craft them…

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2014 YTD C&M Pricing Portfolio

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Why is the Billable Hour Dying so slowly?

“VBB may be fine for commodity work, but my matter is too…

…unpredictable…complicated…important and risky

…unique.”

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So we still monitor industry rates

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Adding Project Management to the Mix

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Pricing and Management Support• Alternative fees require alternative work practices

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1. Fixed Fees• For time period (e.g., month)• For scope (phase)• For life of matter• For portfolio of like matters

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Fixed Fee ExampleAnnual Fee for Defined Portfolio:• Fixed fee of $10M for all matters in competency for a

Fortune 500 company

• Docket varies with new matters added and other matters resolved• Flat fee amount changes annually to account for the

anticipated workload for the coming year• Client pays the fee at $833k per month

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2. Monthly Retainers

• Fixed amount for a set period of time and stated scope of work– E.g., monthly amount for “counseling” work (defined

as maximum hours/task, or hours/period)• Typically applies to high-level, specialized

counseling• Provides “access” to SME’s as needed• Often contains a periodic “look back” to assess

mutual fairness

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Monthly Retainer Example

• Counseling on Privacy/Cybersecurity Issues:

• For monthly fee of $5,000, [law firm] will counsel on day-to-day questions arising in privacy/cybersecurity regulatory arena [add specific inclusions/exclusions]. “Counseling” is defined as individual inquiries requiring less than 3 hours to complete, and total monthly inquiries requiring 10 hours or less to complete.

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• Client or firm holds funds in reserve to grade law firm’s performance• Explicitly linked to client satisfaction with firm’s overall performance:

Holdback criteria:

• Accuracy of budget

• Achievement of case objectives on time/under budget

• Communications performance

• Right staffing performance – right level; right team; compliance with client goals (e.g., diversity; development of vertical client team)

3. Performance Holdbacks

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Holdback Example

• Fee deal with client provided for payment of 90% of agreed fees for 12 month period for class action case, with 10% holdback payable based solely in client’s discretion

• Client paid full holdback when firm won second motion to dismiss antitrust claim with prejudice

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4. Flat fees with success awards

• Identify victories, large and small, possible throughout life of matter

• Reward counsel for achieving victories• Flat fee alone vs. flat fee with victories

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Flat Fee plus Success ExampleAntitrust defense:

1. Flat fee of $X for initial MTD• Set at 50% of average price

2. Plus success fee resulting in premium of 130% of average price

3. Flat fee of $Y for MSJ4. Plus success fee resulting in premium of 130% of

average price

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• Explicitly links Firm compensation to outcome

• May include total cap on recovery varying at stage of “success”

• Ultimate value-based fee

5. Contingent Fees

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Final Pricing/LPM Thoughts:Recommendations to Compete

• Aligning client needs with the right arrangement

• Lead with fixed fees

• Consider success payments vs. a reduced fixed fee

• Increased reporting both internally and externally

• Project Management has to be aligned with VBB

pricing efforts 27