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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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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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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Labor Fees

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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