Richardson: Let’s start with a question for Dennis Lynch. Dennis, with a radical convergence model that continues to deliver results, Tyco and Shook Hardy have cut product liability cases in half, new case files by 65 percent and case cycle time by 40 percent since 2004. That’s a phenomenal result. What benefits have you enjoyed as a result of this value initiative, which involves a flat-fee arrangement, and how does it affect your business relationships?
Lynch: It has provided some certainty with respect to legal spend and has resulted in a deep level of mutual understanding between Tyco and Shook Hardy. As a result, when I submit an annual budget, our business people can count on that number. While this goes a long way on its own, Shook Hardy’s familiarity with our business gives my internal clients an extra level of comfort that allows them to interact freely with the firm. All around, it’s been a great relationship.
Richardson: Paul, how did Shook Hardy become Tyco’s partner in this initiative, and what has been the impact on the firm’s operations?
Paul Williams: In the summer of 2004, Shook Hardy was one of 20 or so firms that Tyco invited to participate in an RFP process aimed at finding a firm to handle the company’s entire product liability docket. Having not done any significant work for Tyco previously, Shook Hardy was included on the basis of our reputation. They were looking for a customized solution that included creative solutions for cost reduction, containment and predictability as well as for improvement on Tyco’s historical results.
Immediately upon being selected, we sat down with Tyco’s legal team and customized a program that focused on the company’s desired metrics, which we have continuously tracked ever since. These metrics drive further innovations designed to meet Tyco’s and the firm’s objectives. We focus on aspects of our operations that leverage technology-based tools to enhance our workflow and project-management practices.
We are routinely invited to share those experiences, both successes and important lessons learned, within the firm so our partners can use this value proposition to better serve other clients. As Dennis mentioned, we take great pride in our close relationship not only with Tyco’s law department but also with its business clients.
Richardson: Jonathan, you shared with us that RBC Capital Markets has worked with Morgan Lewis to produce savings of 35 percent. Tell us about your process and some billing arrangements you have explored.
Hegre: We were able to achieve those savings as a result of value-based billing, which better aligned the cost of outside legal services with our objectives. While moving away from the traditional billing model was a necessary evolution, it took some time to overcome the discomfort that firms felt with thinking outside the billable-hour box. We had to prompt them to think differently in order to change that paradigm.
Morgan Lewis has been a great partner for RBC from the start. Together we successfully explored a variety of value-based billing arrangements, including fixed fees over the life of a matter paid on a monthly basis; fixed fees with risk-sharing provisions; fixed fees for all work on the matter up to a certain trigger point followed by blended rates; and some fee caps.
Richardson: Richard, following the success you’ve had with RBC Capital Markets, does Morgan Lewis plan to expand these value-focused efforts? What other ways of driving efficiency are you looking at?
Rosenblatt: One of the biggest challenges that we faced in pursuing alternative fee arrangements was convincing our clients to take the plunge with us. For many years, we have routinely offered alternative value-based fee arrangements to all clients and for all matter types. Expanded use of this model requires that lawyers commit to it, that clients embrace it and that we carefully monitor the results. Our partners consistently pitch alternative fee arrangements, and, fortunately, RBC is among many clients that are receptive to the idea.
Legal process management is the key to success and an area of focus within our training efforts. We have identified which alternative fee arrangements work well and examined why others don’t, using the resulting knowledge to train our attorneys to be efficient providers of legal services. Based on those efforts, our use of alternative fee arrangements will continue to expand.
Richardson: Ellen, the Pfizer Legal Alliance, which is the collaboration among Pfizer and 19 firms, has stood out for its commitment to continuous improvement. This is evidenced by its innovative approach to encouraging teamwork and developing a strong bench. How has your value initiative affected your relationships with business colleagues?
Rosenthal: We migrated from working with many law firms under traditional payment structures to a radical convergence program based entirely on fixed fees. While many colleagues found it difficult to embrace at first, our finance colleagues quickly assessed the program’s enormous value in offering both budget predictability and substantial cost savings year after year. And business colleagues soon realized the benefits of concentrating our work with a smaller number of firms, including high-quality legal service and excellent working relationships with attorneys who understand our business.
Further, the program allows this group of outside counsel to absorb the collective, shared expertise through our knowledge management processes and continuing education efforts. While the program initially was designed for outside counsel, it also has provided educational benefits to our in-house lawyers.
Richardson: David, you and Whirlpool worked with Wheeler Trigg O’Donnell to achieve a 40 percent savings in your class-action defense program, using a variety of tools that included early resolution bonuses. What are the drivers of efforts to create this kind of value in partnerships between corporations and law firms?
Grumbine: Four drivers were involved in our effort. First, a law firm must be a true partner, not merely a task-based service provider, in gaining insights through matters they handle and then helping corporate clients become more efficient. Critical to the notion of maximizing efficiency is minimizing cycle time, which every corporate counsel knows is directly correlated to lower costs.
Another driver is use of fixed fees, which encourages companies and their law firms to talk without worrying about the hourly rate. Third is cost predictability, which enables better forecasting and planning. Finally, it is important that a law firm understand the company because such knowledge saves time, reduces waste and improves the relevancy of the firm’s feedback.
All of these factors have contributed to Whirlpool’s great relationship with Wheeler Trigg O’Donnell.
Richardson: Michael, tell us about what you’ve learned through working with Whirlpool and whether those lesson can help more broadly in working with other clients.
Michael Williams: The adjustment from an hourly to a fixed-fee model actually was much smoother than we had anticipated. This positive result faces off well against the challenges we meet in handling consumer class actions that, by their very nature, are unpredictable. Many smaller decisions, for example on discovery or procedural motions, can have an enormous impact on case developments and costs.
One broad lesson from this experience highlights the need to spend more time brainstorming about strategies an adversary might use – like adding codefendants or plaintiffs to a class-action case – to harass us and drive up costs.
We also now fully appreciate how a fixed-fee arrangement can facilitate a closer client relationship. It has made us an extension of Whirlpool’s in-house law department and has encouraged the business and the engineering communities to call us without worrying about the cost. Dave can attest that the immense value of this enhanced collaboration is not fully captured in the 40 percent cost savings already mentioned. This dialogue also saved millions of additional dollars in litigation costs by deterring those who might have brought cases against Whirlpool, thinking it was an easy mark.
Richardson: GlaxoSmithKline has made major progress toward its objective of applying value-based billing to all its legal fees, moving from about 3 percent to over 60 percent. It has also achieved substantial cost savings through effective use of technology in selecting outside counsel. I’d like to ask Bob Harchut to share some of his lessons learned from these pursuits, including the benefits of collaborating with other corporate functions.
Harchut: One lesson is that a law department can reap huge benefits by collaborating with the company’s procurement department, rather than subscribing to a “keep them out at all costs” approach. Lawyers tend to think that procurement doesn’t understand the legal profession and wants simply to commoditize what we do. Here at GSK, we’ve embraced procurement, and they have offered great ideas and tools for achieving our value-based fee goals without impeding the legal department’s ability to provide excellent representation.
In order to make this relationship work, the law department should appoint individuals to act as single points of contact, or SPOCs, and I play that role for the law department at GSK. The SPOC serves as the conduit for ideas between procurement and the law department, helping each to better understand the other.
Having an SPOC from the law department pays real dividends. Because I understand the politics, personalities and relationships with outside counsel, I can act as a credible buffer and translate the requirements of procurement into concepts that will work for my law department colleagues. Having an SPOC from procurement enables their deeper understanding of what does and does not work within legal.
I am fortunate to have been working for a number of years with the same two people in procurement. They introduced us to the idea of an electronic reverse auction, which they had used in other parts of the company and said could work within legal. We worked together and came up with a matter-specific reverse auction process that has really helped us in achieving our value-based fee objectives.
Richardson: Ernest, Lucchini has benefited greatly from your leadership on vendor management and use of technology-enabled decision making and process management. These efforts resulted in the reduction of cycle time on matters by 65 percent and the reduction of overall spending by 40 percent. Please share how your project- and value-based initiatives changed the law department’s role and image within the company.
Sultanov: The results you mentioned have elevated the legal department’s stature and increased the company’s level of respect for our specific expertise. The original objective was to dramatically reduce the expense of outside law firms without harming the company, but our efforts to achieve these goals reached beyond the direct result of establishing consistent value standards for all firms.
These efforts extended to tackling IT issues, including implementation of customized systems that provide real-time access to every legal matter. Reports that used to take days now require only minutes. Better IT capabilities for delivering data to an enterprise resource planning (ERP) system also increased transparency in our dealings with legal firms and enabled us to optimize our staff.
Further, we focused on risk prevention, joining with our business colleagues and law firms to address common problems, thereby reducing risk and even lowering costs within other major departments. Our role in improving business processes and establishing best practices allowed the legal department to become a leader within the company, earning us a direct mention when management communicated 2011 best practices.
Our success has inspired management to feel more comfortable with involving the legal department more deeply in critical business processes, for instance in restructuring and M&A activities. In broadest terms, our law department initiative enabled us to create value for numerous department, to become a leader within the company, and to garner confidence with top management.
Richardson: My thanks to everyone for this initial round of comments. Now, I’d like to discuss the impact of alternative fee arrangements on litigation outcomes. Michael, how will the trend toward these arrangements affect class action litigation in the future?
Michael Williams: There has been significant growth in consumer class actions in the last decade, particularly in industries that historically were not involved in such matters. When securities and antitrust class actions, among others, became less profitable for the plaintiffs’ class action bar – because it became more difficult to survive motions to dismiss – we started to see the application of Rule 23 to other areas, such as consumer products.
The automobile, pharmaceutical and tobacco industries fought hard against those cases, so the plaintiffs’ bar identified softer targets, and filings against those companies increased dramatically. Ten years ago, a 100-year-old company like Whirlpool just didn’t see consumer class actions. Now, some corporations are receiving one per month or more.
In an effort to anticipate future action, our firm is monitoring cases involving Whirlpool’s competitors and manufacturers in other areas, like home electronics and computers. Further risk-management efforts include advanced research to identify where the next attacks will occur, whether based on false advertising, latent safety defects or other allegations. From there, we can try to make preemptive strikes.
While I can’t talk about specifics, I can generically say that evidence of our success with risk management is clearly implied when another industry company actually gets sued while Whirlpool does not. Although my primary function involves litigating cases, an increasing proportion of my time is devoted to assisting Dave and his team with risk management.
Richardson: Now I’d like to address some questions from our viewers. One asks about the kind of software being used to calculate alternative fee arrangements. Jonathan, would you like to comment on that?
Hegre: We do not use software at RBC. We look at the type of matter and then use the fixed fee arrangement that makes the most sense in that context. We don’t have a one size-fits-all approach but try to take a realistic approach to the type of matter.
Richardson: Our next question comes from a European GC who asks whether white shoe New York firms and London magic circle firms will agree to fixed fees and the value-based collaborations discussed by our panelists.
Rosenthal: I can point out that members of the Pfizer Legal Alliance include firms like Clifford Chance, DLA Piper, Ropes & Gray, Skadden Arps and White & Case, among other top firms. These top global law firms collaborate with us on a purely flat-fee basis.
Lynch: We have a longstanding arrangement with Eversheds to do most of our legal work in Europe, the Middle East and Africa (EMEA), and it’s been a very successful relationship. While this is not a fixed-fee arrangement, we do enjoy preferred rates in each country for different levels of partners, associates, etc. Thus, we achieve reasonable certainty as to our legal spend in the EMEA areas.
Harchut: Our electronic reverse-auction program has involved about 84 firms, many of which are categorized as white shoe or magic circle firms, and this participation can involve value-based and other alternative fee arrangements. So these arrangements are becoming more commonly accepted by those types of firms.
Richardson: Dennis, we have a question as to whether certain areas of legal work are too complicated for value-based fees.
Lynch: We’ve used value-based billing across the board, including legal work involving our international operations in the EMEA area and Canada. This approach works not only for litigation as a whole but also for specific areas like patent litigation, which are among the most challenging in terms of developing a fair approach to alternative fee arrangements.
When we enter into alternative fee arrangements with firms, we lock down cost parameters according to the stages of the litigation. For example, the fixed fee for pre-litigation investigation covers activities from filing the complaint up to the Markman hearing, and then we set fixed fees through the Markman hearing, etc.
Certainly there are exigent circumstances in which you simply need the right person for the job right now, and these can make fixed fees a less viable option. But generally speaking, this model can be adopted in most situations.
Richardson: Ernest, what are you seeing regarding the adoption of value-based fees in Europe and in the Italian market specifically?
Sultanov: It’s not as much a problem in major areas like M&A, but it becomes more difficult, especially in Italy and France, to adopt these arrangements with the so-called routine and commodity practices. Our pioneering efforts in Italy seek to create customized Lucchini conventions for adopting value-based fees for all legal areas, including white collar and administrative as well as M&A and restructuring.
Richardson: We have one final question from corporate counsel, directed specifically to Ellen Rosenthal of Pfizer and concerning whether the healthcare field is unique in its ability to adopt the creative and collaborative model she has described. How can other industries relate to and learn from Pfizer’s decision to take that big leap?
Rosenthal: In many respects, the healthcare field is not at all unique, and we handle a variety of work that is not specific to healthcare. To echo Dennis’s point, there is no particular substantive field of legal work that is not amenable to alternative fees. Most of our legal dollars are spent on complex litigation, and we successfully use fixed fees in spite of the common argument that this area is too unpredictable to manage under such a financial arrangement. Further, our corporate transactional and other work also is handled using a flat fee.
My advice for those involved in other industries is to analyze your legal spend: take a look backward, get a good understanding of what it is, where it is and how it develops over the years. If you want to adopt model that is similar to ours, i.e., that involves an annual flat fee on a portfolio basis, then budget accordingly, be flexible and work closely with your law firms to manage carefully as the budget unfolds toward year end. By developing a trusting relationship and a partnership, this model can work for anyone.
Richardson: I would like to thank all of our panelists for giving us a variety of corporate and law firm perspectives. You are operating at the forefront, and your positive experiences all serve to underscore that the swift pace of innovation in adopting value-based models is represented across the board in a variety of industries.
We like to think of the ACC Value Challenge initiative as sparking a revolution in terms of how in-house and outside counsel are redefining value, and we’re seeing clear trends pointing to its continued prevalence and growth. Our ACC Value Champions represent the tip of the iceberg, and we look forward to featuring more great value stories.
Published August 2, 2012.
