Category: Enterprise Legal Management

Law firms are resilient – one of the most tenacious businesses that exist.

Never mind the (almost) static, partner-centric organizational structure. They’re slow to adopt new technology when compared to businesses in other industries. They often have the reputation of holding onto tradition and responding slowly to new experiences or trends.

What other profession is so well known for charging at an hourly rate – a set-up that essentially rewards lawyers for spending more time (as opposed to only necessary time) on cases?

However, as corporate legal departments strive to drive down costs and minimize risks, an opponent to the hourly bill is steadily growing in popularity and is now (ok, I’m just going to say it) a mainstream practice for many law firms. The common perception is that alternative fee arrangements (AFAs) (think flat-rates or project- or value-based fees) give corporate legal departments a distinct edge when it comes to saving money and puts law firms at a significant (monetary) disadvantage.

That might not be the case.

As billing models change, resilient law firms are adapting. They’re surviving and thriving when it comes to AFAs.

Why are law firms benefiting from AFAs? Because most of them have the experience and (most importantly) the data to reinforce their AFA negotiations. The result is that law firms make more money using AFAs; not less. Counterintuitive? Read our next post.

State of the Nation

That AFAs are gaining more ground in the bout of in-house vs. outside counsel is no surprise to anyone. And, as is usually the case, the battle to keep law department costs down is fueling the movement.

A survey from the BTI Consulting Group cites that corporate legal budgets were expected to decrease 4.3 percent in 2010. This means that corporate legal departments needed to get the same amount (or more) of work done with less money and resources.

According to Fulbright’s 7^th Annual Litigation Trends Survey Report, 52 percent of the U.S. corporate legal departments surveyed are using AFAs. One in six of the corporate counsel that responded estimate that AFAs account for 50 percent or more of their billings. Among all respondents using AFAs, fixed fees, conditional/contingent fees, blended rates and capped fees are the most widely used AFA variants.

And the practice is growing. The survey stated that four out of 10 U.S. respondents expect to increase their use of alternative fees and with large companies leading the way and that a majority of U.S. respondents see AFAs – and more stringent cost control measures – as becoming fixtures in the market.

To sum it all up, cost controls demand innovative thinking. As corporate legal embraces AFAs, law firms have to anticipate, adapt to and profit from these arrangements.

And they are.

Corporate legal departments are also embracing it. Read Mark Herrmann’s article – Inside Straight: Alternative Fee Agreements for Beginners in Above the Law to see how your legal department can benefit from project or value-based billing arrangements. Mr. Herrmann is the Vice President and Chief Counsel – Litigation at Aon.

Alternative fee arrangements bring about a couple of different (ahem) feelings, depending on who you are and where you work. General counsel applaud them as they reduce outside counsel spend. Agile (and often smaller) law firms consider them a nicely sharpened tool in the business development arsenal. Larger firms, which can have ingrained processes and a strong hierarchy, sometimes find themselves a bit behind the curve.

Regardless, alternative billing is pretty much becoming, well, the new standard for billing.

Not that I’m telling you anything new here, folks. We all know how the in-house perspective on alternative billing has evolved over the years. Let’s recap the highlights of the conversation over the past three decades:

• • 1981: Legal work costs what it costs. We can’t control how much we spend or what outside counsel will charge us.

• • 1991: Wait a second. Maybe we can. If only we had the technology to do so.

• • 2011: We’ve got the technology. We see alternative fee arrangements thriving with documented ROI from our own efforts and/or our peers’ efforts.

So what has sparked this blog post? We can thank The Economist for that.

It published an article on May 5 titled “A Less Gilded Future,” which lays out ongoing and growing challenges for law firms. What factors are attributing to these challenges now? Besides technology and outsourcing – which both force a deduction in billable hours – the other “evil beast” is alternative fee arrangements.

In support of this, the article cites feedback from Robert Ruyak on one of the main causes for the demise of the law firm he worked at, Howery:

Howrey had begun acceding to clients’ demands for flat, deferred or contingent fees, causing income to become clumpy and unpredictable.

With this example in mind, and with what you have seen yourself, does the growing strength of alternative fees present a mighty blow to the proliferation of law firms? Or does it just mean an end to the way law firms conceptualize, pitch and measure their billing structures?

And one more (even more thrilling) thought: Are we actually nearing a point where we can apply industry standards to alternative fee arrangements?

The adoption of alternative fees has accelerated these past 5 years alone. The fees have been in use by some pioneers for much longer than that. Thanks to technology (such as legal project management software), is there enough collective data to begin to consider the average fees associated with matters and general tasks from both an in-house and outside counsel point of view? Imagine the implications this could have on negotiations – a basic plateau to start negotiations on that is backed up by both corporate legal departments and law firms alike. Standards such as this could help law firms negotiate on a more level playing field while also affording the necessary cost controls for general counsel.

What do you think? Now that we have (and have had) the technology, do we have the data to begin building standards for alternative billing?

Stay tuned for the next blog where I will discuss how some firms are pushing alternative fee arrangements with their customers because they are finding higher margins there! Sounds counter-intuitive, right?

Early case assessment (“ECA”) is a valuable tool to analyze the risk and exposure associated with any given piece of litigation. But it is equally important in defining precedent and strategy for managing the litigation going forward. Simply put, ECA is composed of the following components:

1. Investigate facts

2. Analyze contextual issues

3. Decide on objectives for a project

4. Address stakeholder expectations

5. Define exposure (risk & financial)

6. Develop a project plan

7. Create a budget

So as I see it, ECA is critical to litigation. And it plays into Onit’s theme about legal project management being a three-legged stool: assessment of the situation, development of a project plan, and then budgeting for the project. Then, wash, rinse, and repeat.

But, is it really only useful in litigation? I think that this type of planning and critical thinking is valuable to all big legal projects. (You define “big” for yourself, but for me I would think projects that take more than a few days, or use outside counsel, fall into this definition.) So to help break free from the litigation context that ECA is most often associated with, I will call these “initial assessments.”

I would go one step further in applying process to the creation of initial assessments: don’t allow an invoice from outside counsel be submitted before an initial assessment is created. And while we are thinking about this in a process context, perhaps you don’t allow the creation of a project plan or budget before the initial assessment is done also. After all, how can you properly plan or budget a legal project without assessing the situation first???

One final point on the initial assessment must be made. Onit is not in the standards setting business and we don’t believe that initial assessments are a “one size fits all” form. These need to be tailored to a company and, more importantly, to a project type. An initial assessment for an acquisition looks very different than one for loan documentation or ERISA litigation.

In addition to breaking the litigation link to this concept, I also want to start to promulgate the idea that assessments are part of a continuum of project management. So in addition to the initial assessment, there should be periodic ongoing assessments and a final closing (or postmortem) assessment.

Ongoing assessments are key to managing the costs and risk of a project. It should be a review of all aspects of the initial assessment and allow you to consume any new facts or changed circumstances. Based on the ongoing assessment, you should update or refine your project plan, if necessary, review the budget and update that as necessary.

I like tying things like ongoing assessments and budget reviews to existing events or processes so as not to create more work. So, while these ongoing assessments can be done monthly, quarterly, or when the facts change, I think that a good (or better?) time to think about these is when a bill is submitted by outside counsel. That is a good opportunity to have your outside lawyer tell you if there are material changes to the initial assessment. If there aren’t changes, the process is simple and added no new work. If there are changes, then invoice presentment is a great time to ask changes or updates to be noted in the project.

Similarly, bill approval is a great time to ask the inside lawyer to do the same situation assessment and determine whether an update to the initial assessment is necessary. This way, every month a CEO or GC has an up to date assessment of the status of big legal projects.

Finally, but certainly not the least important, is to do a closing or postmortem assessment. Best practice project management dictates that you evaluate the performance of all project aspects to the initial assessment and evaluate the performance of stakeholders (including outside counsel, if used).

I think this applies to legal project management just as certainly as it does to other types of projects. It will allow you to determine what did and didn’t work in terms of risk or financial exposure and give you critical data to create better project type templates and to use information gained to create better project plans and better budgets.

I have been thinking about legal e-billing and spend management for a long time now. My partner and I implemented the first really successful e-billing systems in corporate legal back in the late 1990’s. At that time, corporations were dealing with invoices the size of phone books from their outside lawyers. They were simply too big for busy inside lawyers to review.

The goal with our product was to identify waste. Everyone knew the waste was there. They knew that their invoices were too high. They also knew this was not because the firms were cheating them but because no one was reviewing the invoices for mistakes made by their firms.

Many of the Fortune 500 were the earliest adopters of the technology and the earliest success stories. We designed our product with their requirements in mind. We developed big hairy systems to get invoices electronically from law firms to their corporation customers. We wanted to help them save time and money and eliminate waste.

We at Onit are in the process of developing a new e-billing system that will work for BOTH small and large corporations. One of the first things we learned was that scale matters. Smaller firms and workgroups have very different problems and barriers to adoptions than the largest corporations in the world. Trying to implement software designed to squeeze pennies out of every line item will not work for you unless you have lots of line items.

We have a philosophy about how, why and when you should adopt e-billing and spend management systems and this collection of blog posts, I hope, will articulate some of that philosophy.

Before I start discussing e-billing, let me tell you a story to illustrate how important it is.

I remember walking through a large bank’s offices in the late 1990’s. As we walked back to the conference room to give our sales pitch on why they needed a e-billing system we had to squeeze past boxes four feet high.

I asked “What’s in the boxes?” They said legal bills.

During the sales pitch I asked several questions:

How much do you spend in legal bills? Answer: we don’t know.
How many law firm vendors do you have? Answer: we don’t know.
Home many legal bills do you get a year? Answer: we don’t know.

I knew then that the software we had designed was going to sell itself. In the next series of posts I will be explaining why e-billing is so important and why we at Onit have spent so much time designing a system that works for you, no matter how big or how small your company may be.