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Pay for Results, Get Results
While Shook, Hardy & Bacon continues to bill some clients by the hour, chairman John Murphy sees more companies "wanting more certainty about what their litigation book will cost them for the calendar year." Alternative-fee approaches increase the emphasis on strategy, he says. "We ask things like, 'Is this a case that should be settled, or a case that may involve some overriding precedent involving other products made by the company?'"
High-stakes-litigation specialist Bartlit Beck Herman Palenchar & Scott LLP is one firm that has given up the billable-hour format entirely. Managing partner Sidney N. "Skip" Herman says that accepting the fixed-fee structure offers "the opportunity for an upside: if we win the case, we get a big bonus." Besides, he sees "a risk of inherent abuse" by firms measuring billable hours. "When you pay for hours, you get hours; when you pay for results, you get results," he says. "Perhaps as much as 20 percent of billed hours in the billable-hour model are inflated. You end up rewarding inefficiency."
With Cisco Systems's adoption of fixed-fee arrangements for "the vast majority" of its business with outside firms, says general counsel Mark Chandler, "one effect has been a new focus on technology." In the 1990s, the San Jose, California-based company began managing lots of its legal work — things like tracking subsidiaries' records, contract creation, and patents — with Internet tools, then joined with other big companies "to help select law firms that could move HR counseling onto online functions," says Chandler. Cisco's technological advances and legal benchmarking, which it credits with $100 million of cost savings, "consistently puts us in the bottom quartile [in our industry] when it comes to legal expenses," he says.
Money in a Bucket
FMC Technologies may boast the most sophisticated alternative-fee strategy. In 1993, says vice president and general counsel Jeffrey Carr, there were "48 attorneys in the department and more than 100 outside law firms billing us by the hour," he recalls. The company began cutting its inside legal staff, and reduced that number to 8 attorneys. "Meanwhile, 12 external firms account for 85 percent of our spend," says Carr, "with the remainder local domestic firms and indigenous firms overseas," and each firm applies fees. FMC Technologies tells firms it "will pay 80 cents on the dollar of the budgeted amount, putting 20 cents at risk," according to Carr. "If you come in on budget and achieve the set goal, you get what is in that risk bucket, plus a multiplier as a bonus." The first phase of a case may offer a 100 percent multiplier of the at-risk amount — a substantial incentive. The second phase offers 75 percent, the third 50 percent, and the fourth and fifth 25 percent.
"Since I don't want the firm to stop work if it goes over budget, we've created another fee arrangement covering work in excess of the budgeted amount," says Carr. "We flip the at-risk number, paying the firm 20 cents on the dollar and putting 80 cents in the bucket." This "unleashes the firm's entrepreneurial spirit" and provides "a very tidy bonus through the multiplier."
The success of the strategy is measured in part by how long cases remain open. "Cycle time used to be 48 months in the mid-1990s, and we're down to less than a year now," says Carr. "We also measure deviations from expected values. For example, if we estimate that a case ought to be worth $1.2 million in exposure, plus $300,000 in fees, that's a $1.5 million estimate of total cost." If cases cost $1 million below target, "we count that as a win. Since we've been doing this, we've resolved 40 cases and had only 3 in which we paid more than the expected value."
The approach, and the result, sit well with CFO Schumann. "When we win, they win," he says. "From where I sit, that's a pretty good deal."
Russ Banham is a contributing editor of CFO.
How FMC Technologies Laid Down the Law
Tips for reducing the cost of outside counsel.
• Terms for "success" are defined and agreed upon.
• A target legal expense budget is established for each phase of the litigation.
• Within each phase, up to the target amount, a firm gets 80 cents on the dollar, putting 20 cents at risk.
• If the firm exceeds the target for the phase, the firm gets 20 cents on the dollar, with 80 cents at risk.
• Achieving success in the case's first phase wins the firm the at-risk amount, plus a bonus of 100 percent of at-risk dollars.
• Achieving success in the second, third, fourth, or fifth phases wins the firm the at-risk amount, plus a bonus of 75 percent, 50 percent, 25 percent, and 25 percent, respectively, of the at-risk dollars.
• The success multiplier is adjusted upward or downward by the percentage of total expense budget saved or overrun and by the percentage difference between the actual recovery or settlement and expectations.
Source: FMC Technologies Inc.
The Law of Partnerships
Companies also form alliances with law firms to cut costs.
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