VideoCompanies all want law firms to turn over every stone in the quest to win their cases. Paying for all that stone-turning is another matter.
In the past, the desire for a favorable outcome has usually won out over cost concerns. These days, though, many companies are finding a way to shave expenses while still getting the extra effort they need from their outside legal teams. It often starts with replacing the standard billable-hours approach that law firms have used for most of the century in favor of a negotiated-fee-based model that provides financial incentives if external counsel can keep costs down.
The approach puts Houston-based manufacturer FMC Technologies Inc. "on the same side of the line as the law firm," says CFO and senior vice president Bill Schumann. "I want low cost first and cost certainty second, and I'm not sure the traditional billable-hour format provides either." With the fixed-fee approach, lawyers focus on specific targets, like settling cases "for the lowest legal cost and settlement amount where warranted." When they charge for billable hours, he adds, "there are no incentives."
Billing by the hour remains by far the most common compensation model for corporate law practices, and will probably remain so for smaller companies that use their services. "Generally speaking, if you are under $5 million to $10 million in total annual legal spend, it doesn't make sense" to seek an alternative, says Brad Blickstein, a principal at The Blickstein Group, a Skokie, Illinois-based legal consultancy. "You're just not going to get the return on investment."
But as legal expenses have soared, larger companies like DuPont, Tyco International Ltd., and Cisco Systems Inc. have looked for options. Companies "already view their law departments as cost centers. They need to look beyond that and bring predictability to them," says Fred Krebs, president and chief operating officer of the Association of Corporate Counsel. In a benchmarking survey of corporate law departments, the association found that in 2003, for each internal lawyer employed by the department, companies paid an average of $546,960 to external law firms — up from $480,582 in 2002. It also found that billable-hour alternatives are an increasingly popular way of combating that rise.
Convergence at DuPont
DuPont is the granddaddy of novel legal-fee approaches. In 1992, then-CEO Ed Woolard mandated $1 billion in cost cutting across the company, including a reduction in the number of law firms engaged by its legal department. "We wanted to drive different ways of conducting business with external counsel," says Thomas L. Sager, chief litigation counselor at the chemical giant. The goals: longer-term commitment from law firms, better integration between DuPont and outside counsel, greater alignment in resolving cases quickly, and reduced duplication of effort. Fixed fees provided "certainty and predictability in billing, with the proviso that if the firms became more efficient and yielded better results, we would give them a bonus," he says.
In three-and-a-half years, DuPont cut the number of external firms from 450 to 34. Outside firms today agree to set fees based on the docket of cases, types of litigation, and expected workload. DuPont's approach, known as the convergence model, saved the company $13.2 million in a two-and-a-half-year period, says Sager. Now, "when my CFO asks how much we're spending, I can give him a number," he notes. "We're far better able to forecast our legal spend, anticipate large settlements or payouts, and forecast recoveries."
Tyco International — a company that knows something about legal bills — now uses a similar convergence model. Litigation program manager Jim Michalowicz, who worked under Sager at DuPont until the end of 2003, says "Tyco was in a situation where it was looking to develop a litigation portfolio management program." (All of Tyco's legal expenses were managed under the billable-hour system that prevailed before last year.)
Until recently, Tyco had too many "generalist" internal attorneys, while its external law firms numbered close to 500. "Frankly, we didn't know the actual total number of firms or the related costs, because we didn't have a centralized management system" for the external lawyers, explains Michalowicz. "Nevertheless, it was easy for me to go with my experience at DuPont and conclude that too many law firms breed too much cost."
Following the direction of Bill Lytton, general counsel for Tyco, Michalowicz restructured the company's internal law department to focus on specific practice areas, creating teams to work closely with the outside firms. "In product-liability litigation, our first convergence area, we reduced the number of external firms from 167 to 1," he notes. "We then negotiated a fixed fee that best represented the total legal cost — essentially fees plus expenses." Tyco's overarching goal: to reduce that total cost by slashing total case-cycle time, exposure levels, and the number of cases.
Tyco's lone outside product-liability firm, Kansas City, Missouri-based Shook, Hardy & Bacon LLP, inked its agreement in October 2004, with both organizations comparing the result to Tyco's previous billable-hour experience. "We're using an electronic task-based system where timekeepers from the law firm bill time as they normally would, except they send zero-sum invoices," says Michalowicz. Measuring the fixed fee against that, "we're projecting savings of 25 to 30 percent over a two-year period."
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