When it comes to managing outside counsel, the CFO is usually concerned with the cost of outside counsel and the general counsel (GC) is responsible for finding a way to manage legal strategy within an often shrinking budget. The increased use of alternative fee arrangements (AFAs), however, presents an opportunity for CFOs to participate in more direct strategic discussions around legal strategy and legal spend with their internal legal departments and outside counsel.
Often the first question outside counsel is asked is, “How much is this going to cost?” or is told by the client that “I want to do this as a fixed fee.” Of course, there are a variety of options to accommodate every kind of pricing pressure, and much ink has been spilled on this topic in other forums. If the conversation between a company and its outside counsel starts with economics, however — whether on an hourly or AFA basis — we are all starting in the wrong place. The proper starting point is a discussion of the company’s value expectation.
But how can a company measure value at the outset of a legal engagement? Value is a dynamic concept that is comprised of three elements: synergy, efficiency, and cost.
Synergy. To arrive at a unified value expectation, the CFO and the GC must align the company’s business purpose with its legal goals for each engagement of outside counsel. Once a company does this, then, together with outside counsel, the parties need to evaluate where there are or can be synergies between the client and its outside counsel. The synergy should be around how to accomplish the company’s stated goals and align the respective organizational behaviors accordingly. For example, the parties can use phase- and task-based billing, and budgeting tools and reports, to project and measure this alignment.
Efficiency. The second component of value is efficiency. In order to maximize efficiency, the client and the outside counsel need to determine who should perform which task. Should there be a greater role for in-house counsel, paralegals, technology, or a lower cost third party (including contract attorneys), rather than all work being done by the lawyers at the outside firm? Is there a client team that can be deployed by outside counsel that has worked on similar matters for another client or for this client in the past?
Cost. In light of the synergies to be achieved and the efficiencies created, the client and the outside counsel should discuss the cost of the representation and agree on a fair price and pricing structure. If a client expects certain aspects of a matter to cost a certain amount of money, the client should communicate this to outside counsel. Law firms have numerous strategic pricing options that they can and should be prepared to offer clients, including volume discounts, fixed fees, success fees, fees for particular phases of a matter, and holdbacks.
No one approach is right for every matter and every client, though. It is important that the client (GC and CFO) and the outside counsel discuss the risk that each party will undertake and how to best align their interests. Pricing legal work, if done properly, aligns the objectives of the company and its outside counsel, for immediate and future engagements.
There is no one-size-fits-all model for optimizing value for any particular matter. Rather, value is fluid throughout the relationship. Parties must be able to adapt to changing goals and priorities inherent in legal representation and a changing business environment. A savvy CFO plays a critical and strategic role in this conversation. Here are some tips and best practices to help drive (and maintain) the value discussion.
As law firms and their clients continue to move away from a discussion of discounts and cost to a more holistic discussion of value, there is an opportunity for CFOs to take on an enhanced strategic role in bridging the gap between legal strategy/cost management and business knowledge/operations. By fostering and encouraging an open dialogue on these issues the CFO, GC, and their outside counsel can work together to drive value for a company.
Meagan E. Costello is director of pricing and project management for Goodwin. Adam Chud is a partner in Goodwin’s business litigation group.