Reduce Legal Expense or Value Based Billing which camp do you sit in?

Earlier this week I had the opportunity to attend the Corporate Counsel’s Controlling Legal Cost Seminar. There were a number of fantastic presentations, John Weber (TyMetrix, General Manager) and Steven Williams (Managing Director of General Counsel roundtable) presented the findings of the Real Rate Report. For me this is always interesting, but I’ve seen it before and done the presentation myself. What knocked my socks off was Amy Schulman’s (Pfizer’s GC) and Lisa Damon’s (Managing Partner, Seyfarth Shaw) presentations.

Both set the tone for what Value Based Billing should really be all about. As Amy put it (I’m paraphrasing), in the first instance it cannot be about saving money. You need to focus on how to truly drive value (For her this was about deepening the relationship and creating predictability in their budgets). If you successfully do that you’ll get the greatest bang for your buck and ultimately will save money and get better outcomes.

Lisa did a great job of getting the audience involved and identifies ways that the industry itself can start to move more in the direction of Value Based Fees. Many folks agreed TRUST was the big hurdle and a requirement to making Value Based Billing a success. There was also agreement that clients need to get comfortable with the fact that when done right Value Based Billing is a win-win for law firms and clients. There will be situations where the law firm makes more on a deal because they efficiently and effectively managed it (which is what we are all driving for after all).

Another comment that I found very insightful was from Cindy Westervelt of Staples (who joined Lisa during her presentation). Cindy noted that as Staples began their transformation into more value based arrangements a change in mindset was required for both internal and external attorneys. One example she cited was that everyone wanted to do A+ work all the time, yet not all matters require A+ work (and the associated costs that go with an A+ effort). “Sometime it is okay to do just enough” Cindy commented. By getting everyone on the same page and working together on identifying the A+ and the NOT A+ matters they created a positive environment for all that was a win-win for both Staples and the firms.

In reflecting on this seminar and a number of other conferences and meetings I’ve participated in during 2010, I see two camps forming. One camp is highly focused on saving money through auditing of bills, modifying rate agreements and other tactics (including the establishment of AFA arrangements), while another seems focused on driving to Value Based Billing with a strategy not so much about reducing legal expense but about getting the best value for each dollar spent. In my experience both strategies can work, but you need to decide what camp you sit in. Those trying to straddle the fence may find they’re sending conflicting messages and ultimately may not achieve the results they expect.

Benchmark data will help firms move to new value-based models

My recent post on “Web Tools for Law Firms” reminds me of another piece that I wrote earlier this year but never posted. Whereas the creation of web tools for law firms might be only marginally beneficial to corporate law departments, I feel confident that the new model articulated by O'Melveny and Myers will definitely be. Read on and comment.

I just read a fascinating post in Above the Law called The New Biglaw Business Model, According to O’Melveny & Myers (http://abovethelaw.com/2009/09/omelveny_myers_strategic_plan.php), which was subsequently cited in the ABA Journal (http://www.abajournal.com/weekly/omelveny_aims_to_become_fixed-fee_leader_leaked_plan_says).

In it, bloggers David Lat and Elie Mystal discuss a “leaked” strategy memo from the management of OMM. Whether it was truly leaked or, as some commentators have observed, released as a PR move, is beside the point. The memo is interesting in that it perfectly illustrates the Catch-22 in which large law firms find themselves. OMM management acknowledges that the market for legal services delivered in the traditional model is shrinking. As the memo says, "In the very recent past, our business model, as a whole, has yielded disappointing financial and practice growth results." The plan notes that O'Melveny's litigation model, "which depended heavily on high charge hours levels by associates, counsel and partners to offset the impact of discounted rates and increased write-offs of expenses and time, has been under pressure for at least three years" -- i.e., well before the Great Recession began. In addition, OMM management acknowledge that alternative models are emergent. For example, the decomposition of the full-service firm is being driven outsourcing. "Document review and production have been outsourced altogether or client-directed to contract attorneys," the memo states, "thus eliminating much of the work formerly assigned to junior associates." These difficulties won't go away with the recession: "[O]ur litigation clients are looking for rate and fee reductions, and we expect that mindset will continue into the next good economy and beyond."

To their great credit, OMM management appears to be charting a genuinely new course for the firm, one that seems to honor the long time pleas of clients to pursue alternatives to the billable hour. They even take the courageous step of entertaining new organizational models required to profitably pursue these value based delivery models including a reversal of the traditional pyramid and proactive outsourcing of low value work.

The one question that I am left with in this memo, or any similarly aspirational statement of intent is this, “How can OMM effect this type of fundamental transformation of its model unless its knows, with a high degree of certainty, the costs associated with the matters it is handling?”. Obviously, they can’t rely on their billable information to date. It is that information that is at the root of their client’s dissatisfaction. Rather, they need benchmark information about what the same or similar cases cost when handled in the manner to which they aspire. I would submit that the only way the OMM, or any Biglaw firm, will be able execute on this type of model shift is to have, and be able to rely on, benchmark financial data about the costs and outcomes of similar cases. In addition, there is question of execution. As we all know, it is no small feat to change the fundamental structure of an institution like OMM. And for as hard as that is, changing the culture required to make this new vision work will be exponentially harder.

Supporting and Standardizing Fee Arrangements

While many arguments can be made for why Billable hours are outdated, or perhaps the value they provide (as discussed by John Weber in his prior posts on the future of the billable hour and value-based billing), it is clear the direction for many years has been toward Value Based Billing or Alternative Fee Arrangements. Unfortunately, there are no set standards for these arrangements. Fee Arrangements can vary by case, by firm and by client. In certain circumstances the parties are working off de facto standard frameworks, but the devil is in the details and with each one there are often slight variations from the others.

Supporting these “one-offs” through e-billing systems can sometimes be a challenge as you need to work within the industry-standard LEDES formats. To address some of these challenges CT TyMetrix has developed an Alternative Fee Arrangement (AFA) Module that will allow clients to set up the case-specific or law firm-specific AFA and have the system enforce the agreement.

The module will be launched with eight templates: Blended Hourly Rates, Fixed Fee, Hourly Rate Volume Discount, Task-Based Billing, Deal Based Billing, Hourly Rate Discount, Matter Rates and Years of Experience. This module was originally designed as an Add-On Module for e-Billing clients, but with the recent economic challenges and the strong shift towards AFAs , CT TyMetrix believes this module should be a standard part of all e-Billing solutions and will be offering it for no additional charge other than a nominal setup fee.

While all of this is good and exciting stuff, I still worry about the lack of standards around AFAs. The eight templates were created based on extensive client input and our 14 years of experience. But even with that we know we haven't addressed all possible AFAs (as we’ve seen, folks can get very creative with some of these agreements). The good news is the module is flexible enough to create additional templates, even client-specific ones, as necessary.

I can’t help but wonder, just as the industry saw fit to establish a non-profit group to oversee the LEDES formats, should Law Firms and Corporations considering creating an AFA Standards Committee? While the LEDES 2.1 format allows for the identification of a few AFAs, it does not (nor should it, I would say), address the specific details of how to bill and properly capture these arrangements. I’d welcome your thoughts.

Craig Raeburn
Vice President, Product Management
CT TyMetrix

Value Billing -- The UK Way

Following my recent post on the billable hour, I saw an article in law.com about how firms in the UK have never fallen as hard for the model as American firms. Of particular interest to me was the reference to the model used by Slaughter and May, a distinguished old-line London firm. As Nigel Boardman, a partner explains, Slaughter and May has never billed clients by the hour, nor do partners and associates have any targets for hours worked. "At the end of a deal we sit down with a client and ask, 'How good a job do you think we've done?'" says Boardman.

This reminds me very much of my early days as a litigator at the venerable -- but now defunct -- firm of Thacher Proffitt & Wood. At the end of case, the billing partner would ask the associate (typically only one) to bring the file into his office. The partner would look at the number of substantive documents/pleadings that were in the file, adjust for case results, and then announce the amount to be charged for services rendered. This amount was then discussed with the client and invariably approved. It was value billing in a very pure sense.

When I think back on that approach, I wonder how much better both Thacher and the client would have been with the knowledge that comes from the benchmarking data available with e-billing. Thacher would have been able to accurately predict the fees for a client, a must have for any in-house lawyer today. Moreover, Thacher would have been able to use e-billing data to create success based alternate fee arrangements that increased the premium that it received for an excellent, as opposed to adequate, result.

Has the Billable Hour Become a Liability for Law Firms?

The billable hour and its place in the legal business has always been a hot topic for us. In a pleasantly surprising change, the issue has been raised recently by two high profile law firm lawyers. First, Fred Bartlitt asked the question “Is the litigation market at last ready for a new business model?” on the fascinating new site Legal OnRamp, an invite only site for the glitterati of legal thinking. Next, Evan Chesler of Cravath detailed his case against the billable hour in a recent Forbes Magazine editorial, which sparked a flurry of further conversation in the legal blogosphere (including a law.com article, an abajournal.com blog entry, LegalOnRamp, and of course, the blog entry you're reading right now.)

This discussion is of particular interest to me because, in a very real way, the question of whether, and how, firms can move beyond the billable hour is the reason that my company, CT TyMetrix, was founded.

In 1994, TyMetrix was founded to answer a single question: How can corporations identify which of its firms is providing the most value for each legal service dollar spent. Since that time, we have developed business methods and solutions that are designed to do just that. Our clients gather the information required to assess the value being provided by their firms with our patented e-billing solution and collaborative matter management and case planning tools. They then use our business intelligence tools to mine the data gathered and determine which firms are providing the most value. Our clients then use the data that they have gathered to help firms value cases and implement alternatives to the billable hour.

There is a strong argument to be made that the hourly method of billing is no longer effective in all litigated cases. In fact, many of the top corporate legal departments are using TyMetrix 360 and similar tools to assign, plan, measure, and cost effectively manage litigation using alternative billing arrangements.

How do they do it? With the correct structure and data, it is actually quite simple. With a sufficient number of cases of a particular type (scores not hundreds), the exposure reserve, the litigation reserve, and the actual results, a company is able to use segmentation and a simple algorithm to accurately estimate which firms are resolving cases for the lowest total case cost. With this knowledge in hand, corporations are then able evaluate the staffing and tactics of the successful firms and share them with all the firms used by the corporation.

With a modest amount of historical billing data, they can work together to fairly value cases and set up alternate fee arrangements for matters or portfolios of work. Moreover, corporations and firms can collaboratively plan cases and effectively manage the staffing and workflow.

Using these methods, our clients have made some findings that are quite interesting. For example, based on our experience (which includes more than $20 billion in legal fees), there is strong evidence that cases are most cost effectively handled by small teams, often teams of one, and that the optimal staffing profile includes what can best characterized as junior partner level attorneys. This is the gist of Fred Barlitt’s argument on Legal OnRamp.

In addition to the objective methods for assessing the value of a firm or attorney’s work, our clients rely on attorney and firm ratings. These ratings, while qualitative, often add necessary color to the quantitative findings.

This, of course, begs a big question. If the tools for correctly valuing and managing a case and the litigation expense associated with it already exist, then why does the billable hour continue on as the dominant model of billing for litigation?

Although there are as many answers to this question as there are companies, I would offer some of the following as examples that I have heard over the years.

• I’m too small or I don’t have enough cases of a given type of litigation to have a meaningful segment.
• My cases are unique/too large/too complex/et al.
• Even if I have enough cases to have a statistically valid segment, I don’t want to share what I have found because it is a competitive advantage.
• Even if I have enough cases to have a statistically valid segment, I don’t want to share what I have found because I have data security concerns.
• I don’t want to offend my firms.
  

To these objections, I say this. It is your corporate prerogative to handle litigation as you wish but none of the foregoing is sufficient to continue to rely solely on the billable hour.

To make this work, I would offer a modest proposal: First, and without running afoul of any of the objections set forth above, we would need to agree to a standard for rating attorneys. This is an initiative that has been put forward by a number of companies although I believe that this type of standard is best put forward by a group like the members of Legal OnRamp, as an impartial (and "open source") exercise.

Second, we need to cooperate to build a highly segmented database that establishes fair value for the tasks and activities most commonly undertaken in litigation and, for that matter, in transactions, though that's another topic. Because there are already hundreds of companies that have most, if not all, of the required information through companies like TyMetrix, the data gathering exercise is largely complete. From there, we should consider the significantly larger task of agreeing on standards for the building and usage of a database that captures the data elements essential to enable companies and their firms to make educated bets on different projects or portfolios of work. Firms will have an educated basis on which to create alternate fee arrangements that align their interests with their clients, without the risk associated with blindly jumping into the risk pool. That's how a standard will emerge.

In addition to the existing standards for tasks and activities, we should consider standards for:

• Case types
• Exposures or reserves for the case and the litigation expense
• Reserve segments
• Staffing profile
• The type of the resolution
• The amount of the resolution

Because the quantum of data will be enormous, there will be no question about the validity of the sample size. Because the data will be anonymous, there should be no objections about privacy or a company or firm being singled out. The information could then be tapped by contributors whenever required.

I note that there are numerous precedents for this type of voluntary database. Notably, I think about ISO, to which virtually all insurers contribute “proprietary” information about their losses so that their policy forms reflect a broad risk pool.

I feel strongly that this is a critical issue. Fortunately, I think that there is a clear path to success for the entire profession.

I'd appreciate your thoughts.

John Weber
General Manager, CT TyMetrix

www.cttymetrix.com