Crunching Law Department Numbers to Reduce Outside Counsel Spend
Kone Inc. general counsel Kurt Stepaniaks theory is that any work that can be done can be measured. And if you can measure it, said Stepaniak, you can improve it. On day two of ALMs 24th Annual Corporate Counsel General Counsel Conference in New York City, Stepaniak shared how he uses his legal departments data stores to realize big savings on outside counsel spend.
Stepaniak has been at Kone, the second-largest elevator and escalator manufacturer in the world, for 15 years. A few years ago, he realized that some key components of the companys relationship with outside counsel needed to change.
As part of the panel discussion Managing by the Numbers: Law Dept. Budgeting and Metrics, Stepaniak noted that Kone had been paying hourly rates to approximately 50 outside law firms. The law departments file handlers were spending a lot of their time reviewing and approving invoicesand inevitably, he said, there were lots of fee disputes with the firms.
The hourly rates outside counsel charged the company varied significantly. Although almost all of the work was similarpredominantly personal injury casesone firm might demand as much as double what another firm would charge.
So the Kone GC brought together what he calls his what if thinkers to consider billing alternatives. The first thing we had to do was gather the data, he said, and it was not all in the same place. Once the department was able to examine the data holistically, a surprising revelation emerged.
What we found was pretty fascinating, Stepaniak told the conference audience. Although the firms hourly rates were wildly inconsistent, there was little variability in terms of average cost per case.
In 2007, Kone piloted a flat-fee system with just one of its outside firms. The next year. the law department added 25 percent of its new assignments into the alternative-billing pilot, analyzing its data and making adjustments. We wanted to make sure those numbers were good and would result in a cost reduction, said Stepaniak.
When he implemented the plan across the board in 2010, Stepaniak said, I thought I was going to be tarred and feathered. But all 30 firms Kone was using for outside work signed on. The result? Kones outside counsel spending in 2011 was 30 percent less than 2007down from $6 million to $4.5 million.
The arrangement wont necessarily work for every company. Kones lawyers are able to handle all of the M&A work internally, as well as most of the companys compliance issues. When an outside firm is consulted for compliance, that work still is billed on an hourly basis.
But for Kone, 98 percent of its legal work is now covered by flat-fee arrangements. Thats not to say that disputes with firms have been eliminatedStepaniak said that communication and flexibility with outside counsel are crucial if the arrangement is going to be beneficial to both parties.
He insists on trying the arrangement with every caseat least at first. But if the firm can later explain why the matter isnt amenable to a flat-fee arrangement, he hears them out. I dont view firms as fungible goods, he said. I view them as partners.
Kones billing system encourages the firms to be more efficient, said the GC. They in turn get a guaranteed stream of revenue for matters arising within a specified geographic location.
Moving forward, Stepaniak said he would continue to analyze available data and keep looking for more work that he can measure. It has paid off thus far. When we started this, we thought it was impossible, he said. But if you listen to the data, you can really do it.
See also: "Dispatches from ALM's 2012 General Counsel Conference," CorpCounsel, June 2012.