GlaxoSmithKline Saves Millions in Legal Fees With Value-Based Programs

Gina Passarella

The Legal Intelligencer

07-09-2012

On Monday, July 2, GlaxoSmithKline agreed to a record-setting $3 billion criminal and civil settlement over drug misbranding.

In the nearly four years since GlaxoSmithKline looked to revamp the way it hires and pays for outside legal services, the pharmaceutical giant has saved tens of millions of dollars in legal fees.

Those savings are expected to only increase with GSK’s growing use of online reverse auctions for any matter over a certain nominal fee.

The savings have been achieved through close cooperation with GSK’s most trusted outside counsel who are not exempt from the law department’s global initiative to reduce costs and move away from the hourly billing model.

GSK’s push for value-based billing and its use of technology to achieve it have garnered it one of the Association of Corporate Counsel’s inaugural “Value Champions” award, given to law departments and law firms that have demonstrated a desire to provide value and actually delivered on the goal.

When GSK hired Dan Troy as its new general counsel in September 2008, things started to change in the department. A believer that the hourly rate billing model promoted inefficiency, Philadelphia-based Troy asked longtime U.S. litigation head Bob Harchut to lead a new team called the global external legal relations team. The team’s mission was to “dramatically” change the way GSK paid for legal services by moving all outside counsel assignments throughout the world to value-based fee arrangements whenever possible.

Value-based fee arrangements are ACC’s term for alternative fee arrangements, used in the association’s effort to promote the value aspect of the fee structures.

Harchut admits he was skeptical at first. He didn’t think alternative-fee arrangements could apply to just any matter. Other markets aren’t as far along in accepting such fee arrangements and complex litigation or transactions wouldn’t easily be adapted to alternative fee structures, he thought. But Harchut was willing to try.

“We really were keen to experiment and do it as a launch-and-learn and continuously improve the process,” he said. “What we found was it is super-important to identify early on the assumptions that go into the value-based fee and agree to those with our firms because the assumptions are the basis upon which we go forward.”

GSK wanted a win-win for the company and its outside counsel. It was willing to reward firms for their successes if they were willing to “put some skin in the game.”

The first part of moving to this process was gathering a cross-department team that included members from GSK’s procurement, finance and information technology departments as well as a Lean Sigma project manager. Troy was also willing to invest in meeting those savings goals by hiring two financial analysts to help track the metrics and success of these fee arrangements.

The external legal relations team then initiated a pilot program with 10 of GSK’s major U.S. litigation firms that represented the majority of the company’s legal spend. Harchut said they were receptive.

“I think the firms like doing GSK’s work because it’s superinteresting,” he said.

The firms didn’t get promises of future work, but they knew their cooperation would most likely lead to an ongoing stream of revenue.

The fees were structured in a similar way across the firm, focused initially on fixed- and capped-fee arrangements. Bonuses would sometimes be built in if a firm won a summary judgment or reached an early settlement. The arrangements then started to become a little more complex, focused on fees for certain phases of matters, Harchut said.

The purpose of clearly setting out the assumptions that back up the fee arrangements is to allow both parties to revisit the arrangement throughout the matter. If the firms are getting paid too little, they can rework the deal and vice versa, he said.

“At first I didn’t think this, but now I believe that any type of matter can be amenable to a value-based fee and so much of it depends on the assumptions and being willing to be flexible,” Harchut said.

Before this initiative began, less than 3 percent of GSK’s external legal spend was done on an alternative fee basis. By the end of 2011, that figure jumped to 68 percent, resulting in what Harchut would only call “extremely significant” savings.

The goal is to increase that percentage and Harchut said the mandate is to implement AFAs in all possible cases. Sometimes, however, GSK doesn’t have the leverage with a certain firm in a certain market to mandate such an arrangement, he said.

What “extremely significant” savings means can partially be understood by looking at the savings GSK has achieved through its outside counsel selection initiative, launched in 2010 and rolled out globally in 2011.

The program is an electronic reverse auction system that has so far included 80 law firms and hosted bids for 57 legal matters. The concept was raised by two of GSK’s procurement department employees.

All matters over an undisclosed threshold amount go through the bidding process. In-house GSK lawyers create a template tailored to the needs of the matter and the request for information gets sent to the firms. Firms respond with information such as their experience on similar matters and how they would structure the team on the proposed matter. That group is whittled down to at least three firms that are invited to participate in the online reverse bid. GSK said the bid process encourages “aggressive fee competition” among the firms, but added that the lowest bidder doesn’t always win.

Since its launch, GSK has saved more than $32.6 million when the winning firm’s budget (which is based on hourly rates) is compared to its final alternative fee offer. It has saved more than $21 million in savings when the firm’s initial offer in the bid is compared to its final offer. So in the 57 instances of using the bid, the 57 winning firms were paid $21 million less collectively than they initially bid and $32.6 million less collectively than their hourly rates would have brought in.

All firms involved in the bid, even those that lost, get feedback from GSK about their bids and why they might not have won.

Harchut said working with GSK’s procurement and financial analysis teams is essential to the process and the ability to collect the data to track the success of the fee arrangements. Eventually, Harchut said, he thinks the data will serve as a de facto convergence process in telling GSK what firms are really providing the value, quality and results.

The law firms are tracking the data, too, he said, and GSK looks to cooperate with the firms and make sure the data matches up.

Harchut said GSK loves firms that are actively engaged in project management. The law department is working with the more progressive firms to look for e-billing technology that is better suited to track value-based billing needs. He said GSK and the firms have jointly met with software providers and they are looking to develop software that can predict the value of a specific matter.

When asked whether there were any matters that he would still consider bet-the-company, rate-insensitive matters, Harchut said he would never say “never.” There may be a matter in which GSK decides not to use its new value-based system, but the general rule, he said, is to use this as much as possible.

This article originally appeared in The Legal Intelligencer.