More In-House Lawyers Question the Billable Hour
This column is in response to CorpCounsel.coms February 27 article, AFAs Trending Down in U.S. and U.K.
The legal marketplace is changing, and corporate counsel are demanding value-based engagements with their outside firms that create alignment and incentivize the elimination of waste and excessive work. Global corporationsthe ones law firms covet as clientsfind better value and achieve better results with value-based alternative fee arrangements (VBFs).
According to data provided by members of the Association of Corporate Counsel (ACC), home-appliance maker Whirlpool put in place a system that emphasizes hitting benchmarks on budgets and giving bonuses for ending legal claims sooner rather than later. In the process, it cut its legal costs by about 15 percent. Sherwin Williams cut its spending by a similar amount using VBFs. And Home Depot adopted new billing procedures in 2008, hiring outside lawyers using fixed fees and retainers. As a result, Home Depot cut its legal fees in half.
These alternate value-based billing systems dont just lead to cheaper legal services for companiesVBFs also lead to better legal services. For this reason, multinational companies are trending toward total VBF systems and taking their AmLaw 200, U.S. regional-mid, and non-U.S. firms with them. GSK increased its use of VBFs from 3 percent to 68 percent; UTCs use of VBFs is more than 70 percent; Home Depot, more than 75 percent; and Pfizer is 100 percent VBF.
Over five years, Tyco International used flat fees as an incentive to trim away 55 percent of its product liability cases, while reducing the number of new cases filed against it by 65 percent and shortening the time a case stayed alive by 40 percent. These numbers tell an important storyVBFs can lead to reduced risk for the companys shareholders and better outcomes for the companys employees and executives.
Many other companies use VBFs to encourage law firm lawyers to play a wider role in support of the company and its goals. For example, they can train with company employees to understand how operations work, or be available to intervene sooner rather than later when a potential problem pops up, or learn the job and fill in for a legal department employee whos on leave. All that leads to better lawyering and to better results for companies.
The list of large companies using VBFs ranges far beyond the few mentioned here. Other name brands that are changing the billing culture are Medtronic, DuPont, Ford, ExxonMobil, and Levi Strauss. And its not just the big namesa myriad of smaller companies are also requiring outside firms to come up with new ways to charge for legal services.
ACC has seen the adoption of VBF arrangements gain considerable momentum over the years, with chief legal officer survey results, ThinkTank discussions, and ACC Value Challenge participation validating the premise that alternative fee arrangements (AFAs) are on the rise.
A recent survey conducted by the law firm Fulbright & Jaworski, however, found the percent of companies using AFAs dropped from 62 percent in 2011 to 52 percent in 2012. The report claimed the shift away from AFAs was evident across companies of all sizes and in both the United States and the United Kingdom.
While ACC encourages industry surveys and analysis to track trends and actions to better understand marketplace triggers and identify effective solutions, surveys with low response rates should be viewed with a discerning eye before extrapolating the findings too broadly.
According to Fulbrights study, the results reflected information collected from 392 in-house attorneys, with 82 percent of the respondents identifying themselves as general counsel and 14 percent as head of litigation.
Fulbright does not indicate how many total were surveyed or whether the majority are firm clients. So its hard to guess whether its just a report on what their clients think. Also, a low response rate can skew results and result in a sampling bias. Based upon what we are seeing at ACC, the Fulbright survey may not be the best reflection of in-house counsel trends.
ACC has been conducting surveys for more than 10 years, tapping into its 30,000-plus global membership, partnering with media publications and collaborating with leading industry legal providers.
In January, more than 1,100 CLOs and general counsel from 36 countries participated in ACCs Chief Legal Officers 2013 Survey, providing an unbiased and in-depth analysis of the highest-ranking lawyers in corporate legal departmentsreviewing their top concerns for the past 12 months, today, and into the future, along with a prioritization of their business issues.
This years survey indicated that more than 75 percent of CLOs use outside counsel spending as a method of evaluating success. Three quarters of the respondents (75 percent) also used outside legal spending to evaluate the effectiveness and efficiency of their law department.
Results from ACCs 2011 Census, which provided insights into the largest sampling of the in-house counsel community, indicated that in-house counsel are proactively working to reduce their companies total legal spending by implementing AFAs, reverse auctions and other innovations.
Participation in ACCs Value Champion program is also on the rise. Program participation has increased by 23 percent, with 43 percent of the nominees coming from small law departments (10 or fewer lawyers).
Stephen Falk, executive vice president, general counsel, and corporate secretary for Cardinal Health, aptly noted in an ACC interview that, the firms that are most successful exhibit a firm-wide zeal for value-based arrangements and a demonstrated track record of success with these types of engagements . . . [f]irms that struggle are those where the value-based arrangement is a thin veneer covering an underlying economic structure based on the billable hour.
Let the evidenceand the in-house legal communityspeak for itself. The Fulbright study got it wrong: in-house counsel are demanding better value and driving toward more AFAs, and theres no turning back. Law firms that fail to recognize market demands for better value do so at their own peril.
Veta T. Richardson is the president and chief executive officer of the Association of Corporate Counsel, a global bar association headquartered in Washington, D.C., that is dedicated exclusively to serving the interests of in-house counsel. ACC recognizes innovators of value-based legal billing practices with its Value Champion awards.