2015 Year-End Enterprise Legal Management Trends Report
In an article, published last Wednesday on Law.com, author Jennifer Williams-Alvarez relates how the pharmaceutical giant, GlaxoSmithKline, has virtually eliminated hourly billing across its outside counsel panel, worldwide.
With 84 percent of the work performed by outside counsel for GSK in 2015 billed under alternative fee arrangements, the company has reportedly reduced its legal spend without sacrificing the quality of its legal representation. According to the article, GSK’s AFA usage has grown from just 3 percent in 2008.
In the context of our 2015 Year-End Enterprise Legal Management Trends Report, which reported that overall, AFAs were used in 9.4% of matters and accounted for 7% of billings, GSKs success in implementing AFAs across the board is beyond impressive.
The article reveals that GSK’s goal regarding AFAs is to make them a “win-win.” GSK’s strategy for helping to ensure that the flat fees it negotiates with its outside law firms are mutually beneficial includes a number of tactics that mirror some of the tips we recommended in a past Business of Law Blog post on implementing AFAs.
Although our tips addressed AFA’s primarily from the law firm’s point of view, they’re equally relevant to inside counsel, as GSK’s implementation success proves. We’ve included the complete list of tips from the previous post below.
10 Authentic Tips for implementing AFAs in Legal Billing
- Break litigation matters down by phases
With 330 attorneys in the corporate legal department, that’s what United Technologies did and today 70% of the company’s legal fees are paid by a means other than the billable hour model. “United Technologies and its outside law firms break down each litigation matter into phases, and the company pays a flat fee per phase: investigation, followed by discovery, trial preparation and trial, and an appeal, if it reaches that point,” according to an article by Catherine Ho in The Washington Post: Is this the death of hourly rates at law firms?
- Consider a truly strategic partner
Tyco International published an RFP in 2004 looking for alternative fee arrangements to enhance budget predictability. At stake was the company’s single largest piece of legal work – the “entire product liability docket.” Twenty law firms responded – and one law firm was selected: Shook Hardy & Bacon. “Today Shook Hardy is Tyco’s sole legal services provider for product liability, automobile and general liability matters. When local counsel is needed, the law firm determines who to bring on board and manages the entire legal team for each case rather than the company’s legal department,” reported Rachel Zahorsky in an ABA Journal article titled: Facing the Alternative: How Does a Flat Fee System Really Work?
- Share the risk between inside and outside counsel.
Legal work often centers on mitigating risk and though alternative fees have earned lots of headlines, actually implementing them is still new for many law firms and legal departments alike. In other words, there’s risk on both sides. “It’s worth pointing out that GCs assume risk with AFAs as well. It’s a different way of thinking about buying decisions – get an agreement wrong and they wind up spending more than anticipated. Overwhelmingly, GCs have a strong desire to reserve AFA experiments for firms they trust. Every agreement counted as a win from both an inside and outside counsel perspective improves the chances of a greater share of the business,” wrote Russ Haskin in a Law Practice Today article titled, Six Alternative Views on Alternative Fees.
- Present a unique value proposition.
For law firms offering AFAs, some financial advisors recommend finding a way to differentiate a firm’s services from the rest. The best way to do this is often posing the question to clients. “Start by asking your clients what they value most. Many law firms are afraid to ask this question, as they feel the value of their services is worth less than the price they’re charging. But asking about what they value most, as well as their strategic goals, adds value to your services by showing the client that you really want to be a strategic partner. Once you know your client’s goals, you can organize your legal services to best meet his or her long-term needs,” said Colin Cameron in Law Practice Magazine article titled Win-Win Alternative Fee Arrangements.
- Change the AFAs perspective
AFAs might better describe “appropriate fee arrangement” rather than alternative fee arrangement. It’s this sort of thinking that changes the perspective of AFAs from a law firm discount, to the right price, for the right work, and at the right value. This concept flows from a presentation by law firm pricing strategist Toby Brown and summarized in a blog post: 7 Takeaways from a Geek’s Presentation on Law Firm Pricing.
- Right-sizing law firm staffing
What do clients really want? The same level of service at a lower cost, said Barbara Hendrickson in an article in Canadian Lawyer Magazine titled: Do clients really hate billable hours? Her article offers a half a dozen solid tips for implementing AFAs, which among them is adjusting the staffing model to provide clients with that level of service at a lower cost. She wrote, “Having access to legal service providers who are expert or experienced in the areas of the legal services to be provided is essential. The fixed retainer model is, for the most part, inconsistent with a training model (i.e. articling students or junior associates).”
- Focus on value rather than cost cutting
In a “cheat sheet” on AFAs, Inside Counsel contributing writers Alanna Byrne and Ashley Post say experts believe AFAs shouldn’t only be about costs. “Instead, companies should target areas of their company with high spend and tailor their AFA usage to the case at hand–for example, using fixed fee arrangements for matters that are more predictable, such as labor and employment or IP work.”
- AFAs can still be billed monthly
Law firms need to keep the lights on too and cash flow counts. This idea nests well with the concept of shared risk. Writing in Legal Week, in a post titled, The great fixed fee debate – the lawyer’s argument, law firm partner Barry Goss said, “If clients agree to a fixed fee then they should be prepared to pay that fee on, say, a monthly basis during the transaction, not merely at completion…Fundamentally a law firm’s biggest risk is its ability to manage its cash flow (in recent history this has been the biggest cause of law firm failures).”
- Use data to drive pricing, predictability
What’s a matter going to cost the corporate legal department? That is in essence the driving force behind AFAs – its economics. “When properly analyzed, data about past legal matters and data from across the legal industry as a whole can arm GCs with the information they need to more accurately predict their legal spend and build trust and respect with their CFOs,” writes Kris Satkunas in an Inside Counsel article titled How to use analytics for greater credibility at the business table. “The key is not only estimating the cost of a matter but assessing the potential range of costs along with the drivers of that variability. This information brings real value to the company.”
- Collaboration via knowledge management is key
“More legal work has also been moving to law firms in the 201-500 attorney size category, which are more likely to offer alternative fee arrangements (AFAs). When a firm uses an AFA, such as a fixed fee arrangement or blended rates, efficiency and collaboration become paramount for profitability,” said Alison Nina Bernard of Fried, Frank, Harris, Shriver & Jacobson and Niki Kopsidas of Blank Rome. This observation was included in a New York Law Journal titled Building ‘Collaborative Intelligence’ in a Challenging Legal Market and cites data from the LexisNexis CounselLink Enterprise Legal Management Trends report. “Knowledge management is a key component to effective collaboration within an organization. Knowledge management involves the use of technology to codify a firm’s accumulated knowledge and makes that information available to its attorneys.”
Is GSK’s success in moving its law firms from billing by the hour to alternative fee arrangements a harbinger of similarly comprehensive adoption of AFA’s across the legal industry? Maybe. As we noted in our most recent Property & Casualty Claims and Litigation AFA Usage Survey, the use of AFAs among U.S. P&C insurance companies grew from 69 percent in August 2015, to a healthy 76.9 percent in 2016 – another sign that the continued dominance of the hourly fee is no longer a given.