Companies all want law firms to turn over every stone in the quest to win their cases. Paying for all that stone-turning is another matter.
In the past, the desire for a favorable outcome has usually won out over cost concerns. These days, though, many companies are finding a way to shave expenses while still getting the extra effort they need from their outside legal teams. It often starts with replacing the standard billable-hours approach that law firms have used for most of the century in favor of a negotiated-fee-based model that provides financial incentives if external counsel can keep costs down.
The approach puts Houston-based manufacturer FMC Technologies Inc. “on the same side of the line as the law firm,” says CFO and senior vice president Bill Schumann. “I want low cost first and cost certainty second, and I’m not sure the traditional billable-hour format provides either.” With the fixed-fee approach, lawyers focus on specific targets, like settling cases “for the lowest legal cost and settlement amount where warranted.” When they charge for billable hours, he adds, “there are no incentives.”
Billing by the hour remains by far the most common compensation model for corporate law practices, and will probably remain so for smaller companies that use their services. “Generally speaking, if you are under $5 million to $10 million in total annual legal spend, it doesn’t make sense” to seek an alternative, says Brad Blickstein, a principal at The Blickstein Group, a Skokie, Illinois-based legal consultancy. “You’re just not going to get the return on investment.”
But as legal expenses have soared, larger companies like DuPont, Tyco International Ltd., and Cisco Systems Inc. have looked for options. Companies “already view their law departments as cost centers. They need to look beyond that and bring predictability to them,” says Fred Krebs, president and chief operating officer of the Association of Corporate Counsel. In a benchmarking survey of corporate law departments, the association found that in 2003, for each internal lawyer employed by the department, companies paid an average of $546,960 to external law firms — up from $480,582 in 2002. It also found that billable-hour alternatives are an increasingly popular way of combating that rise.
Convergence at DuPont
DuPont is the granddaddy of novel legal-fee approaches. In 1992, then-CEO Ed Woolard mandated $1 billion in cost cutting across the company, including a reduction in the number of law firms engaged by its legal department. “We wanted to drive different ways of conducting business with external counsel,” says Thomas L. Sager, chief litigation counselor at the chemical giant. The goals: longer-term commitment from law firms, better integration between DuPont and outside counsel, greater alignment in resolving cases quickly, and reduced duplication of effort. Fixed fees provided “certainty and predictability in billing, with the proviso that if the firms became more efficient and yielded better results, we would give them a bonus,” he says.
In three-and-a-half years, DuPont cut the number of external firms from 450 to 34. Outside firms today agree to set fees based on the docket of cases, types of litigation, and expected workload. DuPont’s approach, known as the convergence model, saved the company $13.2 million in a two-and-a-half-year period, says Sager. Now, “when my CFO asks how much we’re spending, I can give him a number,” he notes. “We’re far better able to forecast our legal spend, anticipate large settlements or payouts, and forecast recoveries.”