Tyco International — a company that knows something about legal bills — now uses a similar convergence model. Litigation program manager Jim Michalowicz, who worked under Sager at DuPont until the end of 2003, says “Tyco was in a situation where it was looking to develop a litigation portfolio management program.” (All of Tyco’s legal expenses were managed under the billable-hour system that prevailed before last year.)
Until recently, Tyco had too many “generalist” internal attorneys, while its external law firms numbered close to 500. “Frankly, we didn’t know the actual total number of firms or the related costs, because we didn’t have a centralized management system” for the external lawyers, explains Michalowicz. “Nevertheless, it was easy for me to go with my experience at DuPont and conclude that too many law firms breed too much cost.”
Following the direction of Bill Lytton, general counsel for Tyco, Michalowicz restructured the company’s internal law department to focus on specific practice areas, creating teams to work closely with the outside firms. “In product-liability litigation, our first convergence area, we reduced the number of external firms from 167 to 1,” he notes. “We then negotiated a fixed fee that best represented the total legal cost — essentially fees plus expenses.” Tyco’s overarching goal: to reduce that total cost by slashing total case-cycle time, exposure levels, and the number of cases.
Tyco’s lone outside product-liability firm, Kansas City, Missouri-based Shook, Hardy & Bacon LLP, inked its agreement in October 2004, with both organizations comparing the result to Tyco’s previous billable-hour experience. “We’re using an electronic task-based system where timekeepers from the law firm bill time as they normally would, except they send zero-sum invoices,” says Michalowicz. Measuring the fixed fee against that, “we’re projecting savings of 25 to 30 percent over a two-year period.”
Pay for Results, Get Results
While Shook, Hardy & Bacon continues to bill some clients by the hour, chairman John Murphy sees more companies “wanting more certainty about what their litigation book will cost them for the calendar year.” Alternative-fee approaches increase the emphasis on strategy, he says. “We ask things like, ‘Is this a case that should be settled, or a case that may involve some overriding precedent involving other products made by the company?’”
High-stakes-litigation specialist Bartlit Beck Herman Palenchar & Scott LLP is one firm that has given up the billable-hour format entirely. Managing partner Sidney N. “Skip” Herman says that accepting the fixed-fee structure offers “the opportunity for an upside: if we win the case, we get a big bonus.” Besides, he sees “a risk of inherent abuse” by firms measuring billable hours. “When you pay for hours, you get hours; when you pay for results, you get results,” he says. “Perhaps as much as 20 percent of billed hours in the billable-hour model are inflated. You end up rewarding inefficiency.”
With Cisco Systems’s adoption of fixed-fee arrangements for “the vast majority” of its business with outside firms, says general counsel Mark Chandler, “one effect has been a new focus on technology.” In the 1990s, the San Jose, California-based company began managing lots of its legal work — things like tracking subsidiaries’ records, contract creation, and patents — with Internet tools, then joined with other big companies “to help select law firms that could move HR counseling onto online functions,” says Chandler. Cisco’s technological advances and legal benchmarking, which it credits with $100 million of cost savings, “consistently puts us in the bottom quartile [in our industry] when it comes to legal expenses,” he says.