Guest blogger: Russ Dempsey is vice president and chief legal officer for United Retirement Plan Consultants. Russ has been recognized as a 2012 ACC Value Champion. He is the immediate past president of the Central Ohio Chapter of the ACC. Russ holds both a JD and an LL.M. in taxation from Capital University Law School. He received his BA degree in Philosophy from Marshall University.
You may have noticed the article in The Wall Street Journal regarding ACC’s Value Champions. The article recognizes the successes of the “Champions” and asserts that it’s harder for smaller companies to negotiate value-based fees. I would like to share some thoughts on value-based billing and value from my vantage point as CLO of a small company who happens to be an ACC Value Champion.
The concept of value for small legal departments is significant, and can be more important than in large companies. Average-size companies do not have the same flow of litigation, in total dollar terms, as large companies. The ratio of legal expenses to company revenue, a key metric for many legal departments, is critical in small companies. Spikes in legal expenses, often driven by litigation, can swamp the legal expense to revenue ratio.
Data and value-based billing
I’ve implemented a variety of value-based billing models and have had numerous discussions with other CLOs on the subject. Setting the appropriate fee and predicting outcomes is equally challenging for large and small companies alike. One advantage that large companies have is billing software and data. A greater volume of litigation provides them with more data that can be mined when setting a value-based fee.
Here’s how to address the data hurdle:
- Begin with what you have. It is very likely that you will not be starting at zero. Limited data is better than none. Spend time on the information within your control. It is important data because it is specific to your organization. Also, speak with the controller or CFO about prior legal engagements, invoices and your objectives in using an alternative to the hourly billing model.
- Firms have data — ask them for it. Request examples of cases that are similar to your matter. In my experience, firms will cooperate. If they do not, then consider a request for proposal process.
- Check with in-house colleagues. You are not alone with such issues, and there are many forums (whether it is in-person, at a CLE or ACC program, or online) to ask for opinions and experiences. Also, I’ve found ACC Docket and other legal resources to be invaluable.
- Create your own data. One of the approaches I have taken to address the limited data issue is a risk-sharing model. As you may conclude from its title, a risk-sharing model distributes the risk to the company and law firm. Fee-estimation errors are less painful with this approach, and you are generating data that will help you in setting future fee structures.
Expense management is only a portion of the value equation
The Value Challenge is much more than an effort to reduce outside counsel spend. Any discussion of value in legal services that focuses solely on expenses is too limited in scope. One of my goals with value-based billing and legal project management (LPM) is improved legal outcomes, which can be seen in different forms: better predictability in budgeting, improved quality and results, and alignment with interests of outside counsel. Lower costs and improved efficiency will follow.
I think of LPM and value-based billing as the two pillars of value in legal services. LPM, by creating a process and documenting necessary steps, allows one to systematically address the tactical issues that tend to keep one awake at night. Instead of wondering whether you did x, y, or z, you can shift your focus to strategic considerations.
It is essential to have the tactical items completed accurately and timely, and much has been written about how project and process management can help in this regard. For example, in The Checklist Manifesto, Dr. Atul Gawande describes the implementation of a checklist in eight hospitals that he developed. His work resulted in a reduction of major postsurgical complications by 36 percent; deaths fell by 47 percent.
Further, LPM concepts can help with those thorny value-based billing discussions — especially around objectives and scope — and create better alignment with the interests of outside counsel. The second half of our Value Champion Profile describes how I used LPM to secure a fixed fee with outside counsel.
With a little creativity and collaboration, LPM tools, and some shopping around, we small law GCs are fully equipped to negotiate value-based fees. And it’s so much more satisfying to assign work in a way that structurally aligns our outside counsel with our objectives.