In-house ACCess : In-house ACCess: Association of Corporate Counsel : ACC : The In-house Counsel Bar Association

By Cheryl A. Solomon

Cheryl Solomon was the global General Counsel of the Gucci Group, based in London, England, from 2004 to 2011.  She relocated to the San Francisco Bay Area in 2011 and is currently acting as General Counsel to Kidlandia Inc., a technology start-up with its own cartoon characters (called Kreechurs) focused on providing deeply personalized games and social media experiences for kids.

The voice, views and stories expressed in this posting are of the author and do not necessarily reflect the positions, strategies or opinions of the author’s employer or ACC.

Part One of this article discussed the idea that the choice of which lawyer was going to handle a particular matter was as, if not more, important than alternative fee arrangements in terms of getting value for money. Part Two discusses how your selection of outside counsel provides you with an opportunity to showcase your ability to find the right lawyer for the right project at the right cost. It also provides a list of factors to consider when selecting outside counsel.

Choice of Counsel As Risk Management

As in-house counsel, our fundamental role is to help the company grow and develop, while maintaining an acceptable level of risk. Our choice of counsel should be part of how we accomplish that. If we choose the wrong lawyer, we may get the wrong advice, which would raise the risk level to an unacceptable level. Similarly, if we choose a lawyer whose bills are out of keeping with the nature of the matter, then we have also raised the risk level by increasing corporate costs beyond an acceptable level, which puts pressure on the company’s bottom line.

This is also an area where we can and should demonstrate our value to the company. If we do nothing more than go to the same outside counsel for every matter that we handle, and we let that outside counsel decide how to staff the matter, haven’t we abdicated our responsibility? Over time, the businesspeople could begin to wonder why they need us, if we’re nothing more than a conduit to the same outside lawyer who is the real decision-maker.

Instead, use this as an opportunity to demonstrate your value by giving careful thought to the appropriate lawyer for the matter and how to best address the level of risk. I give some suggested considerations below.

Analyzing the Matter In Order To Choose Counsel

There are a series of considerations that should go into choosing the correct lawyer for the matter, such as:

• What jurisdictions are relevant to the matter? Is it solely contained in one country or state? Are multiple countries involved?
• What court would you expect to be in if you ended up in court?
• Are there particular complexities with that particular jurisdiction or jurisdictions? Can you rely upon the judicial system to adjudicate the matter in compliance with the law?
• Do we need help from local counsel to understand the political dimensions of the jurisdiction?
• What is the value of the matter? By this I mean what is the maximum liability or harm to the company if the matter does not turn out as expected.
• Does the matter involve highly regulated areas such as, by way of example, securities, energy, or finance?
• Could the company or its executives face real criminal liability?
• How complex is the matter? Does it span multiple practice areas?

Analyzing Outside Counsel

In addition, to analyzing the matter, you should also analyze outside counsel to determine their capabilities. Particular considerations are:

• Is the lawyer a specialist in the practice area involved?
• Does the lawyer’s firm have the capability to handle other aspects of the matter, such as multi-jurisdictional or multi-disciplinary advice? Do you need that?
• Does the lawyer herself handle the precise type of situation that the matter involves? An example is that the lawyer regularly handles employment discrimination claims but is not expert in executive compensation or union relations.
• Have you worked with this lawyer before?
• Have you received recommendations from other in-house lawyers about this lawyer?

An important consideration in choosing counsel is making sure that, as in-house counsel, we do not simply go for the “safe” option. There may be valid reasons to choose the “safe” option such as in a particularly complex or sensitive matter when everyone in the company needs to feel secure that you have the best advice that is possible. The important thing is to not reflexively choose the “safe” option but to choose the option that best fits the risk profile of the matter and matches the cost of the advice to the legal risk the company faces.

The more we demonstrate how we are adding value in terms of controlling costs and being thoughtful in our choice of outside counsel, the more we will become the true trusted advisor and business partner to the company.

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 By Cheryl A. Solomon

Cheryl Solomon was the global General Counsel of the Gucci Group, based in London, England, from 2004 to 2011.  She relocated to the San Francisco Bay Area in 2011 and is currently acting as General Counsel to Kidlandia Inc., a technology start-up with its own cartoon characters (called Kreechurs) focused on providing deeply personalized games and social media experiences for kids.

The voice, views and stories expressed in this posting are of the author and do not necessarily reflect the positions, strategies or opinions of the author’s employer or ACC.

For some time now, I’ve been reading and listening to in-house lawyers, law firms and the media discuss how alternative fee arrangements are the answer to escalating outside legal fees. By “alternative” fee arrangements, people are referring to just about anything — except the billable hour. The idea is that by discussing alternative fee arrangements, in-house and outside lawyers will be discussing the value of the legal work in a way that better meets a company’s budget and need for certainty. In addition, there is much discussion and debate about choosing preferred law firm panels and negotiating deeper discounts.

This debate misses the mark for one fundamental reason. When a new matter arises, the most important decision you must make as an in-house lawyer happens before you ever begin discussing fees. Your most important decision is selecting the correct lawyer: This is the holy grail of getting value for money. If you choose the right lawyer, the fees take care of themselves. If you choose the wrong one, you will be unhappy for the entire duration of the matter.

So, it strikes me that the most important question is not how to negotiate fees that represent value for money, but rather how to choose the right lawyer. That sounds as though it should be easy — you just hire a technical expert in the area — but it is much more difficult than it sounds. Why, you might ask? Here are a few reasons we might choose the wrong lawyer:

• Flight to safety, or risk aversion — If we have an existing relationship with an outside lawyer, we are likely to go ask them for advice, even if it is not their area of practice or jurisdiction.
• Large law firm syndrome — We go to a large law firm just because they have a department that relates to the matter.
• Saving money – We are so focused on saving money that we go to the cheapest lawyer.
  

       Now, as a preface, let me say that I often work with lawyers that I have an existing relationship with, that I use plenty of large law firms, and that I use firms with lots of offices in lots of cities. I am not suggesting that you should stop using any or all of these lawyers. What I am saying is that you need to spend time up front thinking about whether those lawyers are the right choice for the particular matter at hand.

For instance, if you have a small acquisition, do you really need one of the biggest law firms in the world? You might decide that you do. I suggest that you take the time to think it through beforehand. It may be that if you go to a regional or local law firm with a good reputation, you will get exactly the advice you need at exactly the price that is reasonable to pay for that particular acquisition.

Similarly, if you have a small employment matter in Italy that relates to terminating an employee there, do you really need to have one of the largest law firms in the world handling that? Are you better off finding an employment law specialist in Italy who deals with more routine matters, or does the large law firm you are considering happen to have someone with the particular expertise you require?

There will be times when you need the legal specialty, reputation or geographic coverage of a big firm. In those circumstances, you should use them, because if you don’t, you will end up paying for it (literally or figuratively) by having to coordinate a bunch of firms yourself, or by not getting the quality of advice you need from lawyers who routinely handle matters in a particularly complex area.

            Not only is the choice of outside counsel important to get the most efficient advice, but it also gives in-house lawyers an opportunity to demonstrate their value to the company. Part Two of this post will explain this in more detail and will also provide a checklist of considerations that should go into selecting outside counsel.

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By Emily Jelich

Emily Jelich is Vice President and Associate General Counsel with the Royal Bank of Canada in Toronto, Canada. Ms. Jelich heads both the Global Capital Markets Legal Team and the Global Dispute Management Legal Team, which include team members in Canada, the US, UK and Hong Kong. Ms. Jelich is a member of the ACC Value Challenge Steering Committee and champions several initiatives within the RBC General Counsel Team aimed at working more efficiently with business partners and external counsel.

The voice, views and stories expressed in this posting are of the author and do not necessarily reflect the positions, strategies or opinions of the author’s employer or ACC.

While there has been a great deal of discussion in the legal community on the topic of value-based fee arrangements (VBFs), I find it surprising that the vast majority of law firms still seem to try to avoid these arrangements in hopes that they will disappear. I do not mean to disparage those law firms that are trying, but I am continuously bewildered by the fact that they are the minority. I’m not here to define VBFs— the Value Challenge material does that much better than I could — but I will say that VBFs are not discounts. They are not even discounts of annual fees.

As part of their reticence, I am struck by some law firms’ responses to requests for VBFs. Particularly, when I ask a firm for a VBF in litigation or regular transactional work, the firm will often respond that it can only propose a VBF if I “promise” the firm all of our work in that specific area for a period of time. Why are firms not sufficiently interested in developing and marketing skills to provide cost certainty and case management through VBFs unless there is a promised stream of work? Why is this promise so useful to the firm? Work in these areas can always end.  

In my mind, the process should be the exact opposite of what I am experiencing. Firms should actively enhance their understanding of cost structure, and then develop and market VBF models. This way, the firm would create an expertise across clients, and would create a valuable differentiator for itself in the market. The few firms that are doing this are gaining the fame they deserve, but the vast majority continue to resist and ignore this trend.

I don’t pretend that VBF capability is easy — presumably, that’s one reason that firms have struggled with, or avoided, it. However, it does surprise me that firms don’t seem to realize the power behind this opportunity. As a client, the firm that understands what may increase or decrease overall costs in a matter, and provides a VBF by assessing which of those factors are within its control, will be a firm I want to retain. This firm would further assist me by identifying which factors I control as the client, and what actions I may take to change the assumptions behind the VBF. This knowledge is very valuable because it helps me to consider where to spend my money and time. 

VBFs are most often discussed in terms of cost management, but they also address a long-heard request from both clients and law firms: they necessitate a conversation about goals and expectations at the beginning of a matter. They also continue discussions, which become based on actual experience instead of assumptions. VBFs may emerge as a simple way to ensure that important communications occur throughout a matter, in addition to their function as a cost management tool.

I believe that the firm that pursues the goal of becoming systemically better at VBFs for its own sake will at the same time become more attractive to clients and will be more likely to develop strong, on-going relationships as a result.

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Do you remember the end of the iconic movie, Revenge of the Nerds, when Lewis takes the mic from Gilbert and suggests that more of us are nerds than jocks? The pretty cheerleader exclaims she’s a nerd too; most of the crowd joins Lewis, Gilbert and his nerd fraternity brothers in an effort to end nerd persecution, and the familiar strains of “We are the Champions” begin to play. Well, that cinematic moment was one of the formative experiences of my youth (I didn’t get out much) and it came to mind when I was thinking about ACC’s new Value Champions program, our new initiative to identify and celebrate law department and law firm leaders who incorporate value practices into their legal projects. 

I've paid my dues/Time after time

I've done my sentence/But committed no crime

And bad mistakes/I've made a few/I've had my share of sand kicked in my face -

But I've come through

Three years ago, ACC challenged the legal community to embrace value practices that are commonplace in every service industry, save one. While we heard some folks sing their hosannas, there were, and still are, folks who believe that the legal services industry can remain the same and still meet client expectations. Like the dinosaurs that were unaware of the meteor, the firms and law departments that continue with the old business model will not find the future climate hospitable. Wait a sec. Wrong analogy. Like the jocks who thought that they would continue to rule the campus on their terms. Sorry about that.

But, like Lewis and his new self-proclaimed nerd supporters, those of us implementing change are in a growing group. In fact, outside and inside counsel who focus on value practices, such as effective project management, value-driven fee arrangements and continuous improvement, are fast becoming the norm, not the exception. And, that’s what the Value Champions program is all about. We’d like to shine a spotlight on them, so that the world can see their accomplishments and learn from them.

I've taken my bows/And my curtain calls/You brought me fame and fortune and everything that goes with it/I thank you all

But it's been no bed of roses/No pleasure cruise

I consider it a challenge before the whole human race/And I ain't gonna lose

Of course, some value practices are easier than others. Some of them require the simple application of business principles from other industries. And, we want to identify and celebrate individuals who have employed those practices, because we believe their accomplishments can be replicated by our members and the rest of the legal community. But, of course, some projects are harder, more complex and more frustrating at times, because the ideas animating them are so novel. Think of the nerds' effort to beat the jocks in the fraternity competition. So, we’d like to celebrate innovative strategies as well. If you’ve tried something novel or something more garden-variety, please let us know about it. Our only requirement is that the submitted project has reduced legal spend, increased predictability and/or reduced the unwelcome types of legal issues confronted by the company over time.

We are the champions – my friends/And we’ll keep on fighting – ‘til the end

We are the champions/We are the champions

No time for losers

'Cause we are the champions – of the world 

Our deadline for submission is March 15, 2012. If you’re in the legal community and you’ve ever cared about value enough to incorporate it into your day-to-day practice, turn up the volume on Freddie Mercury’s classic and join us and submit a nomination form. The legal services industry just won’t meet client expectations until value persecution ends. We look forward to hearing from you.

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A former ACC Chair once defined a successful conference as one that provided a good idea that you could take home and use immediately to improve your department, business or yourself. The recent ACC Annual Meeting in Denver clearly met and far-surpassed that standard. Below, you will find some ideas and observations that I gleaned from the meeting. I credit the speaker or the session where I am able. If no credit is listed, it is because the observation is from an off-the-record meeting, a comment from an audience member, or an amalgamation of my own thoughts and comments from several individuals, and thus, not so readily identifiable.

I hope you find them useful or at least thought provoking.

On your career:

1. Comfort and growth are incompatible. – Michele Mayes

2. Get comfortable outside your comfort zone. – Susan R. Lichtenstein

3. You cannot be so focused on what you think you want, that you miss what you get.  – Michele Mayes

4. If your values get crossed, you must be willing to walk [away from your job], even though you do not know your next step. Fortunately, there are few times when your advice is non-negotiable. – Michele Mayes

5. To be good, you must talk the language of the business; to do that, you must learn to listen. When you understand how the money is made, you are halfway there. – Michele Banks

6. Nobody cares about a legal problem except as a business problem. If you couple that with an understanding about how the money is made, you will be successful. – Susan R. Lichtenstein

On value and value-based fees:

7. For my company, the billable hour is a cost of production. We make money by reducing our costs. Why don’t law firms think that way? For most of them, the billable hour is a unit of production, and they want the number to go up! – GC of a manufacturing company.

8. We have made great progress in the movement toward value — today, nearly everyone acknowledges its importance and is talking about it. However, the enemy remains us. I estimate that 40 percent of the in-house community is actively seeking to achieve value-based arrangements with their law firms, but the remaining 60 percent are too busy, find it too hard or simply like their existing firms. – GC of a technology company.

9. Do not underestimate the importance of the lessons-learned process — a post-mortem analysis is a key part of knowledge management. – Comment from audience in session on Value Fees in Litigation

When crisis strikes

10. Identify those who can derail the situation and develop relationships with them. This could include regulators, clients and major bankers. Make sure your stakeholders are fully informed and part of the process. – Judge Sven Holmes

11. A crisis is a defining event that can take you to the next level. – Ed O’Keefe

12. Planning and preparation are crucial; even though no plan survives the first engagement, planning does. – Ed O’Keefe

13. Your first obligation: Breathe and stay calm. Your first question: Do we actually have a crisis?

14. You begin by collecting the facts. You must be able to gather, protect, analyze and report on the information you collect. Avoid “ready, shoot, aim” and jumping to conclusions without facts. – Brad Lermer

15. You should have a team in place prior to the crisis, and know who will collect the information, where it will be kept and how you will communicate information. Identify the other professionals that you will work with both internally and externally (finance, accounting, law firm, etc). – Ed O’Keefe

16. Know your legal team and identify whom you would go to on your own staff. It should be someone who has an enterprise focus, is fact-based and has the guts to say when you are wrong. Character matters. – Ed O’Keefe

17. Get your message straight. Determine who talks with the media on background and on the record. Be ready to deal with information and misinformation that comes out. Companies have changed how they deal with the press. They are much more willing to engage press even when there is no big story or crisis. This raises credibility and allows for a long-term relationship strategy.

18. Make certain everyone understands his or her role and responsibility. At the close of a meeting or phone call, specify decisions made, who does what and next steps.

19. My biggest mistake — not giving the full picture to the CEO about how bad things are when they are worked up and do not want to hear about it. You must have confidence in the maturity of your business leaders.

20. My biggest mistake — not listening to that little voice inside you when something looks funny. It is probably worth looking into. – Stasia Kelly

21. Decide in advance how to handle difficult sets of facts involving senior management, and have protocols in place that determine what and when to report to the board and audit committee. Have a relationship with the board and audit committee before problems arise. Never forget that you are the lawyer for the organization, not senior management. – Judge Sven Holmes

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 Post 7

Making Time for Value

Week 7. Each week via the In-house ACCess blog, follow the promise and pitfalls of forming a new value-based client-firm relationship. This blog pairing explores how to improve the value returned using a different approach to managing litigation work.  As General Counsel of Kayak, Karen Klein provides legal counsel to senior management and oversight of all legal matters. Karen’s co-blogger is Nicole Nehama Auerbach, a co-founder the Valorem Law Group, The voice, views and stories expressed by the authors below are their own and not ACC’s. To catch up on the story so far, click here.

The firm view

From Patrick Lamb:

Nicole has a day job, and unfortunately (for this column, at least) it is going gangbusters at the moment. Since I am no stranger to writing blog posts and have been following Nicole and Karen’s posts very closely, I volunteered to guest post this column. I apologize for the interruption and hope I can measure up to the high standards Nicole has set in her earlier posts.

I have been a huge proponent of pricing using non-hourly arrangements for a long time. Even as a younger lawyer, I was always bothered when I saw that my opposing counsel was getting paid the same or, many times, more than my firm was without regard to outcome. That struck me as fundamentally unfair. I also saw from close proximity how some lawyers took advantage of deep pocket clients to do (and bill for) all sorts of crazy stuff that was never, under any plausible set of circumstances, going to make a difference to the outcome of the case. The rationale used was at times candid (“we make money this way”) and at other times questionable (“we need to do all this work so the client knows we are being thorough”).   The point is that, to me, the flaws in the hourly model and the abuses of that system in the name of “defensive lawyering” (think, defensive medicine for lawyers) made the system unacceptable. I still have to confess to being somewhat surprised when clients, the victims of the system, are not as fed up with it as I was before we started Valorem.

In our three plus years of operating Valorem, we’ve learned that there are far more in-house lawyers like Karen than there are ones who are fully committed to non-hourly arrangements. This series of blog posts has been enlightening as Karen explained the development of her thinking on alternative fees, including how using alternative fees required her reallocate how and when she spent time on matters, particularly at the outset. As some have said, when you are putting out fires every minute, it’s not easy to set aside time to plan the handling of a matter, even if you know in your heart it is the right thing to do and ultimately a better way of handling problems. Time for in-house lawyers is the rarest treasure, and it must be safeguarded.

One of the results of thinking about this widespread problem—the I-think-I’d-like-to-try-alternative-fees-but-I-don’t-know-where-to-begin-and-how-do-it problem—is that I think it is incumbent on lawyers who want to provide service on this basis to make it easier and more convenient for in-house lawyers to do so. We need to provide detailed planning maps that show what will be accomplished over a given segment of time, when settlement discussions will be suggested, when the trial is likely to occur, and when expenses will have to be accrued. These benchmarks allow a basis for evaluating performance along the way toward final resolution. I think these kinds of tools will prove themselves useful to in-house lawyers and ease the pain of trying alternative fees.

It goes without saying that even the best battle plan never survives contact with the enemy, so both client and lawyer will need to see these plans for what they are, a starting point. But the ability to abide by the plan and force events to move as desired can be an important way of judging performance, both in the quality of the planning to start with and the execution of the plan strategy.

I’d welcome reaction from the in-house world. Are there things we as proponents of AFAs could do that would make it easier for you to implement non-hourly fee arrangements?

Kayak pick of the week: Chicago to Ireland. Erin-Go-bragh!

The client view

From Karen:

I know that Nicole is under the gun (for one of my cases) and a bit under the weather, so I appreciate Pat stepping in to write this post for Nicole. 

Recognizing the demands on in-house counsel time is very important. If we had the ability to leisurely consider how to achieve the results we need to produce for our companies in the most cost-effective manner, our jobs would be so much easier. But so often, we simply need to delegate a problem to a trusted advisor and focus on the next problem. So the more an outside lawyer can do to show how things will work smoothly, the easier it will be to at least try an alternative fee arrangement. That doesn’t mean it will be easy, but at least easier.

I want to comment on the planning aspects of managing an alternative fee arrangement. My background is not as a litigator, and while I understand the process, I am not in the same position to evaluate things as someone who has spent their career in a courtroom. For that reason, being given a roadmap, with attendant explanations of why certain non-obvious things need to, or are likely to happen, what the strategic points are, what options might reasonably be available and other executive level information that will help me evaluate the contemplated strategy, including how it meshes with our business plans, is really important. One of the reasons I value working with Nicole is her ability to explain the strategic and tactical options available and the pros and cons of each in a way I can use to explain to my business colleagues. 

Kayak’s foray into alternative fees has been eye-opening, and despite what we have said about time, I look forward to the passage of some time so I can look back at our alternative fee approach with some distance and compare what we have experienced with what we would have under the more traditional approach. I appreciate the ACC giving us this forum to write about our experiences, and I also am looking forward to speaking with my in-house colleagues about whether my concerns, experiments, experiences and results with AFAs match theirs.

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Post 6

Alternative Fees and Quality of Work

Week 6. Each week via the In-house ACCess blog, follow the promise and pitfalls of forming a new value-based client-firm relationship. This blog pairing explores how to improve the value returned using a different approach to managing litigation work.  As General Counsel of Kayak, Karen Klein provides legal counsel to senior management and oversight of all legal matters. Karen’s co-blogger is Nicole Nehama Auerbach, a co-founder the Valorem Law Group, The voice, views and stories expressed by the authors below are their own and not ACC’s. To catch up on the story so far, click here.

The client view 

From Karen:

In our previous posts, we have written about my transition to using alternative fee arrangements for certain matters. We have also written in depth about the various issues that come up in the context of pricing. From an in-house perspective, there are a number of other issues that I grappled with (or continue to grapple with), most of which are not worthy of a full post on their own. 

Collectively, though, I think the issues bear mentioning. Nicole will respond to them from the firm's perspective in her post, but I will set them out here:

1. How do I ensure that with a fixed fee, the firm I am using won't come to the end of a busy month and cease doing work? This was particularly worrisome for me because the matters being handled on an alternative fee basis are litigation matters. That means that large influxes of work may occur within the same month, and there is little flexibility to push it off.

2. Along the same lines, how do I ensure that my matter isn't being pushed down to the most inexperienced attorney at the firm since that person is the least expensive in terms of time expended? Again, because litigation, even routine litigation, carries risk, it is important to know that matters are being staffed appropriately.

3. Because I know a firm working on an alternative fee basis must be more efficient to have a higher profit margin, how do I know that it won't employ a litigation strategy that is so lean that it hurts us in the end?

These are related questions that all go to the fundamental issue of whether using alternative fee arrangements can result in a difference in the work product you have come to expect.

I will leave it to Nicole to respond to the issues directly. Suffice it to say that my experience has allowed me to become comfortable with both the issues and the solutions to avoid the issues. All in all, while I do not like to resort to clichés to make a point, in this instance it may be warranted -- sometimes you have to simply try it for yourself to see.

The firm view

From Nicole:

Many of the issues that Karen has raised are ones that my partners and I hear repeatedly from clients or prospects. In 2007, before we started the firm, I spoke with a number of in-house lawyers to get a sense of their previous experiences with alternative fees. Then, the number of in-house lawyers who had seriously considered an alternative fee arrangement, let alone had used one, was small. Still, for those who had or those who contended that they would consider it, the biggest issue was ensuring the quality of work did not diminish. 

For us, that was why it was so important that we include a value adjustment line on all of our bills and why we almost always propose that a portion of our fee be held back until the end of the engagement. We wanted to let clients know that they have the ultimate control over the bill even if we are setting that bill based on an agreed upon fee arrangement. For us, these measures always seem to satisfy the concern. 

Having a fee arrangement that includes some "skin in the game" as we like to call it, provides the safeguards the client needs. In most of our arrangements, we have some element (usually a large element) of a bonus or contingency based on the results we achieve. In other words, if we have done more work than we expected in any given month or two because that's how litigation goes, that bonus, holdback bucket or success contingency is a powerful incentive to do that which is necessary to achieve the client's goals. For the same reason, firms using this approach do not have an incentive to push the work down to the most inexperienced member of the team. With inexperience comes inefficiencies - something that firms doing alternative fees should abhor. In fact, we find that our best results occur when the senior partners sit and discuss a client's case. Collaboration at the highest level brings the highest rewards.

Karen's last concern about running a case so leanly that it might hurt the client's position if the case goes to trial is also one we have grappled with. It is important for clients to know that with a fixed fee, it is impossible for the firm to do all the same things that a different firm would do if billing by the hour—isn’t that precisely the point though? Any firm that does that will likely go out of business quickly -- unless their fixed fee arrangements are so high that they are merely surrogates for what the firm would have been paid had it billed by the hour. My partner Pat Lamb refers to this as the “wolf in sheep’s clothing syndrome.” But the items being cutout of the usual arrangement are not key strategic items that runaway high risk of dooming the client at trial. To do that would be akin to cutting off your nose to spite your face. Instead, the trim should be of non-essential items that are routinely done in the billable world but have no great relation to achieving the end result the client wants. For example, filing motion to dismiss after motion dismiss when there is no chance that the entire case can or will be ultimately dismissed with prejudice may not be a reasonable expenditure of time or effort. Same with taking the deposition of every witness who may have some remote knowledge of the case simply to box him or her out on the likely cumulative evidence that already has been established by key witnesses. 

Lawyers who try cases tend to prepare cases differently than those who don’t. The prism of “will this make a difference at trial” tends to create a greater focus help differentiate the needed and essential from the fluff that so much of litigation seems to be. Alternative fee arrangements use that same prism. And we know from looking at scores of great plaintiff lawyers that one does not need an army to secure great results.

Do some of these decisions bear risk? Every decision carries risk. Sometimes the risk is simply that the fee will be unacceptably high (which is why clients railed against the billable hour to begin with), but most business executives operate in a world where risk is a routine factor to evaluate. Having as much as 60 or 70% certainty is a rare thing for them, and something they are comfortable with. It is typically the lawyers who are risk-adverse and who think that engaging in tactics to minimize the risk is an economically reasonable thing to do. With an alternative fee arrangement, the 98% most lawyers strive to achieve certainty must fall by the wayside so that only that which is truly necessary to achieve the outcome is left. In the end, it is the client's call as to what gets left out and whether it is worth the risk. Most clients savvy enough to be using alternative fees appreciate that this risk evaluation is part of their job.

Kayak pick of the week: Chicago to New Orleans.  Just love the beignets!

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Post 5

Avoid the Shock of the “Sticker” with Budget Talk

Week 5. Each week via the In-house ACCess blog, follow the promise and pitfalls of forming a new value-based client-firm relationship. This blog pairing explores how to improve the value returned using a different approach to managing litigation work.  As General Counsel of Kayak, Karen Klein provides legal counsel to senior management and oversight of all legal matters. Karen’s co-blogger is Nicole Nehama Auerbach, a co-founder the Valorem Law Group, The voice, views and stories expressed by the authors below are their own and not ACC’s. To catch up on the story so far, click here.

The client view

From Karen:

We discussed the issue of sticker shock in the last series of posts and I wanted to expand on that a bit. I know from speaking with Nicole that clients who are used to the billable hour sometimes find it difficult to swallow a large fixed fee number when it is presented. I originally had the same concerns. I want to use this post to discuss how I addressed them.

Many times in my career, I asked my billable hour lawyers for a budget on a piece of litigation and the number that came back (usually a range) was fraught with caveats. Mentally, I always seemed to discount the total number, even if it seemed extremely high, because the caveats and cover letter language saying, "It's difficult to estimate without knowing what the other side will do," made me think that the high end of the budget range would never come to fruition. More often than not, we surpassed the budget. The lawyers budgeted low, and my “mental discounts” pushed the expected number even further away from the eventual reality. In other words, I went through a mental exercise that helped me avoid the sticker shock of the budget.

Because so many budgets seem to be off by being low, it seems that whether intentionally or by happenstance, the firms providing the budget were facilitators of sticker shock avoidance. If I had been given at the outset the number that was ultimately spent, I probably would have suffered from sticker shock.  But the fact that the "all in" price under a billable hour arrangement doesn't usually reveal itself until you are already deep into the case does not make delaying the inevitable a better option. Psychologically, it may be more palatable at the front end, but simply delays the inevitable reckoning.

As I worked through my consideration of the sticker shock issue, I realized there are three key benefits to confronting the sticker price at the beginning. First, knowing the total cost at the outset helps the business make better decisions. When spending “creeps,” it makes it difficult to make informed cost benefit decisions. Second, the best time for negotiation about cost is before the expense is incurred, not after. Perhaps the expense can result in a change of scope to lower the cost. Third, is the budget certainty that has been frequently discussed as a key attribute of alternative fees. As someone who has to account for a budget, certainty on a key case is an enormous benefit in overall budget control.  Certainty trumps estimates and uncertainty.  My VP of Finance, Melissa Reiter, will tell you that in her world, the certainty of a fixed fee beats the uncertainty of an estimate -- even a slightly lower one -- any day.

The firm view

From Nicole:

The psychology of buying is something that, as a lawyer, I was not particularly attuned to prior to forming Valorem Law Group. While in a large firm, the only type of "selling" I was accustomed to was when I was pitching a new client or part of those infamous "beauty contests" that lawyers at large firms often find themselves attending. That type of "selling" focused nearly entirely on our expertise and whether we were the best firm for the job. It did not center on an understanding of the manner in which we would charge for the matter. On the contrary, anyone considering me or my firm had a pretty good understanding beforehand about both the way that we billed (by the hour) and the approximate hourly rate I charged. 

It was only after I left to form Valorem that everything changed. Now, the selling aspect centers nearly entirely on the manner in which we bill and price matters. In fact, unlike my BigLaw experience, people who come to Valorem tend to already know that we have the expertise for their matter. Instead, the billing issues take precedence over the qualifications ones. That is how I discovered that there is a psychology to selling, and realized that to actually land cases, it would be paramount to understand the thought process of our prospective clients.

The "sticker shock" phenomena that Karen describes is one that took some time to reveal itself, but eventually it did. Our clients, through no fault of their own, were used to being shielded from the "all in" price of a case because lawyers billing by the hour not only generally have no idea themselves what it will cost to handle a case from start to finish, but even if they did, they rarely shared that price directly with clients. I, too, remember creating "guesstimates" that focused more on explaining why the number I was offering would likely change due to this variable or that. It became evident at Valorem that when we disclosed our assessment of the cost of a case, clients were turned off by the seemingly large up front price.

And so we realized that we needed to ensure that our clients understood the psychology behind the perceived sticker shock. We explain that when they compare our price to the guesstimate of their BigLaw firm, it will never be apples to apples unless that firm guarantees that, no matter what, they would not exceed the budgeted amount -- something we know most firms are not willing to do. As I mentioned in my last post, we also leveled the playing field by extracting and separately pricing going to trial -- something that happens too infrequently to justify its inclusion in the overall price. We also often break our overall price into litigation phases so that it is easier to understand the breakdown of the total number. We still encounter new clients who have not mastered the mindset that must be mastered when comparing alternative fees to billable hour guesstimates. But as more and more clients jump on the alternative fee bandwagon, at least for some of their cases, they are beginning to learn the differences on their own.                                  

Kayak pick of the week: Chicago to Tokyo. Never been and craving sushi.

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