Alternative Fee Arrangements With Law Firms: How Corporate Law Departments Can Help Make Them Work

Monday, November 2, 2009 - 01:00

Veterans of the legal services industry can attest that the law firm business model of billing clients on an hourly-fee basis for their services has been a hotly debated topic over the years. The debate raged in the early 1990s, when many observers foresaw a collapse of the law firm billing pyramid and a new era of compensation arrangements. In spite of all the discussions and predictions, little has changed, and the billable hour has remained the primary common compensation model - until now.

It appears that the recent economic downturn - which has had a dramatic impact on corporate earnings, in-house law department budgets and law firm profitability - may have upset the apple cart once and for all.

An Idea Whose Time Has Come

Alternative fee arrangements between corporate clients and their outside law firms have been gaining momentum over the past 18 months. An April 2009 survey conducted by the Association of Corporate Counsel found that a stunning 77 percent of members would like to consider alternative billing arrangements in work handled by outside counsel. The same survey found that only 22 percent of respondents reported that alternative-fee arrangements currently make up more than 10 percent of their outside counsel spending. So when asked how outside counsel could improve their relationships with in-house lawyers, 60 percent said they could offer alternative billing - the most popular answer among respondents.

The issue has become so hot in legal and corporate circles this year that an August 2009, article in the Wall Street Journal explored the trend in some detail. The Journal story reported that major purchasers of law firm services such as Pfizer, Cisco Systems and American Express have all notified its outside law firms that they are expected to move away from the hourly billing structure and find ways to aggressively reduce costs.

Of course, the proof of a trend is always in the bottom line. According to BTI Consulting Group, the market is tracking for an increase this year of more than 50 percent in corporate spending on alternatives to the traditional hourly fee model. The BTI survey of 370 lawyers who work for Fortune 1000 companies found that money spent on alternative billing arrangements has totaled $13.1 billion so far this year, versus $8.6 billion for the same period in 2008, and has produced average cost savings for those corporate law departments of 15 percent.

The billable hour may not be dead, but it's clearly under attack and losing ground.

Moving To The Tactical Discussion

With the philosophical debate over alternative fee arrangements beginning to wane and hourly billing no longer being the presumed compensation model in the legal services marketplace, a range of important tactical questions are now being formulated by both buyers and sellers of legal services. For example:

• How do corporate counsel and law firms collaborate to identify specific alternative fee arrangements?

• Who takes responsibility for defining how these arrangements will be implemented?

• How do buyers and sellers of legal services take steps to make sure these new arrangements work for both sides?

Much has been written about how law firms need to modify their own business practices in order to comply with their corporate clients' growing demands for alternative fee arrangements. For example, law firms are rethinking ways to reduce their internal costs and re-evaluating the mix of lawyers they assign to matters in order to provide the most efficient client service that will accommodate alternative fee arrangements.

However, much less has been written about how corporate law departments need to contemplate their own business practices in order to make these new arrangements successful for themselves as well as their outside law firms. I believe that an overlooked area where in-house counsel and law firms can work together to make these arrangements work is by leveraging technology to reduce litigation costs.

To that end, one avenue for corporate law departments to play a constructive business role in the migration to more alternative fee arrangements is to better leverage their existing investments in two key areas that tend to create cost management challenges for their outside counsel: legal research and litigation support expenses. There are a variety of ways to accomplish this tactical goal, but one technology-driven approach to consider is the integration of online legal research with robust litigation support tools as a unified strategy for reducing costs.

Thinking Of Litigation Management As A Business Process

In recent years, we have seen a steady shift away from ad hoc corporate counsel oversight of litigation and toward systemic business process strategies that enable more effective management.

Generally speaking, most corporations are built around fundamental operational systems and are influenced to some degree by the notion of continuous process improvement. That theoretical framework is now being applied to corporate law departments with greater frequency and for very good reasons. Namely, litigation is more than an area of practice within the legal profession; it is also a serious business consideration that can have profound impact on the financial health of a corporation.

With this new mindset, corporate executives are increasingly expecting a project management-style approach from their in-house legal departments when it comes to the oversight of their litigation portfolios. One example of this approach to litigation management is the desire among in-house counsel to implement processes and procedures that allow them to gain greater control throughout the litigation cycle.

The truth is that many in-house counsels are unaware of just how disconnected their various litigation processes are right now. There are five crucial components in the litigation cycle that we always encourage our corporate law department customers to consider and assess the extent to which they are integrated:

• conducting early case assessment;

• investigating witnesses and experts;

• researching case law;

• capturing and culling document collections; and

• reviewing and producing documents.

So at first glance, the integration of legal research and litigation tools might seem an unlikely business strategy for corporate law departments seeking to help reduce costs in areas frequently outsourced to their law firms. But the fact is that connecting the daily operational responsibilities that flow from these litigation and research processes - and managing them on your own, just like you would other business endeavors - can produce significant cost savings. These savings may put buyers of legal services in a better position for finding alternative law firm fee arrangements that work.

An Easy Place To Start

Even the most well-intended in-house counsel may see the logic of rethinking his or her own business practices in order to make alternative fee arrangements work, may understand the value of integrating certain daily components of legal research and litigation support functions in order to achieve cost savings in areas typically outsourced to law firms, and yet fail to take any meaningful action. The reality is that other deadlines emerge, big-ticket cases come to trial, and there is always a more pressing emergency to address.

The good news is that there is an easy place to get started.

"Early Case Assessment" is an important litigation management strategy that focuses on an early evaluation of the merits and likely outcomes of disputes. As has been widely discussed at seminars and in various industry publications, the benefits of early case assessment are faster and more strategic decision making, more cost-efficient litigation, and ultimately more favorable outcomes. For example, early case assessment helps in making sound settlement decisions at an early stage, potentially limiting the need for substantial discovery. This is accomplished by facilitating early dispute resolution decisions at the earliest possible stage and before significant expense is incurred.

Many litigation management experts suggest that the best practice for starting an Early Case Assessment strategy is to create a preliminary case report within 60 to 90 days of the dispute. The report itself should be subject to frequent revision and ongoing assessment, based on investigations into the facts surrounding the case. By using an appropriate litigation software tool, in-house counsel can house the case facts on a secure database, where new reports can be generated, shared and analyzed at any time as new information comes to light that alters counsel's assessment of the case.

For example, it would be a good idea for in-house counsel to include specific details in their early reports, such as an assessment of the judge, opposing counsel and jurisdiction, a timeline of key dates in the case, a summary of prior disputes between the parties, a preliminary review of key documents, key witnesses and experts, a summary of key legal issues in the case, a preliminary assessment of potential damages, legal fees and potential settlement possibilities, and a rough budget of various stages of the case through a possible trial.

All of the ingredients that go into the creation of an early case assessment report can be easily and seamlessly created with the assistance of various technology offerings available to in-house law departments. This is a very tangible, specific way that in-house counsel can leverage the power of integrated technology solutions to get started with a business strategy for reducing costs in areas frequently outsourced to their law firms.

In Closing

LexisNexis offers litigation tools and legal research integrated with each other to provide in-house counsel with an easy way to gain early case insight and greater control throughout the life of a case. The result is a more cost-effective and efficient approach to litigation, which helps take unnecessary law firm expenses out of the discussion about alternative fee arrangements.

The LexisNexis Litigation & Research Portfolio offers award-winning software offerings such as CaseMap, Concordance and LAW PreDiscovery. This portfolio provides one place for all work-in-progress to be shared and monitored, delivers an approach that offers in-house counsel assurance they're not missing critical information and have more control over their work product, and enables corporate legal departments to achieve cost savings due to gains in efficiencies.

Corporate law departments can play a constructive business role in the migration to more alternative fee arrangements by leveraging their existing investments in key areas that tend to create cost-management challenges for their outside counsel. By exploring ways to improve business processes with the integration of online legal research and litigation support tools, in-house counsel can help their own cause of better managing litigation expenses.

Craig Bennett is Vice President and General Manager of litigation workflow solutions for LexisNexis.

Please email the author at craig.bennett@lexisnexis.com with questions about this article.