Jeffrey Carr recently asked a room packed with in-house lawyers if they were using a value-billing system. The sometimes brash, often outspoken proponent of the Association of Corporate Counsel’s value-based billing initiative saw only about eight or 10 hands rise in the air.
At most settings this may have seemed normal, however, the location where this question was asked was the ACC annual general meeting in October, one year after the organization began its seemingly all-encompassing initiative, the Value Challenge. The specific forum was called the “The Slow Motion Riot — Revolutionizing Law Department Cost Management,” and Carr, vice president, general counsel, and secretary of FMC Technologies, Inc., in Houston, Texas was the moderator.
“Why don’t people do it? I don’t know. Maybe they are lazy, maybe it’s hard, maybe [as] lawyers, they think of this as being administrative . . . and not professional. My response to that is get over it, you’re being paid to be a manager and part of your function is to manage your legal spend, you can’t do it all yourself,” says Carr, when asked his opinion of why so few people at the conference put up their hands.
In reality there are likely a number of reasons for the lukewarm response from those gathered at the meeting. First of all, it is unlikely anyone in the room hasn’t heard of the Value Challenge, but they simply haven’t begun value billing. Secondly, there may have been a host of lawyers from law firms trying to gain the inside scoop on the initiative. Thirdly, the room might have been full of in-house counsel trying to figure out just what all the fuss has been about.
Carr is often seen as a beacon to shine the light on value billing. He has a simple rule for outside law firms wanting to do work with his company — buy into a value-based billing model or find business elsewhere. For that statement he makes no apologies, his company has a modest legal budget, $7 million last year, and every dime of that budget spent on U.S. counsel is on a value basis.
“This is a business, I am a businessperson first and a lawyer second, as is every person here on my legal team,” Carr says. “I have three jobs here at the company. One of them is to run a high-performance legal team that delivers right-sized legal services to our corporation effectively and efficiently.
“I can like my people that work for me on the outside, I can like them a lot. I can like to go bird hunting with them or out to an opera or to a football game and that can be very enjoyable, but unless they are people who bring value to me as a service provider, none of those things matter to me.”
Value-based billing is not new for FMC. The company began employing the practice a decade ago, and began working on a value-based model in earnest five years later. But the question that often comes up is what is value billing? That is perhaps a question more easily answered by what it is not. On that premise, and simply put, it is not a discount, capped rate, or reduced rate, value billing has more to do with improving the business of clients and if done properly it can mean more money for law firms.
Carr says FMC has two basic value-billing models, the simplest of which is a “report card” system called ACES LT or the alliance counsel engagement system, light or long term. “It’s a really simple model. We come to an arrangement with the firm on a fee basis that might be hourly, it might be project-based, it might be retainer. It might even have a performance component in it, a band or something like that. The firm bills us, we pay 80 cents on the dollar of the invoice and that’s legal fees plus expenses. Twenty per cent is held back and then we periodically give the firm a report card.”
Where the business-helping-business aspect comes in is through the updates. The report card has six factors. Depending on how the outside law firm fulfils those factors, it receive between zero and 200 per cent of the withheld amount. This means law firms have the potential to make 120 per cent of their bill, or 80 per cent depending on the level of “efficiency, effectiveness, and customer satisfaction.” So far in 2009, FMC has paid on average 107 per cent of invoice.
“The paradox of our engagement system is we pay our law firms more than they bill us, however, our legal bills have gone down every time, yet our company has tripled in size since 2001,” Carr says. “So how do you do that? The only way you do that is by changing the way you buy legal services. You buy less of them even though you pay more for them on an hourly basis.”
The fact in-house lawyers are starting to ask how, instead of what, when the subject of value billing comes up is something ACC president Fred Krebs did not expect to happen this quickly. When the group rolled out the Value Challenge in Seattle last year it was to begin to persuade legal departments the old way of billing should be looked at. The idea was to start questioning whether the relationship between law firms and their clients was one that promoted the success of both entities.
“Initially what our effort was aimed at . . . and what it was all about, was persuasion,” Krebs says. “With the economic downturn that provided impetus and momentum, things picked up and moved much more rapidly than we had thought or anticipated.”
Originally the ACC had a benchmark that 25 per cent of its members’ legal billing would be done on a value basis by 2012. That goal may end up being easier to achieve than first thought. As Krebs says of the initiative’s first year, “We thought we would be in the persuasion mode much longer, we are now very much into the how-to mode.”
The “how-to mode” is something Murray Aust, global director of external legal resources for Royal Bank of Canada, deals with every day. As one of the largest consumers of legal services in Canada, RBC has taken cost control to another level. Aust wouldn’t say the exact amount of RBC’s outside legal budget, only that the outside budget is double what the bank spends in-house. It does not have the 100-per-cent value billing that FMC boasts, but they are beyond the ACC benchmark already.
“When you look at our total spend, in terms of bills paid for work done for Royal Bank, whether that is paid by our clients or ourselves, we are over 25 per cent now,” Aust says, in reference to the ACC benchmark. “But we are not comfortable at all with that. We should be doing way better . . . we are probably closer to 50 per cent.”
For RBC the path it is taking to a greater percentage of value billing is also to break down the law firm’s tradition business model. The idea of describing productivity as more lawyers and more hours is not one that works for RBC. It is working toward what Aust characterizes as “the profitability model,” which is about mirroring a law firm’s business practice with that of its clients.
One area RBC is using such a model is in project management. This is basically game planning every action the law department is involved in and setting out estimates and targets for each phase. Basically to make sure the final bill is never a surprise.
Still, not all of RBC’s plans are being met with open arms. Often when the idea of value billing or demanding law firms work in a different way comes up, smaller groups say it’s easier for places like the Royal Bank due to its size. Aust says even with the power of Canada’s largest corporation behind them, the value discussion isn’t a simple one.
“I think you would be surprised,” he says. “[Law firms] are always going to listen to us, but [it’s] whether they co-operate actively or aggressively resist. I think we see a lot of passive resistance.
“What I would take from that is this is going to be a tough road and it is going to be tougher for a company that doesn’t have our size on their side. Because I can say even for our size, which gives us some leverage, I would say this is not an easy thing to do, it’s a big ship we are trying to turn around.”
One such firm that is having the discussion with its clients is Seyfarth Shaw LLP, a full-service U.S. firm with more than 750 lawyers. Lisa Damon, the firm’s former managing partner who is now its national chairwoman for labour and employment law, says it too began working on a different billing structure — in earnest — five years ago.
Motorola, Inc. had begun a process called “Six Sigma” as a way of improving the manufacturing process and avoiding defects. However, the process has been adapted for other uses, with the basic idea that it would reduce inefficiencies. As one of Seyfarth’s clients, Motorola helped the law firm understand the protocol and in turn the firm adapted its own process called “Lean Six Sigma.” Basically the project management system helps deliver the very thing the ACC Value Challenge and businesses like RBC and FMC promote.
“The way we can deliver the biggest return to our clients is to collaborate with them on a process,” Damon says. “Looking at how we deliver work, how they use us to make sure along the line we have the greatest efficiency and then we can lower costs to them while we are continuing to deliver high value.”
But before Seyfarth could even begin on its journey it was given some words from the wise. Tom Sager, senior vice president and general counsel of DuPont, told the firm don’t bother unless it is done from a top-down approach. Sager is known as a value-billing pioneer through DuPont’s convergence and law firm partnering program.
Even with the top-down approach the road has not been an easy one, says Damon. Changing the entire nature in which legal services are provided and billed takes a long time and is still a long way off. “This is a journey for us, I don’t want anyone to think that all of our lawyers and all of our clients are all lined up in unison, we are not, we are on a journey.”
In fact, Seyfarth spent a great deal of time in the beginning of developing its project management systems by “practising” on itself. Now the Seyfarth journey means more and more clients are looking to the “Lean” business model approach. However, because of Sager’s assertion and her belief the approach has to be total firm buy-in, Damon isn’t worried about too much competition. “I’ll be surprised if any other firms are able to do it without the kind of top-down unrelenting commitment that Tom [Sager] talked about.”
Still, law firms would be wise to look at the value-billing model, if for no other reason than it’s what their clients want. “A lot of in-house counsel are embracing the Value Challenge and recognizing that it is not simply a question of saying I want a discount,” says Andrew Fleming, a partner with Ogilvy Renault LLP, a Canadian firm that has won the ACC’s president’s award for work with the association for three years running.
Fleming will be one of the first people to question the billable hour and the use of discounts, because as he says, the lowest price may win you a client for a day, but a value-based system of collaborative approach to legal services will get their business for the long haul.
Like Carr, Fleming believes the Value Challenge is all about in-house and outside counsel working together and understanding each other’s business. “The ability of in-house counsel, and perhaps those in leadership roles in law firms who are being pressured on value challenge, is to create a palatable story for the partnership and sell it, it’s a sales job . . . not a snow job.”
Despite the Value Challenge being ahead of its early goals, Carr is incredulous when he talks about legal departments not embracing value billing. “Frankly we’ve been quite amazed that others have not been as aggressive and robust in sitting down with their outside counsel, having a conversation, and moving forward along those lines. But we are really glad to see the ACC has embraced this issue and going great guns on it. We think it’s the right way to go, we’ve been doing it for years and we think it’s the right thing for the profession.”