The traditional internal-external counsel model based on the billable hour just isn’t cutting it anymore. A model employed by Bruce Power and Gowling Lafleur Henderson LLP is attracting attention around the country. It’s a notion of doing business that isn’t new, but it’s novel — and it’s netting great results for both sides.
Four years ago, Brian Armstrong, general counsel for Bruce Power, Canada’s first private nuclear generating company, took a close look at the relationship his in-house legal department had with external counsel. Frankly, he didn’t like what he saw. So he set out to change the nature of the relationship — to everyone’s benefit.
There were two major problems with the existing relationship the Tiverton, Ont., company had with its external counsel. First, there was a revolving door of lawyers assigned to the account. Second, the company bore the burden and risk around costs, which were uncertain.
From the external counsels’ point of view — and Bruce Power works with a number of law firms — there was one major issue: unpredictable client demands. This unpredictability, in turn, often made it hard for a firm to meet client demands, and it made for an unreliable cash flow.
The first step en route to a new relationship was negotiating. Armstrong, working with Catalyst Consulting, started with the company’s principal external provider of legal services, then met with other providers. “Everybody brought their issues to the table,” he says.
The in-house position was clear. “We wanted to secure a defined team of legal resources for the longer term. We wanted to shift the burden of cost control to the external firm, instead of bearing it all ourselves. [We wanted] predictability,” notes Armstrong, who is also Bruce Power’s corporate secretary.
The wish list was granted. And, in turn, external counsel — Gowling Lafleur Henderson LLP — secured an ongoing client relationship with a predictable, if not guaranteed, revenue stream.
Here’s how. Bruce Power and Gowlings signed a partnering agreement (what others may call a retainer agreement) that spelled out what each team would be responsible for — and what each side could realistically expect.
“Getting specifications right at the beginning — what is expected and when — is important,” says Richard Stock, a partner with Catalyst Consulting in Toronto. “[Lawyers] need to know how to do this in-house or elicit it externally.”
For example, says David McFadden, chair of Gowlings’ national energy and infrastructure group in Toronto, service expectation is always an issue. “[It] is high in terms of turn-around and availability.”
Expectations were met in the Bruce Power-Gowlings partnership agreement by spelling out a set volume of work over a set period of time. Each category of work (litigation and commercial, for instance) was thoroughly examined, and an anticipated volume developed over a five-year time frame.
“We agreed to purchase a certain number of hours of regular work, and we agreed to purchase it for a fixed price — a negotiated, blended hourly rate, which included disbursements and was contingent on optimal staffing profiles,” says Armstrong.
In many ways, this was the tip of the new relationship.
A risk-sharing element was also introduced. If the law firm — which would be paid in equal installments, in advance, over the length of the contract — could do the specified work in up to 10-per-cent fewer hours, it would get to keep the money already paid for this work. “There was an incentive for them to do the work efficiently,” notes Armstrong.
Once the 10-per-cent mark was reached, it would be considered an under-forecast cost and rebated. On the other hand, if the firm required 10-per-cent more hours to perform the allotted work, Bruce Power would get those hours for free. Above that, the company would pay at the blended rate.
“We thought that was a fair way to do it, and it seems to have worked well,” notes Armstrong. Indeed, some years the work has been performed in less-than-anticipated time; in others, extra hours have been necessary.
“It’s important to reach an understanding at the outset — an honest expectation,” says McFadden. “It’s far better to exceed expectations than undershoot all the time.”
There was also another carrot for external counsel. In addition to ongoing, routine matters, extraordinary services, such as mergers and acquisitions, were identified. Bruce Power estimated how much of this latter type there might be, and agreed to send some of this legal work to their external partner. “There was no commitment, but an agreement,” says Armstrong.
The Bruce Power model is attracting attention around the country. In fact, Armstrong and Stock have spoken about their approach (a variation of the DuPont legal model, which is considered a highly effective means of applying business elements to the practise of corporate law) at several conferences. “The notion of doing business this way is not new, but for companies like ours, it’s fairly novel,” says Armstrong.
There’s good reason for that. Most legal work in North America, notes Stock, has traditionally been conducted on an hourly basis and continues to be conducted that way. There’s a simple reason for the continuity of approach: that’s what lawyers, and their clients, have come to expect.
They also expect business to be conducted a certain way.
Applying project management approaches, as Bruce Power has done, is often disconcerting in its newness – and its foreignness. “Law firms are not comfortable doing this, and they don’t have enough practice. On the client side, they’re more comfortable reviewing a bill, but that’s like doing an autopsy,” says Stock.
Post-mortems may not be strategic, but pre-mortems are. And they are good for business — and for relationships. James Wilber, principal of Altman Weil Inc., in Milwaukee, points out that there are three types of work given to external counsel: strategic, important, and commodity or routine.
Some companies like to handle the highest-level work inside and farm out the routine items. Others are more efficient at doing the routine work in-house but need the expertise of external counsel for more important items.
It’s not a matter of right or wrong, but it is a matter of knowing what your legal department, and your company, needs. In-house counsel should have thought through all these issues, says Wilber, and put those thoughts in writing.
It’s a process that’s catching on, he adds. “This type of thinking is becoming more common to in-house departments. More value is put on this type of work in a company than a law firm.”
Rewriting the stone tablets is not always necessary to enhancing, or maintaining, a relationship. It is often the little things that matter most, says McFadden.
His firm holds a monthly teleconference with clients like Bruce Power, at which time the previous month is reviewed, a look at what is on the horizon is discussed, and industry trends are noted — all in under an hour.
Quite simply, says Michel Brunet, CEO of Fraser Milner Casgrain LLP in Montreal, “In-house counsel have to feel they are getting their money’s worth.”
“In-house counsel,” he adds, “are looking for solutions. External counsel are sometimes seen as barriers.”
Research shows that 70 per cent of clients overall — a large majority — move to another firm because they feel the service is not adequate, points out Christopher Sweeney, chair of ZSA Legal Recruitment Limited in Toronto.
And sometimes that perception of inferior service may be linked to how carefully a relationship is nurtured. In some cases, the people behind the profession get lost. It’s important to know your client or your service provider on a personal basis, notes Sweeney. “People like dealing with nice people. It’s not rocket science.”
That same blunt summation also applies to the age-old issue of money. While legal costs and fees have always been a concern, two interesting realities are currently converging on in-house legal counsel and their external partners. First, in some areas of law, a new, and often unsettling, trend has emerged. It’s called commoditization.
“Law has now become a commodity,” notes McFadden. “Law firms are seen as being all the same. . . . It’s just like being a clerk at Zeller’s.”
As a result of commoditization, there is a tendency to go for the lowest bidder, and RFPs are quickly becoming a staple for many in-house legal departments.
On the flip side, in-house counsel are clearly willing to pay for value. The 2006 Altman Weil Law Department Metrics Benchmarking Survey reported that total legal expenses per lawyer were up 7.9 per cent over the previous year. “After holding the line on expenses for the past several years, we’re now seeing a significant jump. General counsel can only do so much in response to billing rate increases, and there will always be critically important work that is predominantly price insensitive,” says Wilber.
In reality, the money issue can be, and should be, dealt with easily, says Sweeney. “Law firms should speak to in-house counsel about the need to raise fees, and in-house counsel need to discuss this frankly.”
“The dance on money,” he adds, “is occurring at all times.”
New steps are being added to that dance. Adaptive payment approaches are becoming more common, such as that put in place by Bruce Power. Among the most common options are fixed fees, discounts for volume, and an average rate, notes Brunet. “The pressure is certainly there [to adapt].”
There is one way to relieve that pressure, he adds. “We need to give value for money.”
That value, notes Stock, has a lot to do with speed. “The pace of business is such,” he notes, “that this is key.” Technology, to a large extent, is driving this need for speed. “The internet has added a strain that wasn’t there 20 years ago,” notes McFadden.
That strain is mediated by the fundamental driver in any relationship: trust. “[This] is the primary criteria,” says Wilber. “Trusting each other to do the best job in the most cost-efficient manner possible.”
Trust is often associated with an individual as opposed to a firm — the human face, not the corporate one. As a result, in-house counsel are often looking for the right lawyer, rather than the right law firm.
A point person is critical to building and maintaining a solid relationship with in-house counsel. “The role of the relationship partner at the firm and the relationship that person has with general counsel has become very important,” says Armstrong.
“That’s the person,” he notes, “that marshals and monitors the resources of the firm on your behalf. As the relationship develops, the relationship partner becomes a key strategic advisor for the company. This is a role that has diminished over the years, but with these [new] kinds of agreements, it re-emerges.”
Structures are in place at FMC, says Brunet, to bolster ongoing contact with in-house clients. With the Petro-Canada account, for example, one lawyer is ultimately accountable for the relationship, and there is a client team to support this person and provide services to the client.
“We stay in regular touch and anticipate their needs,” says Brunet.
Another survey from Altman Weil, the 2006 Chief Legal Officer Survey, indicates the personal touch is paying off and that ongoing communication is highly valued.
Last year was the first time the annual survey found a dramatic decrease in chief legal officer (CLO) dissatisfaction with outside counsel. The results of the 2007 survey are similar.
“CLOs are less likely to fire outside counsel, and when they do, it’s more likely to be for substantive performance issues rather than relationship problems,” principal Daniel DiLucchio said in a news release.
The reasons given by those unhappy with outside counsel were also different. Each year from 2000 to 2005, CLOs named “lack of responsiveness” as the number-one reason for firing a law firm.
In 2006 and 2007, responsiveness dropped to the number-three concern, behind “mishandling a critical matter” and “poor quality legal work.”
When asked what steps outside counsel had taken to improve the working relationship with the law department, the top response was none, but in the number-two position was improved communication, ahead of reduced fees, more transparent billing practices, and understandable budgets.
“Frequently things fall apart because of basic failures of communication,” notes Gowlings’ McFadden. “It’s so easy to phone somebody, but you get so siloed in what you’re doing, you forget basic human courtesy.”
It’s not surprising that people take precedence over expertise and expenditures.
Ultimately, they are at the heart of any relationship between in-house and external counsel, and the nature of that relationship either spells success for both sides, or neither side.
In the end, says McFadden, it’s the people side that drives business. “If the relationship isn’t working, you can have any number of agreements, and it still won’t work.”