Controlling the cost centre

The Bombardier Q400 NextGen turboprop houses a pair of Pratt & Whitney Canada PW150A engines, specifically designed to power the Canadian-made regional aircraft. When the contracts for supplying those engines are discussed, undoubtedly Bombardier Inc.’s Daniel Desjardins and Pratt & Whitney Canada’s Alain Rondeau are involved. As senior legal officers at the two Quebec-based aerospace giants they are also faced with the realities of managing what almost everyone in the business world considers a cost centre — the legal department — during a worldwide economic downturn.

In the face of those economic pressures Desjardins has been on sort of a one-man mission to change the relationship in-house counsel have with law firms. As co-chairman of the Canadian Corporate Counsel Association World Summit held in Vancouver last January, Desjardins, in his opening address, called on corporate counsel to work together and separately to drive down the cost of legal services. At the same conference, Rondeau warned of the dangers of treating outside counsel as commodities.

This may not have been surprising as Desjardins had already made similar statements in his home province of Quebec. Before the January conference, he told the Montreal Gazette his panel would focus on the cost of legal services, telling the newspaper: “[I]t is becoming a very serious issue — how to deal with outsourcing of legal services to law firms all around the world, how to deal with legal fees and the management of those fees, and the services provided by external firms.”

General counsel obviously know their legal departments are cost centres, but Desjardins says the managing partners of law firms have to realize it as well. “There has to be a shift in mentality, law firms have to work on costs themselves.”

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Due to the worldwide economic crunch, companies have become more concerned with the bottom line and, as Desjardins says, “all of us in corporations have got to be better managers of our budgets.”

For legal departments, that has an affect on relationships with outside counsel. But with the current financial situation, Desjardins stresses the dialogue needs to go beyond one general counsel and one managing partner. “There comes a time where we need to have, not only a one-on-one conversation between law firms and the client, but an industry dialogue,” he says. “A true dialogue, not declaring war on excessive billing, [and] profit for partners, but the fact that the old model of an hourly rate that goes up every year just doesn’t work. We have to find a better way to have more effective costs [for] legal services provided by the law firms.”

Desjardins is calling on the CCCA and other corporate counsel organizations around the world to use their influence and begin the dialogue. That discussion is in everyone’s interests, in-house counsel who will become better managers of the bottom line, and law firms. By helping to trim the costs of legal departments more work can be sent outside. Conversely, if costs remain high and keep growing, legal departments will be forced to bring more work in-house, says Desjardins.

Like his Bombardier counterpart, Pratt & Whitney’s Rondeau believes everyone is interested in saving money. Unlike many of his in-house brethren, Rondeau is not as tied to the work of outside counsel for day-to-day operations. “I try to find exceptional people that I can rely on, on the outside. For the most part they are rarer individuals, they are not the rank and file,” he says.

The Pratt & Whitney team provides much of the legal work in-house and when outside counsel are needed the questions Rondeau is asking are very specialized. He warns a one-size-fits-all approach isn’t necessarily the best option in discussions over fees.

During the Vancouver summit, Rondeau made pointed comments about the dangers of treating outside legal counsel like commodities. In a session on effective management of international in-house legal teams, Rondeau said he doesn’t “squeeze the key lawyers” and that outside counsel should be treated like “an investment, like insurance.” He told the group his company does $400 million in research and development each year, and a single Pratt & Whitney engine can be powering an aircraft for 20 or more years. That naturally makes the company more risk-averse. “Tolerance for risk drives a lot of things,” he told the conference when describing how his legal department is set up.

Speaking from his own law firm experience at what is today Fraser Milner Casgrain LLP, Rondeau warned of the dangers of viewing lawyers as commodities. If you push too hard the lawyers that you really need may not be there when you really need them. “When I was in private practice, you have your standard hours and if you have more work, more clients than you can already handle you’ll naturally gravitate to those that either appreciate your work best and those that pay you well,” he says. “If you have a client in that base that treats you like a commodity, I would naturally gravitate to other clients and leave that client behind.”

Rondeau employs those ideas with his legal team at Pratt & Whitney, striving to be the client that lawyers want to call back. “I am interested at being the client at the upper echelon and not the client that treats its outside counsel as commodities,” he says. “But that is for specific needs, the more targeted needs. If we were to have more higher-volume work, I would not be saying that. The higher volume we treat in-house and that is how we cut costs.”

Its risk aversion means the legal team at Pratt & Whitney does the majority of work itself. “The internal lawyers take a long time to train,” he says. “If I am dealing with outside counsel where I need specific advice on some points they also know the particularities of our business, so I don’t need generic legal advice on those things, that is not what we are looking for, we already have that capability.

“At that time, what I am looking for is value added. That is probably an overused term, but very sophisticated, right-to-the-point advice and that means I don’t want to rework and retrain.”

If he needs to go the outside counsel route, it’s for specific matters. “What I have, is what I would say, is a very effective internal legal team that handles the great majority of issues,” says Rondeau. “I would say virtually all of the issues [stay] in-house, so when I go outside it is usually for validation of some more esoteric comments or it is overflow of really small stuff.

“It is very particular top end or it is overflow on the bottom end, so technically on the bottom end so to speak, yes that is a little bit more of a commoditization.”

For Pratt & Whitney there are a stable of thoroughbred counsel Rondeau relies on, and those lawyers are hired for very specific reasons. Still costs come into the equation. “We have a preferred firm rationale and in order to be a preferred firm there has to be some cost cutting and efficiency measures and some standard rates that have to be agreed to, discounts. We try to pool our resources and our spend to preferred firms,” he says. “If I choose a firm I have already agreed to those rates and discounts and I choose a firm because of the people in it, and once that happens I have already got that deal, I don’t want to unduly burden somebody either.

“So those lawyers — and there are only a handful of them throughout the world that fit into that category — they are not the kind of people that I am interested in treating on a commodity basis.”

Rondeau agrees the ideal way to control legal department costs is a hybrid billing system. Agreed-upon rates and discounts for the lower-end work, and then agreed-upon rates for the more specialized work. Still, he says the best way to keep the legal spend down is by doing more in-house. There is another equation to in the mix, says Rondeau: the kind of work he is looking for in 30 minutes would take a lower-level lawyer two hours. While he didn’t say it, it is an easy equation: 30 minutes at $1,000 an hour is $500, two hours at $500 an hour is $1,000.

Association of Corporate Counsel president Fred Krebs likes to invoke the United Kingdom’s war-time prime minister Winston Churchill when describing the debate over the billable hour, “never has so little been accomplished, by so many, for so long.”

In February, The Lawyer Magazine in the U.K. announced the firm Slaughter and May was bending to the will of in-house counsel in embracing alternative billing practices. The article quoted one of the firm’s partners saying it mainly uses “value billing” based on agreed-upon estimates. A few weeks prior, an article in The New York Times trumpeted the headline, “Billable house were giving grounds at law firms” quoting Evan R. Chesler, presiding partner at Cravath Swaine & Moore LLP saying, “this is the time to get rid of the billable hour.”

With some of the world’s largest law firms acquiescing to pressure from in-house counsel to move beyond the billable hour, corporate counsel in Canada may too wish to invoke Churchill in asking, “is the battle for London and Wall Street over, and has the battle for Bay Street begun?”

Last year the ACC, the largest advocacy group for in-house counsel in the world, began its “value challenge.” “At the time, our thought was we have been seeing continuing rumblings, I’ll say, that was sort of the origin and genesis of the Churchill paraphrase, and if you ever got together there [were] regular complaints about continuous rising legal fees and the billable hour,” says Krebs.

In 2007, U.S. law firms began breaking the $1,000-an-hour barrier. This combined with said rumblings, led the ACC to start getting feedback on billings from outside counsel. “To use a metaphor,” says Krebs, “the tinder was already out there, we’ll see if we can light a match here and see if it will take off. Then, I think, mixing my metaphors and all the clichés, the economic meltdown was kind of gas to the fire and increased the sense of urgency.”

The goal of the value challenge is, as its name implies, to put a price on legal fees by creating a value association. Last October, the challenge was introduced at the ACC’s annual meeting in Seattle. At one point, the sessions about it became so popular the fire marshal was nearly called in to clear a conference room filled over capacity. At the time, Krebs told Canadian Lawyer InHouse all the panels dealing with costs and cost reduction were packed to capacity. The value challenge had drawn attention from media and lawyers alike, and not just from the U.S. “We are a global association and the comments that we would hear, that I would hear, in the U.K., in Europe, in Canada, their gripes or however you wish to say it, were remarkably similar in the in-house community around the world. If you are a global company or simply a major national company, you’ve got to be, in this day and age, under economic stress.”

At the core of the challenge and of the gripes is the billable hour. Krebs says the practice provides “relatively few incentives to be more efficient.” Still, he says the dialogue that needs to happen, and Desjardins promotes, cannot be an across-the-board fix. A suite of billing techniques that may include request for proposals, fixed prices, providing a portfolio of work to a firm, and bringing outside counsel on site are all options legal departments may try. “It is not one size fits all, perhaps it’s one size fits one,” says Krebs.

The comments are being heard at some of Canada’s biggest law firms. Ogilvy Renault LLP senior partner Andrew Fleming says both in-house and outside counsel benefit from the discussion. “I think what Mr. Desjardins and others are striving to find in the marketplace and where we can maybe break through a little bit, is to develop a relationship where both sides with all candor, can sit down and make decisions about what value is being brought to the table in a particular circumstance and how it should be priced,” says Fleming. “I don’t think in-house counsel will lose and I don’t think out-house counsel will lose, because I think the benefits at looking at these alternatives will come out of the efficiencies that are created.”

Some believe Fleming sees the future. A new structure of law firm billing favouring fixed fees and discounts, a value-based fee structure. It is something the Association of Corporate Counsel promotes through its 25,000 members worldwide. It is something senior in-house counsel in Canada, like Desjardins, are striving for.

Yet Fleming does not see it as a new system at all, rather a return to traditional billing practices. Practices that existed long before the billable hour took hold in law firms. “Intrinsically, it makes very little sense,” Fleming says of hourly billing. “Essentially the longer you work, the longer you stretch out a problem, the more you get paid. The whole theory should be the faster you get rid of the problem, the more efficiently you get the deal done, the more you get paid.”

Like-minded lawyers, both in corporations and law firms, have begun to embrace a new term, Fleming says, alternative fee arrangements or AFA. And while the term may be new, the practice is anything but. “When I started to practise in the mid-’70s, [the billable hour] was certainly not used. While we kept track of our hours, it was used to assist you in making decisions as to what you are going to bill, and it certainly was only one of the indicators you used. So the billable hour has not exactly been around since the beginning of time.”

Fleming, a sort of billable-hour historian, says hourly rates are almost ubiquitous, with everything based on a per-hour system. Not only what lawyers charge, but also how people are paid in the firm. Still he thinks billable hours represent an inefficient system that does little for clients. “It’s not in anybody’s interests, the billable hour used as a basis to calculate fees, certainly not in the best interest of the clients. I suppose [it is] in the interest of the lawyers if you are in the habit of delaying or being somewhat inefficient, then the billable hour protects you against that.”

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