May 2005

The last major insight from the Boat roundtables was the incredible difficulty inside counsel seemed to have finding lawyers who would pursue litigation on a contingency or other alternative fee arrangements.  For the most part, big firms simply will not engage on the topic and when someone does, he or she frequently does not have the experience to assess price risk, cut fat from the defense or prosecution of the case in order to make the alternative something other than a glorified hourly rate, or to be able to determine what the lawyer’s margin is or will be on the engagement.

This difficulty dovetails quite nicely (and unexpectedly) with an article in the June issue of Corporate Counsel that suggests in-house counsel use contingency fee arrangements for certain kinds and sizes of litigation.  One of the benefits the authors attribute to such arrangements is better and earlier case assessment: “be prepared to engage in a brutally honest, rigorous, and thorough pre-retention assessment of your case with potential contingency counsel. Qualified business attorneys presented with a potential contingency case are going to take a long, critical look at the merits and the potential recovery before agreeing to handle the case. This can be difficult and stressful. Business litigation, like any litigation, can be very emotional.”

This somewhat counter-the-mainstream view is justified because “even business plaintiffs often come to a lawyer with a very one-sided view of their case colored by anger and the desire to exact retribution.”  While “hourly lawyers learn the details of the case as the representation progresses, contingent fee lawyers need to make a reliable assessment and valuation before beginning. The client can also learn from this intensive pre-retention assessment.” 

The better assessment?  According to the authors, “the contingent fee lawyer is likely to be much more candid about the strengths and weaknesses of the case than an hourly attorney who is paid regardless of the outcome.”

If the inside lawyers participating in the roundtables are representative, the real problem is not the willingness of inside counsel to cede the kinds of cases discussed to lawyers on a contingency fee basis, but rather finding suitably qualified business litigators who will work on a contingent fee basis.  Perhaps this site could become a clearinghouse matching interested buyers with interested sellers.  Those who have read any of my entries on fees know well my interest (and my firm’s) in litigation of this sort.  Perhaps we should market ourselves as a one-firm pilot project.

Seriously, there should be a way by which willing sellers can be introduced to interested buyers.  Suggestions?

Today’s Chicago Sun Times reports that McGuire Woods has ousted Chicago partner Ted Tetzlaff, who had been serving in the dual role as firm partner and General Counsel of  Peoples Energy, and has severed its relationship with Peoples, which last year paid the firm $8.7 million in fees.  According the article, Tetzlaff denied he was forced out.  That’s credible.  A firm fires a $8.7 million client, but his departure is amicable.  What on earth am I missing here.  Somebody must have erased part of the press release.

Tetzlaff also is quoted as saying that “I am committed to producing quality representation and fair price.  Sometimes that creates tension.”  What happened to the firm’s discovery that client service was a key factor in competing with the major firms in Chicago?  What happened to the vaunted alternative fee arrangements the firm was going to pursue to help its clients?

Oh well.   Never mind.

During the roundtables, the discussion frequently turned to a question of me-what type of fee did I think had the best chance of succeeding.  My answer was direct-a fixed fee with a success kicker, whether in the form of a pure premium or recapturing a hold back or a combination of those two.  Here’s why I believe this:  in-house counsel need (1) budget certainty; (2) to eliminate the “temptations” created by the billable hour model to overstaff, overlitigate and miss resolution opportunities (“But Mr. Client, if we make an offer now, the other side will view it as a sign of weakness”); and (3) maximize outside counsel’s interest in the outcome.  The fee structure I proposed accomplishes all of these things.  The fixed number by its nature creates certainty and it creates strong incentives for counsel to manage a case as efficiently as is possible, while at the same time maximizing the incentive for a good result.  The incentives will cause behaviors to be modified in ways one can never image.

There appeared to be widespread agreement on this concept.  One issue left unresolved by this discussion was how to set the fixed fee.  Another was what happens if the case settles early or late in the process.  While those details are important, the threshold issue of the general structure of the fee seemed to be an area of agreement.

I am hoping that this blawg will serve as a basis for discussions of these points, by roundtable participants and anyone else with an interest.  If you want to guest-author a post, let me know.

Since I haven’t received permission from anyone to use their names or attribute comments, I won’t.  But in a moment of great insight, one Assistant GC described one significant impediment to use of alternative fees-the risk of public failure.  What happens to a rising star when he or she starts using alternative fee arrangements and those arrangements don’t work out?  Is the loss of stature (or in the extreme case, loss of job) worth it?

My suggestion was that the use of alternative fees be constructed as a pilot project, with certain defined goals.  Start off on a small matter.  Can we get better, predictable budgets?  Does the cost of handling the case go down?  And so on.  Come up with a list of potential measurables and ask the higher ups to sign off?  Pilot projects that fail aren’t that big a deal, but those that pay off can be expanded.

But what do I know.  Any suggestions for this in-house lawyer?

Forgive me for interrupting my report on the Corporate Counsel cruise, but “breaking news” sometimes takes precedence.

Larry Bodine ran an item today in his blog entitled “If a Law Firm Were Run Like Southwest Airlines.”  The piece was based on a description provided by Deborah Ackerman, the GC of Southwest. The dream Southwest firm has these characteristics:

  • Would be the low-cost producer
  • Focus on clients as customers and not as a legal matter
  • Have no layoffs
  • Have an annual chili cook-off
  • Have a tradition of fun. Halloween is a major holiday at the headquarters, and everyone comes to work in a costume, including the CEO.
  • Relax the dress code.
  • Be family-oriented. There is no expensive artwork on the walls of SWA. Instead there are pictures of employees with their families, pets and hobbies.
  • Display “brag boards” everywhere where employees can put up notes about their own and their kids’ accomplishments. Have many employee recognition programs.
  • Establish an Employee Catastrophic Fund to help employees in cases of an uninsured loss or serious illness.
  • Communicate in a timely fashion to employees.
  • Senior partners give hugs and praise from to staff as a daily occurrence.

It seems like Southwest has ignored the distinction between the things it takes to have happy employees and the things employees do to make their customers happy.  I believe in having happy, motivated employees.  But that is not an end.  The end is to have happy, well-served customers.  Larry writes about his great experience flying Southwest to Las Vegas and how fun the flight was.  In other words, the customer’s experience was good.  Law firms, like every other service provider, need to keep their eyes on the prize-customer satisfaction.  Without that, nothing else really matters.  At least not over the long haul.

You may recall that I was to host several roundtable discussions of in-house counsel on the Norwegian Dawn cruise ship in an event sponsored by Corporate Counsel magazine and Richmond Events.  The focus of the roundtables was alternative fees.  In my view, the event was a terrific success by any measure, but the discussions on alternative fees were especially enlightening.

We conducted a survey of those participating in the discussions.  In the aggregate, the in-house counsel reported that they were under significant pressure with respect to their budgets, but at the same time they reported receiving poor to fair budgets from their outside lawyers.  With but a single exception, they reported that hourly rates were too high and, significantly, that their firms’ hourly rates interfered with the quality of the relationships they had with their outside counsel.  The biggest area of interest for alternative fees was litigation.

Virtually without exception, the in-house lawyers all had negotiated for discounted rates, cut bills that they thought were excessive and had not had meaningful experiences with law firms suggesting alternative fee structures.

It was clear to me that this group of in-house lawyers will not continue to operate business as usual and that they are actively investigating the options they have, including greater use of smaller firms (which are viewed as more responsive, by and large) and use of alternative fees.

Part II of The Boat Report will focus on the types of alternatives that the outside counsel seemed most interested in.

Every football season, you hear about players who have arthroscopic knee surgery and then return to play two weeks later.  It doesn’t seem to be that big a deal.  Well, I had my knee ‘scoped on Monday.  All I can say is that it is a miracle that these guys can run and tackle and so forth in two weeks time.  I am fortunate that my parents are visiting for a week-I stole my Dad’s cane just so I can walk around the house!  Actually, “walking” is too charitable a description of what I am doing.  Its an ugly picture, and I’ll save you from it.

Ron Baker, a leading thinker and author on alternatives to the billable hour was a participant in LexThink, a program I attended in early April.  His view is that the client should determine the value of the work that needs to be performed, and that value should drive price rather than price determining value.  He identified the five C’s of value from the service provider’s prospective:  comprehend, create, communicate, convince, capture.  But more illustrative was his explanation for the cost structure of the Corvette.  The car was designed and then built, the cost calculated, a profit added and then a price determined.  When Lee Iaccoca drove the Corvette around, everyone he spoke with loved the car but hated the price.  Ioaccoca always asked what price people would pay.  Finally, he went to the Ford engineers and asked them to build a similar car at a specified price.  The engineers took that number, backed the profit out, knew the cost and then designed a car that could be built for that cost.  Ron relayed that in two years time, the Mustang generated profits of $1.1 billion, while over 13 years, the Corvette had generated profits of only$600 million.

What does all this have to do with value?  Clients need to figure out what a solution to a problem is worth to them, and they can’t use billing rates x hours to do so.  But maybe we lawyers need to play the Lee Iaccoca role and help them set the value.  How many of us can say we’ve ever done that?

While preparing to lead several roundtable discussions later this week on the topic of the billable hour and alternative fee arrangements, I came across a piece from the Yale Law School Career Development Office.  It goes through a series of calculations to show how long you have to work each month to hit certain billable hour targets.  For example, to bill 2200 hours a year, a “normal” number at many big firms, you have to work, on average, from 7:30 a.m. to 8:30 p.m., Monday to Friday.  Plus, you have to work from 9:30 a.m. to 5:30 p.m. on three Saturdays per month.  All of this assumes you have a half hour commute.

Its one thing to talk about hours like this when you are on trial or in the midst of preparing for trial.  Then, there are simply not enough hours.  But day in, day out, year in, year out?  At what point does the brain simply go into low gear and the payoff on that high hourly rate plummet?

This is part of my handouts and I am anxious to see the reaction of those whose votes counts-the GCs and other inside counsel who hire lawyers.  I suspect these roundtalbes will provide fodder for many entries in the next week or so.

In the meantime, what do you think?

Providing yet more fodder for this blawg, the May issue of Corporate Counsel contains a short article entitled “Conflict Avoidance,” which discusses Citigroup’s new policy on conflicts, which makes it difficult to impossible to get a waiver to sue the company.  My vantage point as a partner in a 30 plus lawyer firm makes it easier to discuss contflicts since it seems to follow that the number of conflict problems increases with the size of the firm.  But having spent a long time at a big firm, after reading a number of stories in various media, and more recently having observed closely the negotiation a client endured with another of its firms (a big one, needless to say), it seems fair to say that many firms take off their client service hats and put on their adversary hats when they negotiate for waivers.  I think that, over time, more companies will follow the Citigroup course and refuse waivers when litigation is involved.  If there are any firms with a real client service focus, they might consider adopting such a rule too-not asking for waivers to litigate against a client.  Sure, it might cost them a case, but I believe the loyalty generated will be recognized and rewarded. 

What do you think?