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(Voice): Mr. Carr, your 11:00 a.m. is here

Jeff Carr: Come on in.

General Counsel (GC): Good morning gentleman. We have a problem. We have e a new CEO here at Stoneacre Inc. He is demanding that all organizations in the company become more accountable, that is measure their costs and reduce them.

Jeff Carr (C): What is your reaction to that mandate?

GC: I think he is all wet concerning the law department. He is just plain naive. He doesn’t know that the law department is different. That legal matters are not precise, are inherently unpredictable, and can’t be measured. What I want you gentlemen to do is perform your analysis and them tell him that what he is asking can’t be done.

C: You are right that a law department is not like a factory that lends itself to traditional statistical analysis. Perhaps we should ask some questions first to see if the law department may be at least a little responsive to the request.

GC: Well, OK, I would like to do anything we can that’s reasonable, but I don’t think it’s possible. Shoot.

C: Have you done anything about cost cutting in the past?

GC: Once, when the corporation was on the Total Quality kick, we formed a quality circle in the law department and asked them to come up with ideas. But we didn’t implement any of them, well except for one. This primarily happened because we don’t have any expertise or resources to dedicate to such things.

C: What did you implement?

GC: The team suggested that we could save money by discontinuing the practice of having fresh cut flowers in the elevator lobby each morning and buying several sets of silk flowers to rotated on an ongoing basis to replace them.

C: Did it save money?

GC: Actually, we don’t know because no one tracked it. We don’t have a staff of bean counters like some departments.

C: Well, let’s start by going over some of the material provided in response to the preliminary information we requested from the department. We noticed there were a lot of blanks.

GC: Well, yes, we just don’t have a system to maintain records very well. I don’t think we really need them.

C: We noticed that about 80 percent of your total legal department budget last year was for outside counsel fees. Would it surprise you to know that the other nine corporations in your industry average about 58 percent of their budgets on outside counsel?

GC: I didn’t realize that it was that high, we don’t normally look at that type of number. But how do you know what our competitors are doing?

C: There is a readily available Annual Spending Survey for corporate law departments that documents what is spent in many categories. It is available in many cuts ranging from by industry groups to law department size. It gives you a very good idea of how you stack up against other law departments.

GC: Fine – but we’re different – you can’t just compare Stoneacre to any other company – we’ve have a rich history and unique legal matters. . . .

C: If you need to cut costs, you need to get your internal house in order first. Then focus on external costs because it is typically the largest part of the law department’s total budget. It looks as though you have a lot of low hanging fruit.

GC: It’s not easy. It is an adversarial system. It is us against them. They have a cost plus system with the billable hour and no incentive to be productive, but there is really nothing you can do about it.

C: Let’s start with some easy ones. Have you heard of the concept of unbundling?

GC: Only in the antitrust sense of being the opposite of tying.

C: No, I mean unbundling services. We notice that you have a fair amount of litigation. Do know how much do you spent on deposition services?

GC: No. The law firms handle that and they really don’t break that out in much detail. I do know they charge a handling fee and we have negotiated that down.

C: Did you know that one national court reporting service will give you a substantial discount off the top of there standard prices if you give them a national contract? Dealing directly with a supplier and taking the savings is the essence of unbundling. Let the law firm do what it’s best at, giving legal advice, but unbundle the other services.

GC: And we could potentially measure our savings?

C: What do you spend for legal research?

GC: Virtually nothing – who has time in this run and gun environment. Besides, the law firms do it so I really don’t know or care.

C: Perhaps you should care – research projects at big firms are often unused, irrelevant, but very useful for training young inexperienced associates.

GC: Oh yes, I remember fondly those Friday 4:00 p.m. research assignments at good old White Shoe Bloody Expensive & Arrogant – “the 50 state survey of some arcane point that never saw the later light of day.” Well somebody’s got to pay for it.

C: I suppose, but it need not be you as the client. You might be interested to know that there are independent legal research companies that can do the work for substantially less that the law firm and most people say a better job than the typical research performed by the junior associates in a law firm. Unbundling again.

How about litigation support? How much are you spending for the copying, analysis and coding of the documents used in your litigation?

GC: I don’t know. The law firms handle it. I do know that it is a major an unpredictable cost.

C: There is at least one company that will manage the litigation support function and do it on a fixed rate per page including everything from Electronic Document Collection to Secondary privilege review and privilege log. More unbundling and more significant cost savings and we are just at the support functions.

GC: That’s amazing.

C: How do you receive your legal bills from the outside counsel? On paper?

GC: Yes, all on paper. Our principal outside firm actually sends a courier monthly with a box of paper about two feet high.

C: How do you analyze the bills?

GC: I have a paralegal who divides them up by division so we know who to send them to for payment. But we don’t do any organized analysis.

C: Do you have an outside counsel management plan? Do you have standard billing guidelines that are enforced for each of your outside suppliers? Do you rate or formerly evaluate your outside firms?

GC: No. We are too small for that type of thing.

C: Are you familiar with task-based billing?

GC: I have heard something about it. How does it work?

C: The law firm people, in addition to writing a description of the work they do in their timesheets, also provide a code number, typically based on the ACCA/ABA codes. This permits a detailed analysis, by computer, of the work that has been done.

GC: That’s nice but how do I use it. Isn’t it a lot of just useless data?

C: The tRick is to have the right tools to do the analysis of the information that is important to you. For example we use a tool called “pulse points.” The way it works is that you agree with your outside firm what 8, 10, or 12 or whatever items that you want to use to measure progress in a matter and the law firm provides that information to you in one sheet on a monthly basis. It may include such things as the average cost of all cases that month, or what ever you consider as critical. It invariably shows trends and patterns you otherwise would not see.

We noticed that you have some litigation that is scattered around the country. Do the law firms that handle similar types of cases share information? About company witnesses, expert witnesses, the company’s position on various to assure that it is consistent?

GC: No.

C: Have you ever considered creating an extranet that would enable you to more effectively manage your relationships with your outside counsel as well as your vendors?

GC: Oh, we’ve got far too many extranets to deal with already. It seems that each of the different law firms that we deal with is setting up their own extranet. It has become unbearable – so many different URLs, a different password for each site, attempting to track where the information is located for each matter… what happened to the supposed efficiencies of automation?

C: So, your firms are establishing their own extranets for you?

GC: That’s right.

C: And you’re supposed to log into each of these extranets in order to work with each law firm?

GC: You’ve got it.

C: Who’s managing the relationships you have with your outside counsel – you, or the outside counsel?

GC: I’ve begun wondering that myself, lately.

C: To what extent is the work product that is maintained within these different extranets being reused as you encounter similar issues?

GC: Well, when appropriate I would hope that each of the firms would reuse the work product they create for us.

C: What happens when one firm completed the prior work, and you’re having another firm address the new matter?

GC: Are you implying that we should expect that one firm would actually build on existing work product that was created by someone from a different firm?

C: I couldn’t have said it better myself.

GC: That doesn’t happen. Sure, we’ve had a few firms who have told us that they would allow attorneys from other firms to access the extranet that they’ve set up for us – but that typically doesn’t go very far. There’s a lot of turf concern between our firms, and none of them wants the others to have the inside track with us. As a result, they generally resist the idea of using another firm’s extranet. And I have to say that I have my own misgivings about relying too heavily on a single firm for that level of process management

C: So, why don’t you just set up your own extranet and use your system to manage your various relationships with your outside counsel?

GC: We thought of that – briefly. We hit a major snag when the company “security police” caught wind of what we were considering. It is hard enough to get external access into our network for our employees – let alone to allow someone outside of the company into our environment.

C: Have you ever considered an ASP-based solution?

GC: A what?

C: An Application Service Provider – or “ASP”-based solution. That’s where an external, trusted third-party would host the technology, but you – or better put, someone within your department, would manage who has access privileges to the system and even define what those privileges entail – down to the individual user level.

GC: And this would be outside of our network environment, right?

C: That’s right.

GC: And we could avoid our internal bureaucratic IT processes?

C: You’ve got it.

C: Do you use alternate fee arrangements with your outside firms?

GC: No it is pretty much all by the billable hour.

C: Well, you’re not alone. Nearly 80 percent of all engagements are based on standard billable hours. One of the ideas that we will suggest is that you analyze your legal needs to determine which might be better handled with an alternate fee approach. For example which type of matters has a repetitive nature and might be a candidate for a flat fee. We have found that the typical employment law cases, the type that all corporations have, can usually be addressed with a flat fee agreement. This means that the whole dynamic has changed. The law firm now has the incentive to be efficient in order to maximize profit. We have found that this frequently means shorter cycle times with cases being resolved more quickly, which interestingly enough, has in turn has produced smaller settlements. It is a double win for the client because he has smaller and more predictable legal fees and, in this instance at least, smaller settlements because the cases are handled more efficiently.

GC: The problem with that is that I don’t know what a fair flat fee is; either I may pay too much or the firms will stop work when they’re spending more hours.

C: The ideal solution is to have records that show what you have been paying on an hourly basis and compare that to a flat fee offer. Absent that type of information being available internally, enough companies are now demanding flat fees for various types of work. There is a growing body of information available that will help guide you in analyzing the issues.

C: Do you ask your outside firms to share the risk part of their fees based on their performance in the matter you have retained them for?

GC: Of course not. They are paid for the hours they bill. But it is an interesting concept.

C: There are several risk/reward schemes that provides incentives to the outside firm to “put some skin in the game,” that you might want to consider.

C: Something else you might want to consider, joining a consortium for legal services purchasing.

GC: You mean like eBay?

C: Not exactly. It is a group of small law departments that are getting together to purchase legal services as a group. That gives them more clout and the ability to use more sophisticated management techniques. The consortium recognizes that a small law department frequently does not have the time or resources to devote to outside counsel management like a large department might have. So they have put together a basket of measurement and management tools that provide members of the consortium with a turnkey solution to dealing with outside counsel. It includes a number of things we have just discussed, but designed for small, under-resourced law departments. Similarly they have solicited law firms and legal suppliers to offer alternative fee arrangements or discounts to consortium members so they do not have to individually negotiate them themselves. For example there are offers to handle standard employment law cases and certain intellectual property matters on a fixed fee basis.

We started the conversation with the need for statistics. I think you can now see that there are meaningful opportunities to measure and numerous ways to reduce your legal costs.

GC: I do, but you know, we measure a great deal of things around here and I’m concerned that the things we measure don’t really mean anything.

RS: I’ve listened quietly for some time now and I’d like to weigh in. In my view, partnering isn't just about cost cutting.

JC: Rick, what do you mean?

RS: Well Jeff, its really about value. Simple cost cutting only benefits one party and not the other. For example, layoffs,

JC: How do we get value from our outside attorneys and providers and cut cost at the same time?

RS: It’s not as hard as you would think. First you start off with a partnership in which each of the parties has common goals.

JC: Give me an example of a common goal between our company and your firm.

RS: Easy, the most favorable outcome of your legal situation at the most efficient cost. You have to look at the entire cost of the transaction and just the attorney fees and costs.

JC: I can see how that would be beneficial to our company, but where’s the incentive for your firm?

RS: With the proper budget including built in performance bonuses my firm will make money and save you money at the same time.

JC: I am still not following you.

RS: It’s a matter of both parties agreeing on the goals of the case and then agreeing to the path forward to obtain those goals. There has to be a sharing of the risks and rewards throughout the path forward.

JC: Sounds like your firm is the only party taking a risk.

RS: No, both parties share in the risk as well as the rewards. Our risk is the fees that we put aside in a bucket which we will only receive at the end of the case when the agreed upon goals are met. The better the result the more of a bonus my firm earns. You got to remember, you have to look at the total transactional cost, which includes the outcome, whether it be in a settlement or judgment. Your risk is an adverse outcome.

JC: I am beginning to like the sound of this!

RS: The bottom line is, if we save you money on the overall cost of the transaction, then we get rewarded in the form of agreed upon bonuses. If we don't save you money on the overall cost of the transaction, my firm loses the fees in the bucket and any anticipated bonuses. This situation really creates the environment to form a partnership that has common goals and incentives.

JC: OK gentlemen – Make it so!

C: What do you mean?

JC: Do it.

C: Do what?

RS: Come on guys, we’ve got to get away from today’s “system” where the consultants and firms thrive on cost plus billable hours. And Jeff, as the client, you’ve got to be clear on objectives and be loyal to those of us that invest in this.

JC: That’s right. Let’s build a structure that leverages our collective expertise, shares risk, and increases profits for all parties based on success.

Rick (enters, excitedly): Craig, I just got a call from Stoneacre. They want us to handle defense of the three patents on which their entire business is based. The general counsel understands he is betting the company. And I’m sure he’s talking to other law firms. I told him we would be willing to defend the case on a risk sharing basis. I am working right now on putting together the budget, and a written proposal.

MP (irritated): Wait a minute. What do we look like — a bunch of ambulance chasers?! This is defense work right? They don’t have a choice. We will do it full hourly. Hey, come to think of it, since this is such a big deal for them, can’t you increase the rates a little for this matter?

Rick: No, seriously, the general counsel likes my idea. More specifically, I proposed that we take the case on a modified fee basis:

We prepare a budget for the case through trial.
We get 80 percent of hourly as long as we are within budget, plus 100% of expenses;
We bank the 20 percent in a success bucket; and
We get a bonus — a multiplier of the bucket if we win!
We could get 110 to 120 percent of hourly.

And the general counsel is willing to give us an additional bonus amount if we stay below budget.

If we exceed budget, we get 20 percent of hourly and the balance goes in the success bucket.

MP (agitated): Oh that’s great. You mean if we don’t achieve success we only get 80% of our fees up to budget? Worse yet, if we exceed budget we only get 20% of those fees?

Tell him we aren’t his bookie — full hourly

Besides, you don’t have authority to make a proposal like this unless it is approved in advance by the firm’s finance committee. Tell the general counsel that you are submitting your alternative fee proposal to the committee and we will get back to him in a couple of weeks. In the meantime, you can start working on this on a full hourly rate basis.

Rick (reasoning): General counsel needs counsel today, Not two weeks from now. If we’re as good as we claim, why should we be afraid to take risk in the case as long as we get rewarded for success?

Stoneacre’s general counsel is under incredible pressure from his CEO to reduce the legal department’s budget for outside legal services and improve the results to business units. We’re not going to get this case unless we prove to him that we are willing to be part of the solution.

Why can’t others around here understand that our firm’s profitably ultimately will depend how successful we are in helping customers’ achieve their business goals?

We have to be customer-focused first.

MP (disgusted): I agree with all of that, but you know how bad we all are at budgeting.We only control half of the case. We can’t control what the other side does. And discovery . . . don’t get me started.

There is no way our finance committee is going to approve a deal where we risk only getting paid 20 percent of our hourly rates just because a budget turns out to be wrong.

The problem with in-house counsel is that they have never handled complex litigation and they don’t understand law firm economics.

Rick: You know that’s not true. Stoneacre’s general counsel and his entire legal staff came out of large, high quality law firms.

Our real problem is that they understand law firm economics just fine. The general counsel knows how much money our partners make and he knows he can hire a first-rate 4-7 year attorney for a total compensation package that is equally to the fees we will charge in for single month’s work. Why do we insist on a pricing structure that forces our customers to enlarge their in-house legal departments are our expense.

MP (mean): The general counsel should go can go buy a lotto ticket.

Why doesn’t he just auction it off on eBay

Rick: Funny you should mention that.

He said he was thinking about presenting an RFP and then doing a reverse auction on the internet! I think he’s shying away from that, but you can be sure that he is getting comparative bids from other firms.

MP (pointing to Chart): I still say that the General Counsel doesn’t’ understand law firm economics. But you should.

Five years ago, we were riding high; Four years ago was even better! Then the dotcom bust and profits have been falling ever since No deal flow. We have tried to offload costs but even though we have let a lot of people go, we are still slipping. Trust me.

Remember when we had that retreat three years ago and adopted our new mission plan and corporate structure. You guys have tasked me with our mission — to increase the firm’s profitability. I need your help. This is not the time for us to be taking risk on nutty alternative fee schemes.

Rick: I disagree. A tough legal climate is precisely the time to be taking risks. In the face of very strong messages coming from all our corporate customers, we can’t continue practicing law like we have for the last several decades.

If we are going to meet our customers’ demands, we have to be willing to price our services based on value not hours.

We have to dramatically reduce our overhead into order to reduce our fees and give us the flexibility to take risks.

We have to dramatically reduce the cost of our office space and make the space dramatically more efficient. How can we justify fancy offices when we don’t need them to do our job?

How can we ask our customers to pay for a huge, wood paneled library when everything we need is available on our desktop?

How can justify a bloated staff bureaucracy that exists principally to support the imagined needs of our partners and has little or nothing to do the legal product we provide to our customers?

MP: I don’t recall “dramatic change” as being part of the mission I was asked to implement. Let me see — it must be in here somewhere . . . .

Rick: No seriously.

Why don’t we turn this place upside down? Let’s get out of our fancy offices and reduce space costs. Let’s eliminate the partnership and make every attorney a member. I might be able to face life if I knew I would never again have to sit through another worthless partnership meeting. Let’s include our staff in bonuses and everything other major firm decision to give them added incentive to be a part of our legal service teams. Let’s make every person here an integral part of the teams we form with our customers.

MP (opening second chart): Teams! Let me tell you about teams. Start thinking about our team for a change! Let me tell you how our team works — leverage, baby; leverage.

Rick: Leverage — with these associate rates?

MP: That’s right, it’s more important now than ever. You know we went to $125,000, when all those California firms went to $140,000 two years ago. You kept saying, we wont’ be competitive. Well it looks like a pretty good move now doesn’t it.

Rick: Are we even making money off these guys? Well . . . no. . . . but unless we do it we can’t get junior associates.

Let me show you:
Salary: $125,000
Benefits: $ 65,000
Indirect Overhead: 175,000

Rick: $175,000 — That’s outrageous!

MP: What are you complaining about? When I went to the last Managing Partner’s Forum, and we all sat around and fixed billing rates for the quarter, most firms were at $225,000.

Rick: Come on.

MP: Well add it all up:
$125,000 plus $65,000, plus $175,000 is $365,000 that we need to get from every junior associate, just to break even.

Rick: Give me a break.

MP: No really — Wake up and smell the Coffee Rick! You have to bill 2,000 hours a year at $175 an hour is only 350,000. We loose $15,000 on every junior associate.

Rick: You are making my point. Our clients don’t want to pay for first year associates. Stoneacre’s general counsel actually proposed that if we wanted to use a first year associate on his matters, we should pay him instead of him paying us. He said he came to us for our expertise, not to help train our associates.

First year associates are too expensive. Hell, we’re all too expensive. Corporate counsel won’t pay to support our expensive, out of date methods of practice. We don’t have any choice but to make dramatic changes in our business.

MP: The partners will never buy it! Eliminate the partnership? Give up our high-end offices?

Listen, we’re not dead in the water. Only a few years ago we spent a lot of time on total quality management. We talk about client-service and business development at every partners’ meeting. For each client, we have a client service partner. We have a marketing newsletter. I agree that we need to be client-focused but let’s not get carried away. Our partners will never buy dramatic change.

Rick: Yeah, but our clients will.

END OF ACT