How to Use Value-Based Fees Draft as of 2017-04-27 1552 How to Use Value-Based Fees Russ Dempsey, Associate General Counsel, AIG Property Casualty William Garcia, Chief Practice Innovation Officer, Thompson Hine LLP Kathryn Kirmayer, Senior Vice President - Law and General Counsel, Association of American Railroads June 5, 2017 for discussion only -- do not distribute

Topics Common Value-Based Fees (VBFs) Draft as of 2017-04-27 1552 Topics Common Value-Based Fees (VBFs) Most/least appropriate uses for each VBF Typical friction points in negotiating & implementing VBFs Common reasons VBFs do not produce desired results Tips on avoiding misses for discussion only -- do not distribute

Panel Russ Dempsey Kathy Kirmayer Bill Garcia Draft as of 2017-04-27 1552 Panel Russ Dempsey Kathy Kirmayer Bill Garcia for discussion only -- do not distribute

Why VBFs? Increased predictability Increased communication Draft as of 2017-04-27 1552 Why VBFs? Increased predictability Increased communication Simplified administration Improved results Improved relationships “As more companies rely on business-savvy [law department operations] professionals to improve their process . . . [there is] much more interest in alternative delivery and billing models.” Source: Blickstein Group Ninth Annual Law Operations Department Survey , December 2016 for discussion only -- do not distribute

Draft as of 2017-04-27 1552 5/31/2018 What is a VBF? Matches the client’s perceived value to the charge for the service Aligns lawyers’ and client’s expectations Incentivizes lawyers to do only those tasks that contribute to perceived value Tied to results, not time for discussion only -- do not distribute

What a VBF Is Not VBF Hours Rates Discounted rates Blended rates Draft as of 2017-04-27 1552 What a VBF Is Not VBF Hours Rates Discounted rates Blended rates Volume discounts for discussion only -- do not distribute

VBFs: Benefits & Challenges Draft as of 2017-04-27 1552 VBFs: Benefits & Challenges Benefits Challenges Shifts risk of loss for inefficiency Front loads goal-setting Rewards results, effectiveness, & efficiency Longer term: encourages OC investment in reducing costs of service Eventually creates fee-setting efficiency Upfront investment of time In scope/out of scope assumptions Scope changes & true ups Staffing mix “Fudge factor” Sufficient data/time to agree on fee Who “won”? for discussion only -- do not distribute

VBF types & How they are Used Draft as of 2017-04-27 1552 VBF types & How they are Used for discussion only -- do not distribute

Most Common VBFs Portfolio Flat Fees Fixed Fee per matter Draft as of 2017-04-27 1552 Most Common VBFs Portfolio Flat Fees Fixed Fee per matter Fixed Fee per phase/deliverable Risk Collar Success Fee Source = Big Law Fails To Bend To GC Billing Needs, Survey Says (Law360, December 16, 2016) 63% of in-house counsel prefer Flat/Fixed Fees Source: 2017 Thompson Hine Innovation Survey for discussion only -- do not distribute

Where are VBFs Most Common? Draft as of 2017-04-27 1552 Where are VBFs Most Common? Litigation Commercial & Contracts Labor & Employment Intellectual Property Source: “Big Law Fails To Bend To GC Billing Needs, Survey Says” (Law360, December 16, 2016) for discussion only -- do not distribute

Portfolio Fixed Fee Best Uses Less effective uses Draft as of 2017-04-27 1552 5/31/2018 Portfolio Fixed Fee Best Uses Less effective uses Large number of matters in portfolio Well known issues Common matter life cycles Ease in determining what work is in scope vs out of scope Ease in determining early if matter is in the portfolio First date Small portfolio With shadow billing Solely to drive a discount for discussion only -- do not distribute

Portfolio Fee Friction Points Draft as of 2017-04-27 1552 5/31/2018 Portfolio Fee Friction Points Negotiating Implementing/Monitoring Estimating volume ranges & correlative fee variations Impracticality of perfect protection for both sides Defining parameters of portfolio Data deficit Timing of payments Variability in cases within portfolio type number Exceptions swallowing the rule Potential timing disconnect between work volume & payment schedule for discussion only -- do not distribute

Fixed Fee Considerations Draft as of 2017-04-27 1552 5/31/2018 Fixed Fee Considerations Best uses Less effective uses Known commodities/surprises unlikely Common issues Common lifecycle Phased fees Single large matter Novel matter New client for discussion only -- do not distribute

Fixed Fee Friction Points Draft as of 2017-04-27 1552 Fixed Fee Friction Points Negotiating Implementing/Monitoring Defining scope changes that warrant re-negotiation Uncertainty at the outset about factors that drive cost When payments are due time milestones Scope change re-negotiation triggers Mid-phase resolutions & impact on fees for discussion only -- do not distribute

Risk Collar Considerations Draft as of 2017-04-27 1552 5/31/2018 Risk Collar Considerations Best uses Less effective uses Scope is hard to define Where size of risk in a fixed fee is uncertain Transition from hourly to fixed fees When trying to avoid ongoing attention to billing process As a way to avoid hard discussions and analysis to support a fixed fee for discussion only -- do not distribute

Risk Collar Friction Points Draft as of 2017-04-27 1552 Risk Collar Friction Points Negotiating Implementing/Monitoring Size of collar Parallel collar ranges Scope Costs of shadow billing Who “won”? Advance warnings that collars are in play Scope creep 99.9% of collar True up issues for discussion only -- do not distribute

Success Fees Best uses Less effective uses Draft as of 2017-04-27 1552 5/31/2018 Success Fees Best uses Less effective uses Where issues require front end agreement on goals Where OC creativity will be a key component to achieving success When objectives can be clearly articulated at outset so “success” can be measured Where success does not add incremental value Where effect on success of OC creativity/risk taking is unclear for discussion only -- do not distribute

Success Fee Friction Points Draft as of 2017-04-27 1552 Success Fee Friction Points Negotiating Implementing/Monitoring Defining “success” Defining an appropriate bonus If combined with an initial discount, size of kicker to compensate for risk Scope changes that undercut “success” definition for discussion only -- do not distribute

Performance Holdback Best uses Less effective uses First dates Draft as of 2017-04-27 1552 5/31/2018 Performance Holdback Best uses Less effective uses Where frank ongoing communication about satisfaction is likely to happen Larger or portfolio matters to justify investment in ongoing communication Ongoing relationship between firm and client creating trust in fundamental evaluation fairness at the end of engagement Where metrics can be articulated First dates Where performance measures can’t be fairly defined Smaller matters for discussion only -- do not distribute

Holdback Friction Points Draft as of 2017-04-27 1552 Holdback Friction Points Negotiating Implementing/Monitoring Defining metrics qualitative (e.g., “client satisfaction”) quantitiative (e.g., budget to actual accuracy) Committing to on-going evaluation Client must be prepared to acknowledge firm’s performance – and maintain reserves to pay the holdback Constructive feedback Willingness to try new things for discussion only -- do not distribute

Contingency Fee Considerations Draft as of 2017-04-27 1552 5/31/2018 Contingency Fee Considerations Best uses Less effective uses Client cannot/will not fund matter Success can be defined and agreed upon Firm understand client’s business Success may not generate cash Success hard to define for discussion only -- do not distribute

Contingency Friction Points Draft as of 2017-04-27 1552 Contingency Friction Points Negotiating Implementing/Monitoring Size of contingency at various milestones Potential for divergent interests over proffered settlement Defense contingencies Quick win for discussion only -- do not distribute

How to Use Value-Based Fees Draft as of 2017-04-27 1552 How to Use Value-Based Fees for discussion only -- do not distribute