Maximizing the Value and Effectiveness of Your Outside Counsel Relationships Chris R. Sackett Brian S. McCormac BrownWinick 666 Grand Avenue, Suite 2000 Des Moines, IA

The Eternal Tension Between In-House and Outside Counsel In-house counsel is overloaded with work Outside counsel is always looking for more work In-house counsel cannot spend money and outside counsel cannot live without it –Problems exacerbated by recent economic downturn Increased demands for in-house lawyers to “in source” work Increased demands for outside counsel to generate work and increase productivity Solution –Deeper relationships –Better communication –Focus on value

Why Use Outside Counsel? Overloaded Prompt turnaround needed Expertise –Specialized areas of law –Geographic Insufficient support –Litigation –Major transactions Special engagement –Outside in-house counsel –Family leave –Cover temporary increase in legal work Reputation Insurance Policy

What Does In-House Counsel Hate About Working with Outside Counsel Poor Communication/Unresponsive Quality Not Timely Doesn’t Understand Business Lack of Project Management Skills Failure to Focus on Risk/Benefit, Value and Budget

What Does In-House Counsel Hate MOST About Working with Outside Counsel Cost –Lack of value –Surprise –Overcharging –Inefficient staffing –Learning on company’s dime –Reliance on billable hour/refusal to offer alternative billing

What Does Outside Counsel “Like Least” About Working With In-House Counsel? Nothing Last minute delegation Lack of explanation of business goals Lack of information Unresponsive in-house counsel Barriers to communicating with non-legal personnel Unrealistic budgets Lack of communication after the work is done *Bottom Line – while these issues may frustrate outside counsel, it’s within their control to fix them – COMMUNICATION.

What’s Wrong With the Billable Hour? "Both in-house and outside counsel hate the billable hour. It hurts relationships." Joseph K. West, associate general counsel of Wal-Mart Clients don’t buy lawyer hours. They buy solutions to legal problems. Imperfect proxy for the actual value of work. Creates incentives for outside counsel to be inefficient, particularly in highly leveraged firms Keeping track of time and processing bills is time consuming and requires law firm overhead.

What’s Right With the Billable Hour? Gives firms an easy way to track lawyer productivity Provides clients with a detailed list of services –Generally preferable to flat fee invoice description for “services rendered” Accountability for time spent Allows clients to track and internalize outside counsel costs through task coding

Why Has the Billable Hour Survived So Long Billable rates are tied to the reputational capital of a firm. Increased internalization of commodity work that would lend itself to alternative billing Work being outsourced is often complex Difficulty of estimating alternative fee arrangements

Alternative Fee Arrangements Result-based fee/contingency fee –Pros For Clients –Only pay for success –May allow clients to pursue legal remedy that would not be feasible under billable hour system For the Firm: –Provides incentive to maximize efficiency in work and staffing –Cons: For Clients –If successful result with little effort, client may pay more than it would have on an hourly basis –Firm’s incentive to minimize lawyer time may have negative impact on quality of work and thoroughness For the Firm: –Firm assumes the risk of an unsuccessful result –If firm achieves successful result with little effort, client may feel it overpaid

Alternative Fee Arrangements Fixed/Flat Fee –Pros For Clients –Precision in budgeting –Can provide economical way to handle commodity or large blocks of work For the Firm –Precision in budgeting –Can provide firm large chunks of work to keep lawyers busy –Good for strengthening relationship between client and firm –Cons For Clients –Firm has no incentive to invest time or top personnel in matter to assure top-quality work –Unforeseen circumstances can lead to conflict –Increased communication/monitoring required For the Firm –Risk of losing money –Difficult and time-consuming to estimate budgets for flat fee work –Can be viewed negatively within the firm (“loss leader”) –Increased communication/monitoring required

Alternative Fee Arrangements Capped Fee –Pros For Clients –Certainty of maximum fee –Shifts some financial risk to firm For the Firm –No financial benefit for firm vs. standard billable hour work. Can help secure work from clients with strict budgetary concerns –Cons For Clients –Firm has no incentive to invest time or top personnel in matter to assure top-quality work –Unforeseen circumstances can lead to conflict –Increased communication/monitoring required For the Firm –Risk of losing money –Difficult and time-consuming to estimate budgets for flat fee work –Can be viewed negatively within the firm (“loss leader”) –Increased communication/monitoring required

Alternative Fee Arrangements Volume Discount –Pros For Clients –Lower rate –Incentive to strengthen relationship and increase work with firm For the Firm –Likely to receive increased workload from client –Good will –Cons For Clients –Still a billable hour system so inefficiency concerns remain –Top attorneys at firm may avoid discounted work –Discounted work may receive less priority at firm than full rate work For the Firm –Less revenue for time worked –Other clients may learn of discount and lead to further rate erosion

Alternative Fee Arrangements Blended Hourly Rate –Pros For Clients –Likely discount off of senior partner rates –Client may pay lower overall fee For the Firm –Easy to negotiate and administer –Encourages delegation –Cons For Clients –Inefficiencies of billable work –Likely to increase work done by inexperienced attorneys –Potential for lower quality and increased time worked For the Firm –Negative impact on profitability if not managed carefully

The Future Convergence –Clients are likely to continue to reduce the number of firms they work with Strengthen relationships with top providers Increase familiarity with business and understanding of objectives Increased Demands for Discounted Rates and Alternative Billing Arrangements

The Future Increased use of technology to allow more efficient interaction between in-house and outside counsel Increased pressure on in-house counsel to do more legal work Increase in number of in-house lawyers and “rental” of outside in-house counsel Increased emphasis on project management and accurate budgeting

Conclusions/Universal Truths Outside counsel must know and understand their clients, their clients' business and industry, and their clients' objectives. Deepening relationships and understanding between outside counsel and in-house counsel always brings value. Outside counsel must learn to think and act more like in- house counsel - focusing on project management, communication, predictability, budgeting and value. Alternative billing arrangements can and should be considered as a win-win alternative, where appropriate.

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