1. How to Use Value-Based Fees
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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
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2. Topics Common Value-Based Fees (VBFs)
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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
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3. Panel Russ Dempsey Kathy Kirmayer Bill Garcia
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Panel
Russ Dempsey
Kathy Kirmayer
Bill Garcia
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4. Why VBFs? Increased predictability Increased communication
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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
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5. Draft as of
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
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6. What a VBF Is Not VBF Hours Rates Discounted rates Blended rates
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What a VBF Is Not
VBF Hours Rates
Discounted rates
Blended rates
Volume discounts
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7. VBFs: Benefits & Challenges
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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”?
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8. VBF types & How they are Used
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VBF types & How they are Used
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9. Most Common VBFs Portfolio Flat Fees Fixed Fee per matter
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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
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10. Where are VBFs Most Common?
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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)
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11. Portfolio Fixed Fee Best Uses Less effective uses
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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
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12. Portfolio Fee Friction Points
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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
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13. Fixed Fee Considerations
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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
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14. Fixed Fee Friction Points
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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
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15. Risk Collar Considerations
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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
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16. Risk Collar Friction Points
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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
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17. Success Fees Best uses Less effective uses
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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
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18. Success Fee Friction Points
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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
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19. Performance Holdback Best uses Less effective uses First dates
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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
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20. Holdback Friction Points
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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
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21. Contingency Fee Considerations
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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
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22. Contingency Friction Points
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Contingency Friction Points
Negotiating
Implementing/Monitoring
Size of contingency at various milestones
Potential for divergent interests over proffered settlement
Defense contingencies
Quick win
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23. How to Use Value-Based Fees
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How to Use Value-Based Fees
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