New England Biz Law Update
Buy one company and get the legal services for the second acquisition at 50 percent off! Get the first 10 hours of legal services free!
Each bargain, of course, comes with the typical catches. You know, stuff like, the 50 percent off applies only to an acquisition of equal or lesser value. The 10 hours free requires a minimum purchase of 15 hours of legal services.
Maybe it was the barrage of holiday sales pitches, or the fact that my law firms were chasing me to get paid before year-end that started me thinking about truly alternative fee arrangements for our outside counsel to consider.
I admit that even the term “alternative fee arrangements” makes me cringe. I have never been a fan of fixed fees, blended rates, value-added billing or any of the other alternatives to standard hourly rates. The alternative billing options always seemed to me to fall into the category of the cure being worse than the disease – or, maybe more accurately, a cure for a disease different than the one about which I was complaining.
Every hour is not of equal value
Here is the disease I am complaining of: To our outside counsel every hour they spend on our work is of equal value regardless of what we have them working on. To put this in context, an hour they spend on helping us acquire our largest competitor is worth (meaning billed) at the same rate they use when they are handling a simple confidentiality agreement that we just can’t get to.
For us the value is very different. For us, the difference also is often a very practical one. For example, the hours billed to the M & A transaction will be capitalized and dwarfed by the bills from the investment bankers and accountants.
What have outside counsel done to try to address this problem? They tell us they will be sure to push the work down to the lowest cost associate who can do the work.
This doesn’t help very much because their “lower priced” associate is still being billed out at $375 an hour. What adds insult to injury is that we know that we could send the work to a more experienced lawyer at one of the ex-GC groups or a solo refugee from a brand-name law firm for $185 an hour. We even could get a contract attorney from one of the staffing shops for even less, or, if we wanted to get really exciting, outsource the work to India.
Why don’t we? Probably because we don’t have enough of this type of work to justify the time and energy it would take. We also, in fairness to our big firm outside counsel, like the comfort of working with a name brand law firm, and better yet a name brand law firm we already know and trust and understands our business.
For those of us who don’t work in the GE and DuPont law departments of the world, we don’t think of this in terms of “convergence” or other fancy terms when we limit the number of outside counsel we work. Instead, if we think about it all, we know that each additional law firm relationship means more time spent managing outside counsel – time we don’t have.
Our outside counsel would also prefer that we don’t spread our affections around. Every other law firm relationship we have with a firm that can do the work that they are doing puts them at risk.
The problem is that that the ever increasing pressure we in-house counsel feel to cut legal costs, together with the increasing cost of our big firm outside counsel, is making us miserable and forcing us to consider our alternatives. My question is whether our big firm outside counsel can help us while helping themselves.
Here is the idea that I am throwing out for discussion: Why can’t law firms take what appliance manufacturers, airlines, grocery stores and others have been doing for years to deal with the issue of differing “price points” that their target customers require?
What these industries have done is have a discount line or a store brand that is meant to come in at a lower price point. They provide an option for those customers who can’t or won’t pay for the name brand. Whirlpool, for example, sells dishwashers under four different brand names – Whirlpool, KitchenAid, Roper and Estate – each targeted to the need and applicable value (which translates into price) of different customers.
I wouldn’t care if my outside counsel outsourced the work to India or Des Moines so long as they find and manage the lower cost alternative and that the work is done well. I appreciate that law firms are going to worry that by offering a lower cost alternative they will be putting downward pricing on all of their services. That is true and the law firms will have to work hard to differentiate what work can be done by their “discount” brand and what can’t.
This is probably a good point to turn, as I typically do in this column, to someone smarter than me to help turn my meanderings into something of value to you. For this purpose, I have asked Silvia Coulter of CoulterCranston to help me out.
Silvia has been helping outside and in-house counsel with everything from business development and strategic planning for longer than I am sure she cares to remember. Silvia notes that G.E. makes missile guidance systems and they make washing machines – all with their good brand name, but, priced according to market and need. We shouldn’t pay the same for both, she adds.
Silvia observes that it wasn’t too long ago that attorneys were hired to perform legal work and a bill was rendered for the completed work. In a sense, this was considered “project pricing.” And most knew if it was a fair price.
Today, firms have put a “ceiling” on their earning potential – meaning they have imposed mandatory billing requirements for their attorneys. Just short of literally punching a clock, tracking every minute of every day is tedious and almost impossible. But more important, it caps a firm’s ability to generate revenue. Tracking time by the hour also leaves uncertainty about what the final bill will be.
Granted, complex litigation may be an exception but short of that, most experienced lawyers know what it will take to get a deal done, to craft complex real estate loan documents and on and on. Why not project price and aim high?
Everyone will be happy – in house counsel will have a budget and outside counsel can actually forecast their revenue and enjoy the practice without the chains of the billable hour. And for small deals and simple matters, firms should come up with a fair price for the work, Silvia suggests.
Most businesses forecast revenues based on past annual company performance. Law firms can do this just as well. But, more important, as the buyer of the services, in-house counsel could begin to impose this on outside counsel, Silvia adds.
How? Review history, look at what similar work cost in the past and add a small percentage for COLA and send it out. Manage the costs instead of being managed by the costs of our outside counsel.
And what if you don’t like the end result? Can you get your money back? Coulter suggests the firms that employ new methods of project pricing will come out winners in the end.
A truly alternative fee arrangement
Let me throw out for discussion another truly alternative fee arrangement, this one related to how a law firm that you have never worked with gets a chance to show what they can do.
Here is the suggestion to our outside counsel: Offer coupons for some free or discounted work. Maybe something a little less blunt than the “buy legal services for one M & A deal and get the next at 50 percent off” I started this column with, but not by much.
You may laugh, but let me tell you a true story. I moderated a panel this past summer for one of the large international law firm associations on how they could get more business from in-house counsel.
One of my panelists was not a lawyer but the business manager for a large bank. This multi-billion dollar bank didn’t have an in-house lawyer. The business manager was responsible for hiring all outside counsel for the bank.
When asked what it would take for a law firm that had not previously worked with him to get his interest, his answer was a coupon for some free or heavily discounted work. That would at least get his attention long enough for him to look at the law firm more closely and consider giving them a chance.
At first the outside counsel in the audience thought he was joking. He wasn’t. Would that work for you? Has any law firm ever offered to do its first work for you at a significant discount, or, better yet, for free?
Please tell me what you think about these ideas and any other alternatives you think of. You can reach me at [email protected]. You (we) are the customers here. What we think is supposed to matter.
Gabriel Miller is general counsel and chief operating officer of STORS, a digital signage media company for retailers. He can be reached at [email protected].
Silvia Coulter is managing director at CoulterCranston, a firm specializing in strategy and business development for the legal industry. A sought-after business development coach, she is the author of Thomson/LegalWork’s book, “The Woman Lawyer’s Rainmaking Game,” which is available online at amazon.com. She may be reached at [email protected].
