Alternative Fee Arrangements That Work

Transcription

1 Alternative Fee Arrangements That Work ABA Corporate Counsel Seminar February 13, 2010 Mark D. Wolf - Assistant General Counsel - FMC Technologies, Inc. Copyright FMC Technologies, Inc., All Rights Reserved

2 Discussion Areas Who We Are... ACES Alliance Counsel Engagement System... ACES LT ACES for Litigation Live Examples + Real Metrics... Why It Works + Keys To Success... Where To Start... Law Firms + Companies Should... Then... 2

3 FMC Technologies, Inc. 9 years old (Houston headquartered + in 26 countries) Int l Manufacturer (energy products / energy systems) Annual Sales = $ 4.6 Billion Market Cap = $ 7 Billion Litigated Cases Beginning of 2002 = 40 Litigated Cases Beginning of 2006 = 68 Litigated Cases Beginning of 2007 = 61 Litigated Cases Beginning of 2008 = 40 In-House Lawyers Worldwide 10 (including the GC) 3

4 External Legal Spend vs. Revenue ( ) Total Spending (in Millions) Revenue (in Billions)

5 External Legal Spend vs. Revenue ( ) 0.035% Percent of Revenue 0.030% 0.025% 0.020% 0.015% 0.010% 0.005% 0.000%

6 At FMC Technologies, We Believe That... We are not in the business of answering interesting legal questions (we make / sell energy products and services)... Our legal department exists to help achieve legitimate corporate objectives... We do that by aligning the in-house legal function with the support system of law firms and legal service providers... Much legal work today is basic blocking and tackling... Usually, there is no such thing as a new legal question and most questions have been asked and answered before... 6

7 The FMC Technologies Solution Alliance Counsel Engagement System Aligns objectives and interests Provides for flexibility in achieving success Works for all types of engagements 7

8 Model #1 - ACES LT (for long term) Used for engagements on an hourly, retainer, or project basis: 20% of fees billed held back as at risk and we pay 80% of fees billed 0 to 200% of at risk bucket is paid based on performance report cards using evaluation criteria We annually evaluate all law firms on this basis and stack rank them (allows us to compare to / contrast with other law firms) Performance based pay is best communication medium Law firm usually learns they ve been fired when they no longer get work from a client (if unhappy, they first deserve meaningful feedback regarding their performance) 8

9 ACES LT The 6 Evaluation Criteria 1. UNDERSTOOD CLIENT S GOALS: business + legal objectives 2. EXPERTISE: knowledge + expertise about issues + law 3. EFFECTIVENESS: strategy, execution + results 4. RESPONSIVENESS: deadlines, client policies, communications, etc. 5. PREDICTIVE ACCURACY: budget reasonableness + predicted results 6. EFFICIENCY: staffing + time spent, overall fees 9

10 ACES LT The 5 Evaluation Results 1. UNACCEPTABLE = 1 2. MEDIOCRE = 2 3. GOOD = 3 4. VERY GOOD = 4 5. EXCELLENT = 5 Average score of 3 (or Good) = law firm earns its full rates Average score < 3 = law firm earns less than its full rates Average score > 3 = law firm earns full rates + bonus 10

11 ACES LT Real Time Calculator 11

12 Model #2 - ACES for Litigation 1. Goal Setting dismissal, defense verdict, decision tree based settlement, cross-supply agreement, etc. 2. Budget Setting 90 day time increments 3. Performance or Success Bonus declines over time 4. Efficiency Bonus/Penalty actual vs. budget analysis 5. Expected Value Bonus/Penalty how accurate was firm in its decision tree evaluation v. actual settlement 12

13 ACES Litigation General Concepts Stays with the hourly billing unit (law firm inventory) Again, 20% of fees billed are held back as at-risk and we pay the remaining 80% Alignment occurs by paying for efficiency and success Law firm typically realizes higher effective hourly rates Gets law firms to focus on margins, not revenue Gets law firms to focus on success and efficiency 13

14 The FMC Technologies ACES Excel Template 14

15 ACES Results & FAQ s All expenses / local counsel fees are included as part of an allin budget concept Firm acts a general contractor responsible for their 3 rd party sub-contractor costs Seeing reductions in average per case fees & costs Cycle times rarely exceeding 1.5 years in length Effective hourly blended rates higher than law firm stated rates Buying fewer hours ( freeing up the law firm s inventory) 15

16 Example: Dismissal Success (standard v. actual fees paid) $50,000 $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 Dec. Jan. Feb. Mar. Apr. May June Standard Actual 16

17 Example: Missed Valuation (standard v. actual fees paid) $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 Oct. Dec. Feb. Apr. June Aug. Oct. Standard Actual 17

18 Example: Adverse Verdict (standard v. actual fees paid) $350,000 $300,000 $250,000 $200,000 $150,000 Standard Actual $100,000 $50,000 $0 Nov Jan Mar May Adverse Verdict July Sept Nov Jan Mar Appeal Success May 18

19 Example: Appeal Success (standard v. actual fees paid) $350,000 $300,000 $250,000 $200,000 $150,000 Standard Actual $100,000 $50,000 Adverse Verdict Appeal Success $0 Nov Jan Mar May July Sept Nov Jan Mar May 19

20 All Cases Average Fees & Costs ( ) (closed cases by year without Plaintiff) In Thousands (29) 2004 (28) 2005 (51) 2006 (36) 2007 (44) 2008 (17) Number Closed by Year 20

21 Law Firm Ex. - Budget vs. Actual Hours Billed Actual Hours Budget Hours Hours # 1 # 2 # 3 # 4 # 5 # 6 # 7 # 8 # 9 # 10 Case 21

22 Law Firm Ex. - Budget vs. Actual Billing Rates Actual Rate Budget Rate $500 $450 Billing Rate $400 $350 $300 $250 # 1 # 2 # 3 # 4 # 5 #6 # 7 # 8 # 9 # 10 Case 22

23 Why It Works Mutual Winning / Alignment of Objectives Company saves money in absolute terms Firm makes more money per billable hour Financial Rewards For efficiency For achieving success Financial Penalties For inefficiency For failing to achieve success 23

24 Keys to Success Importance of Budgets Companies manage to budgets filled with uncertainty every day Law firms are hired for their expertise and experience in handling thousands of particular types of matters and should be expected to provide assumption-based cost estimates Fluidity of Discussions Between Client + Law Firm Budgets must be fluid, reasonable & realistic Definitions of success must be fluid, reasonable & realistic 24

25 Where to Start... Initiate a sit down between firm and company... Make it informal (a brown bag lunch)... Both sides must talk openly about their expectations... Be transparent... Listen carefully... Pick a few ideas... 25

26 Law Firms Should... Provide assumption-based budgets... Eliminate pass through billing of costs that are truly overhead and part of their cost of providing legal services... Look first to past work product (wherever that may be) so as not to reinvent the wheel... Not turn over every stone under the veil of advocacy... Continuously strive to reduce their costs creatively and constantly to deliver a lower cost product... Be compensated commensurate with their performance... 26

27 Companies Should... Understand law firms must make a profit in order for the relationship to be mutually beneficial... Define their engagement objectives and advise law firms if those objectives change... Understand that matter-specific budgets may need to be revised for unforeseen events and developments... Understand they accept the risk of not allowing law firms to turn over every stone in connection with some matters... Evaluate law firm performance fairly and regularly... Reward law firms for achieving success and being efficient... 27

28 Then... Try a few of the ideas... See what works and what doesn t... Try scaling up the concepts that work well... Keep at it... 28

29 The Demise of the Billable Hour? 29