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  The Cost of Choice

Author: Lori D. Brazier and Richard Stock, Lexpert, March 2004, pg. 82

Schedule 1 banks are among Canada’s most diversified and significant users of legal services. They are important clients for many law firms across the country. As part of a comprehensive plan to derive greater value from legal services to the bank and to its clients, TD Bank Financial Group's legal department introduced an innovative combination of policies, working protocols and pricing arrangements. With half of its outside counsel services delivered by firms in the Greater Toronto Area, TD was still using over 800 firms across the country. Highly decentralized organizations like TD, at one time, gave independent business lines the authority to retain counsel.

TD’s number one priority, according to executive vice-president and general counsel Chris Montague, was to maintain or improve the quality of legal services to the bank and its customers. TD wanted to maintain this range of choice for its business units. But it also wanted to better balance the cost-effectiveness of its workflow practices with the business relationships it wanted to protect. The legal department's role in this initiative was to create a shorter list of preferred firms and counsel across Canada, to provide the lines of business with the tools to effectively retain outside counsel, and to assist law firms in managing their relationships with TD.

Early Decisions

The following commitments were made in early 2003:

  • TD decided to reduce the number of firms it retained and favour those who did their banking business with TD, or referred clients, with additional work;

  • interim billing guidelines were issued to primary firms across Canada. One feature in the guidelines was to require the business lines to obtain competitive estimates from law firms for all files where fees were expected to exceed $50,000;

  • the services of a third-party electronic invoicing and analysis clearinghouse (in this case, TyMetrix) were retained; and

  • the 35 Canadian lawyers in TD's 40-lawyer global legal department were aligned with each business line to improve the bank's effectiveness in the use of inside and outside counsel.

Estimating the Demand

Few organizations have accurate financial information about legal fees. Payables systems are not designed to analyze the nature of legal work, the relative use of partners and associates, and expenditures by region and line of business. This is especially difficult for banks to do because more than half of the legal work is paid by third parties and is not processed through the payables function.

TD decided to undertake an extensive consultation with its business units across the country. Members of the law department were also canvassed to work with the business lines and to then estimate volumes (files, hours, fees, deals, etc.) for the current year. A number of projects were then commissioned, which reviewed a cross-section of law firm invoices to learn more about how files tended to be staffed for more than a dozen categories of legal work. By mid-2003, TD was able to estimate the demand and cost of outside counsel for 14 categories of legal work in every region of the country and take into account its list of preferred counsel.

Proposals from Law Firms

Because TD had decided to leave the choice of counsel to its business lines, the legal department worked hard to reduce the list of firms that would be invited to submit proposals for legal services. A succession of conversations between the legal department and the heads of business lines produced the list of preferred firms, with priority given to firms that did business with the bank and firms whose lawyers had strong relationships in place. The business units also wanted the freedom to assign certain files to lawyers they knew had a certain type of expertise. In most cases, it was possible to keep the list to 4 or 5 firms in each area of law and region of the country.

By mid-fall of 2003, TD issued a request for proposals to fewer than 90 firms (down from more than 800), asking them to put forward their best teams and pricing alternatives, reflecting preferred but flexible staffing profiles, and the estimated volumes of work for 2004 to 2006.

Evaluating the Results

Every proposal was evaluated to ensure that it met the qualitative criteria and to calculate the cost of using the firm for each category of law. The business units were consulted again to ensure their firms were putting the right teams forward. They also had a chance to comment on the relative differences in price for each firm. Certain business units were more price sensitive than others, while same favoured other factors in the value proposition.

TD decided that firms with unit prices within 10 % of the lowest price for a given category / region of legal work would be considered within a good economic “ comfort zone ” and that business lines should consider these prices equal for purposes of selecting a firm. Firms with weighted hourly rates beyond the 110 % mark were told of their relative position in the financial evaluation and invited to reconsider their staffing distributions and prices. Some firms elected to make changes and others did not. Almost all were retained as preferred counsel and their teams and target prices were passed on to the business lines.

The Cost of Choice

TD was able to involve its business units and its legal department at four different intervals: to identify the preferred firms, to consider the proposed teams and work distribution, to evaluate the initial pricing for each firm, and to suggest a possible allocation of work between firms. TD secured a commitment from 90 firms for stable teams and target unit costs across a 3-year period. The business units still have a range of choice in the firms they use and billing guidelines and the competitive bidding process are in place. TD Bank Financial Group estimates that it will save more than 20 % on its legal costs across a 3-year period. The combination of measures introduced over a one-year period means that TD’s clients, shareholders, and preferred law firms come out ahead.

Bob Aziz, TD’s senior vice-president and assistant general counsel predicts that “the true measure of success will be the enthusiasm with which all stakeholders undertake a renewal of these arrangements in 3 years."

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