Fixed Fees and Performance
Author: Richard Stock - Lexpert, March 2017 at pg 66
Putting more eggs in fewer baskets to streamline the supply chain requires a higher level of oversight.
IN WRITING ABOUT fixed fee arrangements with law firms, Ben Heineman (Inside Counsel Revolution) suggests that there are trade-offs. Fixed fees “may drive firms to leaner, more productive staffing,” Heineman writes.
“The bad news is that, even though they need to produce a good result, firms may cut resources too far and impair quality in order to get a bonus for coming in under the fixed fee.” I can understand the concern that a general counsel may have: that she may be getting the B-team or that the firm may be cutting some corners on resource allocation.
It is common enough for companies to request budgets and caps for individual matters, or for phases of matters. This should be done as a matter of course for all files that are likely to require at least 50 hours of legal work. The budget estimate should detail the number of hours for each fee earner for each phase, and for each task within a phase of a legal matter. Planning should assume an 85-per-cent probability rate. All of this makes the firm and the client accountable to each other to define the scope of work, the risks, and the anticipated results.
A longer-term commitment to more work from fewer firms, using non-hourly fees, is more complex. Putting more eggs in fewer baskets in order to streamline the supply chain has been a procurement practice for 30 years. However, starting to do this in a way that integrates the company and the law firm in a strategic fashion goes several steps beyond managing a panel of firms and running a request for proposals every three or four years, especially if the fees are non-hourly.
I have seen of multi-year non-hourly fee arrangements succeed and I have seen them fail for a number of reasons. The performance of preferred law firms, including those to which a long-term commitment fore workflow and work volumes is being made, should be assessed twice a year and when certain milestones are reached for complex matters. There is something to be said for tying performance to part of the fees, too.
Key performance indicators (KPIs) are essential and must be set out clearly. No company wants to waste time evaluating primary firms on overall performance every six months if part of the hold-back on the fixed fee is invariably released. This type of administrative overhead is resented by corporate counsel that have no time to spare.
KPIs will be effective if they are designed to improve results, productivity, innovation in service delivery, or costs. Behaviours and resource allocation must be influenced by the choice of performance activities to be carried out by the law firm and by the corporate client.
It can be tempting for a client that has agreed to a multi-year fixed fee for a volume of regular and complex work with a leading law firm to monitor and manage the relationship informally or on an exception basis. Heineman maintains that corporate counsel must be held responsible for the quality and the cost of the legal work of external counsel. Accordingly, inside counsel must create and manage an intelligent performance program for external counsel.
There are three components for a basic performance program applied to external counsel.
The first is a fee arrangement which combines a base fee with a fee for performance. This must go beyond a hold-back on a base fee to an arrangement that stimulates productivity, results and innovation in service delivery, beyond what firms typically provide as part of their non-billable time investment for their best clients.
The second component of the performance program is the right infrastructure and sufficient time for the law department to collect input from across the company, and then to organize well enough to debrief external counsel in a timely fashion every six months.
The third component suggests that you get what you measure and what you pay for. It makes sense for the company to spend money beyond the base fee for performance against targets set out in the KPIs. Too many companies prefer to trade on professional relationships only, rather than set stretch goals and performance targets for preferred external counsel. This traditional modus operandi is too easy, too comfortable and much less than a company expect of its own lawyers.
Fixed fees for large portfolios of regular and complex work are cost-effective provided they are combined with a robust performance management program tied to legal fees.