Retainer Fees for Regional Firms
Author: Richard Stock - CCCA Magazine, Vol 5, No 2 (Summer 2011)
Several weeks ago, a full-service Canadian law firm told me about a multi-year alternative fee arrangement developed by one of its clients. The company was U.S.-based and was expanding its North American program with its litigation counsel. I found many features to be familiar, but there were a number of others which are uncommon. These went a long way in creating the confidence essential for a win-win financial arrangement.
Some Canadian insurers, financial institutions and several levels of government use 50 firms, and a few use in excess of 100 firms. Other organizations like CP Rail, Bombardier, DuPont, Bruce Power and Vancouver Coastal Health rely on only a handful of firms. Admittedly, it is easier to concentrate the work if it is corporate commercial rather than litigation in nature, or if the company’s footprint is regional rather than national or international.
The company had been reducing the number of its litigation firms from more than 120 over a 10-year period. One reason was due to a sustainable reduction in its volume of commercial litigation. Still, it had firms in nearly every state and a number across Canada. The time had come, they reasoned, to “regionalize” its commercial, general liability and employment-related litigation. That meant identifying only 8 firms to serve as regional counsel, giving them the flexibility to retain local counsel should they require assistance.
The company had spent much of the last three years gathering good data about the number and types of cases which had been referred to counsel. That meant details of all legal fees and expenses – expert fees, court reporting fees, mediator fees, travel costs and more. The fees, expenses and indemnity payments were rolled up for each region. The legal fees covered everything that the company had paid to terms, including trials and appeals. Three years of data, thousands of cases divided across eight regions provided a solid information base.
The company invited a number of its local counsel to consider becoming regional counsel. Those which expressed an interest were provided with three years of historical data, the number of pending files, and with the company’s projections for new files for several years forward.
Proposals and Selection
The company was large enough to designate lawyers from its legal department as litigation managers. Workflows and monitoring could then be aligned with the eight regional firms. Assurances were quickly given that the litigation philosophy of caring for customers and of protecting the company’s brand and reputation would continue unchanged.
The firm’s proposal was asked to suggest which local firms, if any, it would normally use to service the portfolios of work within the region. These firms were to be sourced from the company’s roster of local firms.
Law firms were asked to make a proposal in the form of a single fee for a region for a three-year period. The program was designated as “retainer-based” because firms are then told how much revenue they are to receive when the year begins. The figure can be adjusted at the end of the year based on experience, but the rules for this are made clear up front.
Once the work gets underway, regional law firms submit electronic “shadow bills” detailing their hours and expenses for each case. The bills are used for monthly and quarterly audits, but they are not the basis for payment. External counsel guidelines continue to apply. Only the traditional fee arrangements are changed.
Risk Sharing and Efficiency
Two goals of the retainer program were for the company and the firm to share risk, and for the firm to benefit from more business and greater efficiencies. The design of the fee arrangement manages the effects of significant variances in matter billings and volumes by providing relief to the firm and the company. The company proposed three rules as part of a layered approach to sharing risks and rewards.
- if the shadow bills for the year are within 10% of the planned amount, then no money changes hands. A good number of Canadian clients have such retainer arrangements in place
- if the actual number of matters is within 25% of the planned volumes, then the company pays 50% of the fees in excess of the 110% of the planned fees. The shadow bills are used to measure the variances
- if the actual number of matters varies by more than 25% from the planned volume, then the first two rules apply and the fees varying in excess of 25% are paid or rebated at 100% of fee value. Again the shadow bills are used to measure the variances
The company benefits because it deals with fewer firms, it has predictability in budgets, and it achieves savings in its external legal spend. The firms receive a larger volume of work, greater revenue and, under the right conditions, higher profitability.
The layered approach is unusual, but it can be persuasive if the data and conditions are in place. Both law firms and companies should consider this innovation in financial arrangements.