What is the Future of Price: Defining Value in Value Billing [live COLPM post, part 1]
This is a live post from the College of Law Practice Management Futures Conference. This session is What is the Future of Price: Defining Value in Value Billing.
[As with all my live posts I try to capture the highlights of what panelists discuss and report accurately. Any of my own editorial comments appear in square brackets preceded by my initials, RF.]
The Moderator: Ronald Staudt, IIT Chicago-Kent College of Law
The Panelists: Toby Brown, Vinson & Elkins; Lisa Damon, Seyfarth Shaw LLP; Paul Lippe, Legal OnRamp; Mark Ohringer, Jones Lang LaSalle Americas, Inc.; and Ellen Rosenthal, Pfizer
Ellen Rosenthal, Pfizer on An Overview of the Pfizer Legal Alliance
Gets a lot of questions from law firms about how to value work. She did not have a good answer for how to set the price for a large chunk of work on an annual basis. There are no good metrics. Law firms measure on an hourly basis; Pfizer measures based on value received. The two are not speaking the same language.
Pfizer forbids its lawyers from talking about hours with the engagement partners. Wants to move away from lawyers. But the 500 lawyers of Pfizer push back a lot. They need to think a new way about value, outcomes, and deliverables. Coming up with a language to discuss pricing or value is very challenging.
The premise is that the billable hour is dead. About 70% of its global legal work is non-hourly billing. Pushing to put all of the legal work in the Pfizer Legal Alliance (PLA). The PLA consists of 17 firms; there has not been any turnover. Pfizer views this as a real alliance and collaboration. Pfizer believes that long-term, committed relationships will produce better value. The PLA law firms are integrated with the businesses and each other. The firms really work with each other. They do not hoard work because with a fixed annual fee set at outset of year, there is no incentive to hoard.
Pfizer is heavily invested in training the lawyers in the Alliance. Within Pfizer, three senior lawyers are on a governance board (“Steering Committee”) with the Alliance’s Roundtable governance group.
The core value of the PLA is mutual value. Cynically, one could say Pfizer is asking for a discount. But real view is for changed economics and search for non-economic benefits. Thinks mutuality is a key idea of value.
The PLA value proposition:
- Cross-firm collaboration and information sharing and predicable income flow
- Access to learning about Pfizer
- Regular meetings between Pfizer and each PLA firm
- Knowledge sharing platform
- Annual meetings and firm visits
Law firm lawyers enjoy practicing more because they work collaboratively internally, with other firms, and with Pfizer. Pfizer sets a fixed fee a the beginning of the calendar year, payable monthly, irrespective of the level of work. Firms have predictable cash flow; moreover, they have no incentive to say they can do something well just to get the business. Alliance firms get to hear from CEO and other very senior Pfizer managers. There is a secondment program for law firm associates; there is also an associate roundtable (cross firm).
Pfizer sets the price in December. Discussions start soon to discus scope of work in 2012. 70% of scope is known; 30% not known. Staudt asks “how do you discuss scope without raising hours?” Rosenthal: we just don’t talk about hours. Also, we do not discuss specific matters in detail – we address the entire portfolio. But this is the challenge: if we say we are paying a firm $20 million, how much work is this.
Lippe points out that part of value is that it’s better to prevent a problem than fix it. That should drive some of the discussion. Rosenthal sees this more as a tactic than a principle. Pfizer experiments each year with how to refine the value and fees. Trying to focus on risks, level of complexity. Risk has multiple aspects (e.g., reputation, financial). [RF: I wonder if Pfizer or law firms run Monte Carlo simulations to assess potential outcomes in a large portfolio of work.] Pfizer asks, retropsectively, where firms spent most of the resources and then compare that to the value provided. What is the value to effort ratio? Is this at right level and, if not, how should it be adjusted? These are open questions that Pfizer is working on.
There is no true-up at end of year. Bonuses are for collaborative behavior and extraordinary outcomes, NOT for doing more or less work than expected.
Mark Ohringer, Jones Lang LaSalle Americas, Inc.
Company is one of the two largest providers of commercial real estate services such as managing or investing property. CBRE is the main competitor. Jones Lang invented the idea of outsourcing real estate management.
Mark is very frustrated with law firms. Has not found any strategy that is effective to manage and work with law firms. His strategy is to try to minimize work sent outside because fees are “sky high”. It got better for “about five minutes” during the Great Recession. Law firms are like private schools and hospitals – always going up.
Whenever Mark has a lot of repetitive work, e.g., contracts, he will hire a lawyer. His cost of getting a happy, experienced lawyer is about $125/hour. So once he has a full load of work, he hires someone inside. No firm can compete with his inhouse price. Manages 2 billion square feet of space. That means a lot of slip and fall cases in offices and retail space. Has completely outsourced all of this work to insurance companies. So the insurers deal with law firms.
Mark calls his department competition to law firms. Has hired 60 lawyers to work on revenue generating contracts. He cannot pass this cost through to customers (unlike banks). Does as much as possible to keep litigation from going to court. Wants to keep contentious matters out of law firms hands. If it becomes clear that a dispute is well-grounded, company will investigate. If something really went wrong, write a check to fix is better than litigating. Same with HR / employee matters.
So what’s left for law firms is hard to predict work such as M&A. Acquisitions can be global and flow unpredictable plus require specialized expertise such as ERISA and antitrust. For this limited scope of work Mark sends outside, he is willing to pay hourly. But he has people on staff who watch law firms like a hawk. Restrict outside counsel to where expertise is really hard – then watch carefully.
Cannot find way to motivate law firms to get to quick resolution of matters. They have no financial incentive to do this.
Mark recognize he is just one voice. Not claiming this view is a universal gospel. About 3/4 of money on law is NOT for outside counsel. For work that does not yet justify hiring a full-time lawyer, Mark works with Axiom. Legal OnRamp is working with company to automate forms. All this to keep work away from law firms.
Now, so little goes to firms that Mark is reasonably satisfied – as long as he carefully manages and gets just the senior partner and not all the minions.
“Completely flummoxed” with how to deal with law firms.
So the principle here: inhouse law department is the competition for law firms.
Paul Lippe, Legal OnRamp
Key value principles:
1. Always listen to client
2. Consider cost of doing work internally as alternative
3. Always easier to improve value than talk about it
4. Need alignment: common platforms, common incentives
Does a 2×2 grid.
1. Lawyers are actually smarter and act like they think they are smarter: this is status quo
2. Lawyers are actually smarter but act like clients are smarter: out compete other firms
3. Lawyers are not as smart as clients but act like they are: smarter bankruptcy [cites Kodak]
3. Lawyers are not as smart as clients and act like clients are smarter: dramatic success with clients
Lisa Damon, Seyfarth Shaw LLP;
Key value principles:
1. What’s best for the client is best for the law firm. This may mean bills are lower. Just listen to clients and follow-up.
2. Focus on relationships. When you do value right, relationships are different. Go from vendor to business partner quickly. Lawyers are much more satisfied
3. Clear and flexible approach to measuring success. Lawyers resist establishing success criteria. Start with a clear definition with client of success. OK to change this as long as you discuss with client.
Toby Brown, Vinson & Elkins
Key value principles:
1. Reiterate relationship, do what’s best for client
2. Understand the client’s goal
3. Define scope: is it a single matter, a portfolio? What does client expect?
4. Understand the fee goal
5. Price with fees, not rates. Assess fair market value (FMV) of services, not number of hours. But recognizes FMV may be hard to establish. But FMV of rate has not bearing on FMV of fee.
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