1. Welcome Association of Corporate Counsel – Louisiana Chapter February 26, 2010 | Baton Rouge, Louisiana | CLE Program LOUISIANA CHAPTER

2. Build a Better Mousetrap Creative and Alternative Fee Structures Writing and Soliciting RFPs for Legal Services

3. Introduction Dan Schwarzenbach

4. Traditional Models

5.  Traditional Hourly Rates  Tiered Volume Discounts  Blended Hourly Rates

6. Traditional Hourly Rates  Based on the costs of providing an hour of legal services  Generally determined by the classification (i.e. attorney; paralegal, etc.) and years of experience  Overhead is another factor  Often the perception is that there is no incentive to work efficiently  More hours worked produces greater revenue for the firm

7. Tiered Volume Discounts  Annual agreement based on the volume of business  Percentage discount increases as volume of work increases  Peaks out at some maximum percentage of discount

8. Blended Hourly Rates  Can be applied to timekeeper classifications and/or timekeeper years of experience  Classifications  Partners; non-partner attorneys; non-attorneys  All attorneys; non-attorneys  All timekeepers  Years of experience  More than 25  15 to 24  5 to 14  Less than 5  Non-attorneys

9. Partnering Model  Is your law firm at risk by putting some “skin” in the game?

10. Partnering Agreement  A three year agreement providing:  Predictability of annual legal expenditures  Pre-determined allocation of work by appropriate levels of experience  Discounts based on quantity of work and certainty of cash flows  “Cuff and collar” to limit both parties absolute exposure  Overage/underage rolled into future periods  Staffing allocations can differ by practice area

11. Partnering Agreement  Predictability - levels the monthly payment to an agreed upon amount based on estimated needs of the client  Allocation of work – assures the proper level of experience for each task based upon a pre-determined model for each practice area  Discounts – provides discounts from the first hour worked based on client’s estimate of work needed

12. Partnering Agreement  “Cuff and collar” – limits the exposure of both parties by establishing upper and lower boundaries should actual work be substantially different from estimated work  Overage/underage – allows the flexibility of spreading variances between actual and estimated to the next year  Staffing allocations – considers experience requirements based on each particular practice area

13. Partnering Agreement  Other benefits and advantages  Provides one blended billing rate for all work based on the agreed upon staffing models and appropriate discounts  Sets billing rates for a three year period avoiding the need to address rates each year  Places the responsibility for engaging and paying outside counsel on the law firm partner

14. Typical Legal Fee Annual Spread

15. Partnering Model Annual Spread Level Billing Predictability Flexibility

16. Partnering Model Cuff and Collar 5% “Cuff” 5% “Collar”

17. Cuff and Collar Over/Under 8%? Firm issues client a 3% rebate, or rolls difference into next year calculation. Client issues firm a 3% payment, or rolls difference into next year calculation, divide by 12 and pays the 3% over time. 8%?

18. Excess Fees Roll into Next Year of Agreement Divide by 12, budget for and pay in 2011 Unanticipated Events?

19. Alternative Pricing Models

20. Alternative Pricing Sellers’ market vs. buyers’ market  2010 and beyond will be a buyers’ market for legal services Use of fixed or project pricing is commonplace in Europe and Asia Most industries undergo pricing evolution motivated by a downturn in the economy

21. Alternative Pricing Clients think:  Means to lower total fee spend Law Firms think:  Potential for a premium The Challenge  Balancing both interests/needs

22. Alternative Pricing Client Concerns Addressed by Alternative or Creative Pricing  Lack of predictability  Perceived value Too often the client views the results received as a poor value, especially in view of rapidly increasing hourly billing rates. What is critically important to the client?  Widening gap between rates charged and the client’s perception of value received  Value assessments, performance evaluations, service agreements, etc.  Overall price  Surprise Factor In-house compensation tied to outside counsel budgets?

23. Alternative Pricing Categories  Hourly rates With or without discounts  Hourly rates Premium based on results  Project or Fixed Fee Pricing  Full Contingent Pricing

24. Alternative Pricing

25. Alternative Pricing / Common Practice Hourly rates  With or without discounts Variations  Fee Caps  Unitary or Blended Rates  Volume Threshold Discounts  Staffing restriction

26. Alternative Pricing These four are not new, nor are they real alternatives. They are the dominant, short-term pricing trends, driven by the buyers’ market. The challenge is, they don’t address the driving priorities of most clients, and they aren’t balancing law firm/client interest.

27. Alternative Pricing Hourly rates  With discount or premium based on results Variations  Busted deal rates / success fee  Ad hoc discounts / premiums  Criterion Bonus  Non Criterion Bonus

28. Alternative Pricing Project or Fixed Fee Pricing Variations  Menu pricing Consumer pricing / wills, divorces  Project pricing  Retainers  Portfolio pricing Commit in advance to do a stream of work for a set period of time

29. Alternative Pricing Full Contingent Pricing Variations  Percentage of result  Percentage of deal

30. Which Systems Show the Most Growth? Hourly rates with non-criterion bonuses Payment of a bonus, and the amount, is entirely at the discretion and satisfaction of the client Tends to work only with entrepreneurial clients Long term growth potential, but with highly limited application Menu pricing (consumer level: divorce, wills, estate closing) Preset price for each piece of work Increasing use, but primarily at consumer level of profession Advantage is that it provides predictability and allows for shopping services by clients, but works best for commodity services

31. Which Systems Show the Most Growth Project Pricing  Fixed price is developed for a project, after investigation by firm and discussion with client Doesn’t work well on small projects that can’t justify investigation time  Provides predictability, allows client to shop, provides premiums by law firm (if managed well) Critical elements  Case assumptions  Change orders

32. Which Systems Show the Most Growth Portfolio pricing  Similar to project pricing  Spans multiple legal matters over a period of time for a set price  Again, case assumptions and change orders are critical to success

33. Which Systems Are Preferred? No single system is right for everyone Fixed or project pricing is the system most clients are expressing the most long term interest  This is the system which most companies buys goods and services  Provides price, value, and predictability  Only works if we acknowledge there are some elements we can’t control (plaintiffs’ counsel for example) and those elements may change price

34. Trends and Examples

35. Realign relationship between in-house and outside counsel Billable hour still reigns supreme Altman Weil  1-10% of revenue for 1000 law firms surveyed came from alternative fees Legalbill Co.  Less than 2% of matters worldwide

36. FMC 8 in-house lawyers $4.6 billion in revenue Outsource most legal work Use performance-based pay 20% of every invoice is “at risk” Firms get paid between zero and 200% of the at-risk amount  Dependent on performance  Standard multipliers are adjusted for performance against budget “I don’t buy hours. I buy results.”  Jeffrey Carr, General Counsel ACES Litigation Model

37. Client must define the success criteria  If success is achieved, a bonus is paid to the firm Client and firm develop a case/matter budget Activities in the matter are grouped into four to five major activity categories corresponding to the UTBMS codes for litigation For each activity a “target budget” is developed Normally, the target for the initial case assessment is $15K and for appeal is $0 The aggregate of the activity targets is the total matter target

38. ACES Litigation Model Within each activity grouping, the firm bills the client at its normal hourly rates (subject to the client’s billing policies and procedures) Until the target is reached for any particular activity group, the client pays the firm a percentage (normally 80%) of the billed fees The unpaid fees (normally 20%) are placed in a success “bucket” If success is reached, a bonus is paid. The bonus consists of the amount in the bucket plus a multiplier The amount of the multiplier depends upon the point in time when success is achieved and normally is 100% (early stages before substantial expenses incurred), 75% (pleadings), 50% (discovery), or 25% (trial & appeal) This declining multiplier has the effect of paying higher effective hourly rates for early success and lower rates as a matter drags on before resolution

39. ACES Litigation Model A second level bonus is paid by adding 1% to the bucket multiplier for each 1% of total matter target saving In other words, if the firm had expended only 40% of the total matter target, there would be an additional 60 percentage points added to the applicable bonus multiplier. Conversely, if the total matter target is exceeded, this becomes a point-for- point penalty, reducing the bucket multiplier by 1% for each percentage point of total matter excess A third level bonus/penalty may be used to reflect the deviation from the expected value of the case (based on a mutually agreed decision tree) for any settlement or judgment Budget targets are flexible and will be revised to reflect unanticipated events; however, the firm must identify its baseline assumptions and these must be agreed in advance

40. Cisco All firms know Cisco Systems works on a fixed-fee basis  Monthly flat fees for bundles of matters  Incentive-based fees Company pays extra for successful results  National Firms working with Cisco Morgan Lewis Fenwick & West Baker Botts Weil Gotshal  On why he switched to flat fees: “I’d be trying to create efficiencies and limit the scope of the work being done while law firms would be totally committed to success on the legal merits without giving any thought to my costs.” Mark Chandler, General Counsel, Cisco

41. Clorox and Pfizer Bid out entire portfolios of work  Major M&A deals Flat fee to Morrison & Foerster to represent Clorox in its $913 million buyout of Burt’s Bees  Labor and Employment Pre-set fixed monthly fee to Jackson & Lewis to handle all of Pfizer’s labor and employment work

42. Bartlitt Beck Clients pay the firm a pre-set flat monthly fee  Hold back 20-40% If the case goes south, client keeps the holdback If there is a successful result, the firm gets a bonus up to 5X – or more – of the holdback

43. Trends and Examples A top 15, New York based, international law firm will generate almost half its revenue this year from alternative pricing  Primarily fixed price work, spanning litigation and transactional At least 10 of the Top 20 firms in the US have advanced programs underway Commonplace among London firms

44. Trends and Examples “Never has so little been accomplished by so many for so long.” Winston Churchill

45. Challenges Alternative arrangements only work if law firms become more efficient at handling matters and clients offer some upside potential Law firms who want to partner with clients need to take on some of the price risk In-house counsel and outside lawyers must monitor matters closely  Use “shadow billing” by tracking timekeeper hours on matters subject to alternative arrangements Share information Permits the firm to compare actual time with the amount it’s charging

46. Challenges “Alternative fees arrangements take a lot more engagement than many in-house counsel like..”  Jeffrey Carr, General Counsel, FMC “Potential clients are generally very receptive to the idea, but they don’t always accept it…”  Jeffrey Healy, Partner, Tucker Ellis “One of the challenges is showing people how to do it…”  Frederick Krebs, President, Association of Corporate Counsel

47. Networking Luncheon