PowerPoint Presentation

Value BasedFee Structures1Introduction2[Presenter introduction]Format: Interactive

3Fitting image colleagues sitting around a table working through different approaches. Please share your ideas and perspectives.Business CaseDefiningScoping AssessingImplementingManagingEvaluating

Overview4Why Even Focus on This?

As busy as everyone is as much work as we all have to do it is worth asking, Why even focus on value-based fee structures?

Why is this worth our time?

So lets gather some information on this. What are you hearing about value-based fee structures? Conversations from the client side? From the law firm side?

[Goal: get the audience participating and invested right from the outset. Track the comments and perspectives on a large easel pad and return to these points periodically throughout the presentation.]

5Survey corporate counsels single largest unmet need is better value from law firms

Survey 54% of CEOs/CFOs are very highly or highly interested in reducing these costsClient PerspectivesThere is growing client demand for better ways to engage. [Cite data points above.]

Whether you view this as a carrot (i.e. opportunity) or a stick (i.e. mandate) depends on your perspective.

Sources / citations: Benchmarking In-House Counsel Management Practices, 2008 BTI Consulting Group, page 55 (re single largest unmet need).

The New Model for Law Firm Performance Management, Research Initiative Summary, Corporate Executive Board / General Counsel Roundtable 2007, page 9 (re CEO / CFO concerns).6Quantifying the Problem

Source: Corporate Executive Board, 2009.The rise in legal costs has far exceeded the rise in overall costs. This is creating pressure within corporate legal departments.

General counsel and chief legal officers are looking for solutions to help better manage costs. Increasingly, they are required to show progress on this front.7The Result: Higher Use of Value-Based Fee Structures

Source: The Legal Intelligencer, July 02, 2009.More companies are using value based fee structures (VBF).

Slide tracks the responses when Legal Departments were asked do you spend more than 10% of your outside counsel budget via non-hourly fee structures.

In 2008, 27% of Legal Departments responded yes. But in 2009, 43% responded yes more than 10% of our outside counsel budget consists of non-hourly fee structures. This is a large growth rate in the span of one year, and the 2010 figure is likely to increase.

Granted, 10% of budget on alternative fees is not a large threshold. But the data point shows both growth (more companies using VBF), and incremental approaches (try VBF on a portion of the docket and see where it goes from there).

8The Result: More VBF Dollars

Source: The Wall Street Journal, August 24, 2009, p.A1.Also, more dollars are spent via value-based terms, as opposed to the hourly rate.

Talk with several in-house lawyers and youll likely get a sense that these changes are here to stay. 9Reduce inefficiencies (savings from 15-30%)Increase productivityImprove the way legal services are deliveredFocus on results to better align incentivesThe Business Case for VB FeesThe benefits to be achieved are real, and many clients cite these as driving forces behind the demand for value based fees.

But it goes beyond just the dollars. Its about better management of costly resources in a world of increasing competition and shrinking margins.

This is especially true in companies where other divisions have increased productivity via innovative use of technology, knowledge sharing and similar management tools all to improve the companys bottom line.

The refrain that legal is different is increasingly falling upon deaf ears.

10Begin with the end in mind.

-Stephen Covey11So where do we want to take this discussion today?

Begin with the end in mind applies to our focus here. This session is all about the real-world application of effective concepts and tools. Session will be successful if you are able to go back to your office and effectively implement to deliver better results.

We will focus on a step-by-step approach to effectively implement value-based terms.

Please ask questions and share perspectives along the way.

What is the client buying?

What should it cost?

Core QuestionsBegin with the end in mind also applies to the underlying VBB analysis. These are the 2 fundamental questions to keep in mind

What is the client buying? Not in the aggregate, like litigation services but what specific components or deliverables go into the overall engagement.

What should it cost? Not based on gut feel, but rather on a reasoned assessment of the value of each component or deliverable. Well look at valuing pieces of work in light of the economic value they generate, and alternatively in light of the cost of comparable services.

12Overview: Value-Based FrameworkThis is the road map. These are the steps.

Across these categories there are aspects of legal analysis, financial forecasting, project management and good old fashioned communication.

There are a lot of moving parts, but the good new is that its all manageable when taken step-by-step in an organized way.

Defining . . . value from the clients perspectiveScoping . . . the work to identify the various componentsAssessing . . . the various fee structure options to pick the best one(s)Implementing . . . terms so we can successfully executeManaging . . . the work (substance and process ) to ensure successEvaluating . . . our results to improve in the future and harvest data

13Value-Based FrameworkThe first step is defining value. What is important to the clients business, and what does success look like in the context of this matter?14Defining Value

The measuring tape is a good image here.

Defining value means drilling more deeply to establish a measurable benchmark of performance, either for the matter as a whole or for discrete pieces of it.

It means putting a stake in the ground to say this is what we are striving for, and if we achieve it or better, then we will have succeeded in delivering value.

The fundamental shift away from how many hours will it take to what is the value to be delivered.15What does it mean to achieve greater value?

How will we measure that?

Defining ValueThink about how you would answer these questions in the context of your own specific matters?

How can you build this analysis into your planning at the outset of a new matter?

Lets dive into the measuring value part.16According to outcomes achieved

According to the cost of comparable services

Measuring Value: ApproachesHere are two possible approaches.17Is it reasonable to expect a particular outcome with respect to the matter(s)?

Is the desired outcome measurable in terms of dollars or timing?

Value Via Outcomes AchievedExamples of expected outcomes: Complaint dismissed, infringing product removed from the market, deal closed.

Examples of outcomes measurable in terms of dollars or timing: Litigation settled for less than x, Recoveries obtained in excess of y, Deal closed within z months

18Should a portion of outside counsels compensation depend on the result?

Should the definition of success be more comprehensive to cover legal fees as well?Value Via Outcomes AchievedShould outside counsel fees depend, in part, on result? For example portion of fees set aside or held back, paid if a certain outcome is achieved. Can be subject to a multiplier for different degrees of success.

Should definition of success be more comprehensive to cover fees as well. E.g. Net liabilities, plus fees, should not exceed Y?

Should we measure outcome objectively via results, subjectively via client evaluation, or hybrid of both? See FMC Technologies ACES approach for an illustration.

Timing is key. If there is not enough information in hand to do this now what additional info in needed, how do we get it, and when do we revisit? (Many companies use Early Case Assessment (ECA) to produce this information.)

19Resource: Outcome-Based Tree

Can use this resource as a guide when analyzing role of outcome-based fee terms. Contained in the ACC Primer.20According to outcomes achieved

According to the cost of comparable services

Measuring Value: ApproachesA real estate analogy is helpful here. If were planning to buy a new house, we can value it by looking at the cost of comparable houses. Rarely is there an exact comparison, but we still arrive at a helpful range by adding or discounting for the particular differences.

21Outcomes aside, can we define value per the cost of comparable services?

Value Via Cost of ComparablesIn our world, the question is can we value a piece of legal work by looking at the cost of comparable services from similarly qualified firms?

22Key questions

What items are we buying or producing?

How do we segment the work to enable apples-to-apples comparisons?

E.g. Portfolio(s)? Matter(s)? Component(s)?

Value Via Cost of ComparablesDo we have enough data, and is the matter sufficiently predictable, to focus on the cost of the entire matter? (e.g., Pay x to handle single plaintiff employment discrimination case from beginning to end, through trial.)

Alternatively, would it be better to price distinct components or stages of work? How do we break it up? Examples:Pay X for a law firm to draft and argue a summary judgment motion; Pay Y per deposition taken; and, In the transactions context, pay Z to produce an initial draft of a license agreement.

Can we analyze the structure and cost of a portfolio of similar cases? Is there a large enough number of cases, with sufficiently similarity and predictability year-over-year so as to bundle them?

Well get into some more examples in a bit. But thinking along these lines shows the importance of the next phase of the analysis scoping out the work into its component parts, so we can better identify comparables from a valuation standpoint.

23Value-Based FrameworkScoping out the work is not a new concept. We all likely do it to a degree.

The shift here is beyond a gut feeling that the budget or work plan looks right, to a more exact level of detail enabling sound project management within a legal matter.

This may represent more administrative effort than some of us are accustomed to or comfortable with, but the two concepts are inextricably linked. You cannot achieve effective value-based fee structures without effective project management.

If you dont know the various components of what you are buying, how do you know how much they should cost as a finished product?

24Scoping

The image fits see yourself as the architect of the work, and how it will be produced.25What are we buying?

How do we segment?

Then, who is best suited to produce?Legal department?Law firm?Vendor?Scoping: GenerallyThe first two questions are the precursors to answer before addressing the question who is best suited to produce?

Make buy decision. Decide what is best done internally and externally. Some clients dont have certain operational resources (e.g. to fully manage e-discovery) so they outsource that to law firm. This might be the right decision, but you only know after analyzing.

Concept of unbundling. De-construct an aggregate bundle of work, focusing on component tasks and costs, can help identify opportunities to assign matters more effectively either to: (1) other lower cost firms or vendors who would deliver the requisite quality, or (2) to the same firm or vendor that is performing most of the aggregate work, but at a more effective price points for the less specialized components. Yes, this analysis requires increased administrative efforts and coordination, but net savings are worth it.

26Existing information from prior matters

Other sources (ACC, other in-house contacts)

Existing law firm information

Scoping: Sources of InfoDepending on how your department functions, you can gather this scoping information by: speaking with your colleagues who have worked on these matters, or diving into summary documents that were used to manage those matters. Examples of summary documents include status reports, budget templates, forecast updates, staffing plans, and project management documents.

If you use electronic matter management and e-billing systems, those are good sources to check as well, depending on how effectively they are used in tracking key components of matter activity.

Regarding law firm input From a clients perspective, effective scoping and cost conversations with law firms often occur when multiple firms are involved before the assigning decision is made. In this context, there is greater validation of the assumptions and price points.

27Scope and complexity of the work

Type of resources composition of team

Timing, duration & sequence of steps

Price you paid in the pastScoping: Reference Points Keep an eye out for tasks that are marginal and which may not add sufficient value so as to justify doing.

28Scoping: Categories

As we scope out the work, what baskets or buckets of components do we identify?29Depending on similarity and predictability, categories of legal work include

Portfolio of similar matters (e.g. employment discrimination cases)

A single, distinct matter (e.g. M&A transaction)

Components within a matter (e.g. SJ motion)Scoping: CategoriesIdentifying the categories help then segment the work most effectively. Assembling this information over time will enable greater assessment of cost structures for each component. 30Resource: Value/Scoping Checklist

The scoping process asks what needs to be done and what is the most effective way to perform the work and thus begins to outline a plan for effective execution.

The attached resource, from the ACC Primer, can help drive the conversation between client and firm.31Value-Based FrameworkAssessing is the next step. It looks at the various options in terms of fee structures, then selects the option(s) that best fit the particular matter.

This is a highly customized analysis. In-house lawyer contributions here are critical. 32Assessing: Generally

Good image weigh the options and pick the best fit, keeping in mind both substantive legal success and financial value.33Who should perform the work?Focus on quality and costWho are the right service providers?What is the role of competition? (RFPs? Bids?)

On what terms?How will outcomes factor into the equation?What fee structure?

Assessing: GenerallyFirst, it is important to consider not just quality but cost. How do you assess cost? It is not just about rates thats only half of the equation. Rather, you assess law firm cost via: comparative all-in fee constructs, willingness to put skin in the game, and via track record on prior flat fees for you or for other clients. If you simply send a new matter to a firm and dont thoroughly assess comparative budget or cost info up front, there should be little surprise if costs are not ultimately well managed.

Second, consider who the right service providers are to handle the matter (or components of it). You may want multiple law firms or vendors in the mix. As clients increasingly unbundle work, the market is seeing extensive experience across the spectrum of providers, including bringing certain pieces of the work in-house, and stretching overseas for the right types of projects.34Fixed fee per deliverable or matterCapped feeFlat fee per periodPortfolio fixed feePer capita fee / Ad Agency Model

Performance-based hold backContingency (partial or full)Assessing: Fee Structures(Walk through each of the options, focusing in details set forth in the Matrix [next slide], contained in the ACC Primer. The audience can follow along with that document as a hand-out.)

35Resource: Decision Tree re Terms

Another helpful resource from the ACC Primer to walk you through key analytical steps.36Resource: Matrix of Options

(Contained in the ACC Primer. Consider passing this out as a hand-out so the audience can follow along in detail.)37Value-Based FrameworkImplementing is the next phase what do we need to put in place to make these fee terms work?38Implementing: Generally

Good image what must be done before we flick the switch on execution?39Four key items:

Implementing: GenerallyThere are 4 key items to address in implementing effectively: (1) Terms, (2) Reports / Tracking, (3) Frequency of Updates, and (4) Provision for changed assumptions.

Lets discuss these in more detail.40Pricing: Fixed, flat, hourly, combination?

Payment: When, how much?

Outcome portion: Held by client? Accrued?

Look-back: Shadow invoices? Assumptions?

Structure: Firm manages others? Vendors?

Implementing: TermsWhat terms?Pricing. Is it all value-based fee structures or a hybrid approach retaining some hourly rate billing?Payment. How should payment be phased for value-based fee structures? It is equally apportioned across a certain number of periods, or does payment flow depending upon the completion of the underlying projects? Outcomes. What happens to the outcome-driven portion? (Set aside by client? Paid, but credited back by the law firm if necessary?) Look-back. Is there a look back provision using shadow invoices to compare flat fee amounts to what would have been paid under an hourly rate approach? If so, what rates should be used standard sticker price rates or discounted rates?Structure. Is one outside firm responsible for managing the expenditures of another to make it all come in on budget?

41Staffing plan: Who? How many? Right mix?

Project plan: Defined roles? Optimal fit?

Budget & forecast: How much in total? How much for components? When?

Frequency of Updates? What is optimal?Implementing: Reports & Tracking Staffing Plan. Who will be working on this matter? Is it the right mix of seniority and resources, with limited turnover? Project plan what will they be doing, and when?Budget and forecast how much will it cost (piecemeal and total) and how updates flow regarding progress vs. budget (covering both dollars and activity assumptions)?

Deciding frequency. The frequency of updates should vary depending upon what is being tracked, and how important is the need for sufficient time to course correct. Examples: monthly for items like progress vs. budget on key matters; quarterly for items like progress vs. budget on routine matters, and yearly for items like formal outside counsel performance reviews.Periodic updates. Must also plan periodic updates on: substantive legal issues, activity assumptions, project plan, staffing plan, and financial forecast.

Also consider: what is the role of technology and matter management systems in monitoring progress on these fronts?

42What provision for changed assumptions?

Is there role for shadow invoices tracking hours worked?Implementing: AssumptionsWhat provision for changed assumptions?What is the definition of material change in assumptions requiring revisions to budget (up or down)?Is there a formula for revising the budget?Who is involved in that discussion and how will decisions be made? 43Value-Based FrameworkManaging is the next step how to ensure that things progress well.44Managing

Image fits lots of communication and collaboration to ensure successful management.

Executing against the plan? (budgets, timing, outcomes)

How strong is the quality of the work produced? Changes if necessary45Corollary to implementing

Seeks to ensure quality execution of plan

Formal or informal tracking? Scorecards?

Managing: GenerallyThe more formal your approach the more you use templates and scorecards the better chance of harvesting helpful information for assigning, scoping and pricing future matters.46Are we effectively executing against the plan? How strong is the quality of the work produced?

How strong is the process of producing the work?

Managing: Core ChecklistIf were not on track why? What changes do we need to make?

This can mean changing the way work is done (to be more effective), changing the timing of tasks (to stay on schedule or budget), or changing the scope of the project plan (to better reflect changed assumptions around matter activity). Can also mean changing staffing mix.

47How strong are the information tracking and communication processes?

How are things faring according to both quantitative and qualitative measures?

Managing: Core ChecklistHow strong are the information tracking and communication processes? Are periodic updates provided in timely fashion, with the right level of detail? Are unanticipated developments communicated effectively so as to avoid unnecessary big surprises?

How are things faring according to both quantitative measures (wins / losses, timely completion of work and deliverables, on budget) and quantitative measures (client satisfaction, responsiveness, creativity etc.)?

48Value-Based FrameworkEvaluating is the last step asking how well did we do, and how can we make it better next time?49Evaluating

Checklist is a good image for evaluating how did we perform against our goals?

50How well did we do?

Where did we succeed most strongly?

How can performance be improved next time?

Evaluating: GenerallyThese are the key questions to ask in evaluating.

The more time we invest here, the greater the future returns. Also lead to better client / firm relationships.51What do the clients think (business people and business unit counsel)?

How did the fixed fee work? Was the firm any less responsive because of it?

What per unit data points might be helpful for next time?

Evaluating: ChecklistImportant not just to ask the questions but to ask them of all the various stakeholders (like front line attorneys, more senior supervisory attorneys, and project managers / finance types.)52How well did inside counsel manage performance and partner with outside counsel?

What suggestions do outside counsel have for improvements in the future?

Did we get good value for the price we paid? If not, what can we do?

Evaluating: ChecklistAlso valuable to ask questions about the performance of the in-house team. This show that the client is serious about continuous improvement across the board and is committed to being held to the same standards.53Evaluation data, well preserved, can help drive better decisions on future matters.

Evaluating: Future UseThis is part of sound Knowledge Management. How can we take information and learning and make them broadly accessible in the future to drive better decisions and improve performance.

On this front, consider strengthening your internal management efforts with helpful resources like the ACC Value Index (www.acc.com/valueindex), and After Action Reviews (www.acc.com/legalresources/resource.cfm?show=40522)

54Thank You55Appendix:Value & Scoping Questions56Defining ValueWhat are the desired results? What is a reasonable definition of success on this matter, based on what is currently known? Are there dollar ranges, timeframes or other measureable outcomes associated our definition of success? If not, what information is needed in order to arrive at a more specific, measurable definition of success? When would we be in a better position to assess?

Value & Scoping Questions57Defining Value (Continued)Are there matter milestones during which we should re-group and consider any adjustments to the definition of success? Which milestones? What would the law firm suggest in terms of mechanisms or fee structures to tie a portion of compensation to outcomes delivered on this matter?Value & Scoping Questions58Defining Value (Continued)

What experience does the firm have with type of fee structures suggested? Which service providers in their firms are most expert at delivering services within those structured fee relationships?

Would other firm client(s) be willing to speak with us about their experience with the firms value-based fee structures?Value & Scoping Questions59Scoping Questions

What service items are we buying in connection with this matter?

What are the component projects or deliverables?

What is the timing? When do these need to be done?

By what type of resource? Value & Scoping Questions60Scoping Questions (Continued)

What interdependencies?

Who would be managing all of this?

What vendors and additional resources are required? Can they be deployed in this project to save money, time, improve results, create new capacities? Value & Scoping Questions61Scoping Questions (Continued)

How about local counsel or boutique counsel who can take on defined slices of the work more efficiently?

How about external experts or other service providers?

What are the lines of communication and how are they maintained? Value & Scoping Questions62Scoping More Detailed:

In order for us to achieve our goal(s), what work is required over the next 12 months?

List the assumptions around drivers. E.g., How many witnesses to be interviewed? What parameters of due diligence?

Value & Scoping Questions63Scoping More Detailed (Continued):

Duration and cost of various phases?

Likelihood that B will follow after A? Where are you more confident and less confident in the assumptions?

Value & Scoping Questions64Scoping More Detailed (Continued):

What contingency plan if one aspect heats up? (Mandatory vs. discretionary work)

What project management approach? Lets see the sample reports and tracking documents.

Value & Scoping Questions65Metrics and Improvement

What metrics should we use to measure success?

How should we gather metrics data and build it into the process?

How can we bake improvement processes into the relationship?Value & Scoping Questions66Appendix:Value-Based Fee Matrix67Fixed Fee per DeliverableDescriptionExampleIdeally Suited ForAffixes an all in price for a distinct piece of work, encompassing all of the law firms ancillary preparation and effort.Pay X for a law firm to draft and argue a summary judgment motion; Pay Y per deposition taken; and, In the transactions context, pay Z to produce an initial draft of a license agreement.Situations in which certain component pieces of work are distinct and measurable such that client and law firm can agree upon a workable fee schedule, even if the number of units of work may vary going forward.68Capped FeeDescriptionExampleIdeally Suited ForCommonly used to set a ceiling on what the client will pay the law firm in a particular matter, or for a particular piece of work. Resembles a fixed fee, but with certain drawbacks (discussed in the Assessing section below.)Legal fees for this matter, in this calendar year, not to exceed X. Fees for drafting and arguing this appeal not to exceed Y.Fees to handle this transaction not to exceed Z. Situations in which the client is most comfortable with the hourly rate billing model and favors greater predictability (by capping fees on the high end) as opposed to lowering fees (by sharing with the law firm a portion of savings generated under fixed fees).69Flat Fee per PeriodDescriptionExampleIdeally Suited ForTypically covers distinct categories of services during the course of a specified period.Monthly flat fee to cover advice and counsel requestsAll-in per diem fee for trialMonthly flat fee for administrative management during certain phases of litigation.Quarterly flat fee for handling all IP litigation of a certain typeQuarterly flat fee for handling a certain volume of commercial agreements.Situations in which distinct pieces of work need to be performed on a recurring basis, and the client wants to create an economic incentive for the law firm to staff and perform the work more efficiently (i.e. reducing its own cost to increase its margin).70Portfolio Fixed FeeDescriptionExampleIdeally Suited ForRepresents a broader application of the fixed fee approach by assigning a large portfolio of work to a single firm for a fixed fee, usually after a competitive bidding process. Duration can vary, but generally a multi-year term (2 or 3-years) is common; payment schedule may be monthly, quarterly or on another set period.All employment litigation for a fee of X, All product liability litigation of a certain type for a fee of Y, All transactions of a certain type for a fee of Z,All securities portfolio filings for a fee of XX.Situations in which a group of matters is sufficiently similar, recurring and predictable so as to lend itself to relatively consistent year-over-year patterns in terms of activity and fees.71Per Capita Ad Agency ModelDescriptionExampleIdeally Suited ForFixes a set price to purchase on a discounted basis the full-time or half-time services of a certain person or team, who then produces the work required.For the coming year, pay X to purchase 50% of the billable hours for attorneys 1, 2, and 3 to work exclusively on this clients identified matters.Situations in which a client wants particular outside attorney(s) to be available and the law firm is willing to provide a discount in exchange for the certainty of revenue in advance and the volume of work is sufficiently predictable so as to keep these folks busy.72Success FeesDescriptionExampleIdeally Suited ForAlign interests by tying a portion of law firm compensation to outcomes achieved. (Can be used in conjunction with any of the value-based fee options described above).Percentage (e.g., 20% or some other number) of fees billed will be set aside by client and paid to the law firm subject to a multiplier (e.g. 0, 1, 2) depending upon the extent of success Without a holdback, opportunity for bonus based on results achieved and value deliveredSituations in which the client is able to define success (entirely or in part) according to objectively measurable markers that the law firm can help attain via strong performance.73ContingencyDescriptionExampleIdeally Suited ForLaw firm compensation depends entirely upon achieving certain outcomes. Law firm fee is equivalent to X% of the clients recoveries in a particular matter. Reverse contingency can also apply where, e.g. defense law firm gets paid only if it wins a dismissal or jury verdict.Situations in which client seeks recovery and/or is cash-strapped and is therefore willing to forego a larger portion of its upside stake in exchange for protection on the downside (i.e. pay large fee for a win and no fee for a loss). This is higher risk and higher reward for the law firm.74HybridDescriptionExampleIdeally Suited ForCombination of one or more of the above approaches on a given matter or for a portfolioFlat fee for handling litigation plus per diem for trial and success bonus for outcomeSituations where client and firm wish to be flexible to address various touch points differently and reward results.75