Facing the Alternative: How Does a Flat Fee System Really Work?
Posted Mar 9, 2012 7:50 PM CST
By Rachel M. Zahorsky
While every law firm is culturally unique, often the same fears and concerns—namely diminished profit margins and budget difficulties—plague outside counsel when it comes to changing billing practices. For many, creative fee schemes seem to create more nightmares than profits. But a few outside firms and their business clients have found a way to make it all work. The secret is in trust, sharing and statistics.
In 2004 global industrial conglomerate Tyco International Ltd. issued an open request for proposals for law firms to craft new and different models for its litigation work. Eager to achieve greater predictability of cost and legal spending, the company was also willing, for the first time, to place its entire product liability docket (the company’s largest program) with a single firm, what it calls the convergence model. More than 20 firms responded, some of which had been longtime service providers to the company.
“We went to the convergence model because it [represents] best practices in our view,” says Dennis P. Lynch, vice president and chief litigation counsel at Tyco. “At the same time we were in the process in 2003-2004 of building the law department, so we had limited resources to deal with litigation, among other things. So it was also a practical thing for us to do; the combination of cost savings and more efficiency fit the needs of the corporation.”
“Litigation is very difficult to budget because you don’t know how litigation is going to turn out,” Lynch says. “A case without large exposure could cost you as much as a case with large exposure to risk. There is a lot of unpredictability; you’re really giving as much certainty as you can to a very unpredictable effort.”
Although litigation boutique Shook Hardy & Bacon was familiar with nontraditional fee arrangements—the Kansas City, Mo.-based firm had created an alternative fee program for Ford Motor Co. in the mid-’90s—partner Paul Williams had never represented the security-systems giant nor handled an entire national docket.
Today Shook Hardy is Tyco’s sole legal services provider for product liability, automobile and general liability matters. When local counsel is needed, the law firm determines who to bring on board and manages the entire legal team for each case rather than the company’s legal department.
“I think it has worked well because we’ve truly partnered with them,” Lynch says. “They’ve gotten to know well the players here, the business, products and obviously the law department. And we do work as partners—and that trust, which goes both ways, goes a long way to building a relationship as good as this one is.”
And according to Shook Hardy, more than 30 percent of its revenue comes from alternative fee arrangements now, and that number continues to grow.
The key to Shook Hardy’s successful pitch? Increased collaboration and trust between the firm and its potential client from the initial fee pitch and negotiation process through the close of a matter.
“From an industry standpoint, a lot of outside firms and in-house counsel are exploring alternative fees,” says Williams. “But there is trepidation about how to make it work or take those steps to see how it would apply. A lot of firms are talking, but they don’t know how to do it.”
Click here to read the rest of "Facing the Alternative" from the March issue of the ABA Journal.