Lexpert magazine features articles and columns on developments in legal practice management, deals and lawsuits of interest in Canada, the law and business issues of interest to legal professionals and businesses that purchase legal services.
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66 LEXPERT MAGAZINE | MARCH 2017 BY RICHARD STOCK | COLUMNS | Richard Stock, M.A., FCIS, CMC, is a partner with Catalyst Consulting. The firm has consulted to more than 250 law departments over 20 years. Reach him at (416) 367-4447 or at rstock@catalystlegal.com. Fixed Fees and Performance IN WRITING ABOUT fixed fee arrange- ments with law firms, Ben Heineman (In- side Counsel Revolution) suggests that there are trade-offs. Fixed fees "may drive firms to leaner, more productive staffing," Heine- man writes. "e bad news is that, even though they need to produce a good result, firms may cut resources too far and impair quality in order to get a bonus for coming in under the fixed fee." I can understand the concern that a general counsel may have: that she may be getting the B-team, or that the firm may be cutting some corners on resource allocation. It is common enough for com- panies to request budgets and caps for individual matters, or for phases of matters. is should be done as a matter of course for files that are likely to require at least 50 hours of legal work. e budget estimate should detail the num- ber of hours for each fee earner for each phase, and for each task within a phase of a legal matter. Planning should as- sume an 85-per-cent probability rate. All of this makes the firm and the client account- able to each other to define the scope of work, the risks, and the anticipated results. A longer-term commitment to more work from fewer firms, using non-hourly fees, is more complex. Putting more eggs in fewer baskets in order to streamline the supply chain has been a procurement prac- tice for 30 years. However, starting to do this in a way that integrates the company and the law firm in a strategic fashion goes several steps beyond managing a panel of firms and running a request for proposals every three or four years, especially if the fees are non-hourly. I have seen multi-year non-hourly fee ar- rangements succeed, and I have seen them fail for a number of reasons. e perfor- mance of preferred law firms, including those to which a long-term commitment for workflow and work volumes is being made, should be assessed twice a year and when certain milestones are reached for complex matters. ere is something to be said for tying performance to part of the fees, too. Key performance indicators (KPIs) are essential and must be set out clearly. No company wants to waste time evaluating primary firms on overall performance ev- ery six months if part of the hold-back on the fixed fee is invariably released. is type of administrative overhead is resented by corporate counsel, who do not have time to spare. KPIs will be effective if they are designed to improve results, productivity, innova- tion in service delivery, or costs. Behaviours and resource allocation must be influenced by the choice of performance activities to be carried out by the law firm and by the corporate client. It can be tempting for a client that has agreed to a multi-year fixed fee for a vol- ume of regular and complex work with a leading law firm to monitor and manage the relationship informally or on an excep- tion basis. Heineman maintains that cor- porate counsel must be held responsible for the quality and the cost of the legal work of external counsel. Accordingly, inside counsel must create and manage an intelligent performance program for their external counsel. ere are three components for a basic performance program applied to external counsel. e first is a fee arrangement that com- bines a base fee with a fee for performance. is must go beyond a hold-back on a base fee to an arrangement that stimulates productivity, results and innovation in service delivery, beyond what firms typi- cally provide as part of their non- billable time investment for their best clients. e second component of the performance program is the right infrastructure and sufficient time for the law department to collect input from across the company, and then to organize well enough to debrief external counsel in a timely fashion every six months. e third component suggests that you get what you measure and what you pay for. It makes sense for the company to spend money beyond the base fee for performance against targets set out in the KPIs. Too many companies prefer to trade on professional relationships only, rather than set stretch goals and performance targets for preferred external counsel. is traditional modus operandi is too easy, too comfortable, and much less than a compa- ny expects of its own lawyers. Fixed fees for large portfolios of regu- lar and complex work are cost-effective provided they are combined with a robust performance-management program tied to legal fees. Putting more eggs in fewer baskets to streamline the supply chain requires a higher level of oversight LAW DEPARTMENTS 'KEY PERFORMANCE indicators are essential and must be set out clearly. ... KPIs will be effective if they are designed to improve results, productivity, innovation in service delivery, or costs.'