What GC's Really Want

Over the past year, numerous stories in the legal press proclaimed the rise of alternative fee arrangements in the tight economy. But according to James Wilber, a principal in the law department group at Altman Weil, "There has always been a gap between how much people are talking about alternative pricing and how many are actually doing it."

To find out what's really going on, California Lawyer invited four general counsel to speak candidly with Daniel Cooperman, a member of the magazine's editorial advisory board and former general counsel at Apple. Their discussion, condensed on the following pages, is in many ways a reality check against the popular wisdom.

As the moderator, Cooperman asked the participants to share their observations on budget cutbacks for legal services, alternative billing arrangements, outside counsel policies, preferred providers, and staffing of legal matters. The panelists included Laureen Seeger of McKesson and Seth Jaffe of Williams-Sonoma, both based in San Francisco, and Mark LeHocky of Ross Stores and Robert A. Gordon of Safeway, who are both based in Pleasanton. -CS

Moderator: There currently is enormous pressure on in-house counsel to reduce costs. Has there been a change in your thinking about how you handle cases or what matters you are keeping in-house versus sending outside?

Gordon: We feel like we've been under cost pressure in our legal department for years and years. I don't think there's a change in our settlement philosophy or litigation philosophy. Our biggest change is that we have started an in-house litigation capability. We have two litigators at our office who are appearing in court and at depositions, trying cases and so forth.

For transactional matters or otherwise, if we feel like we are capable of handling a particular project, we do it without outside counsel help. We had a situation where we were constantly in touch with regulatory counsel and considered going to a fixed-fee type of arrangement and instead brought that capability in-house. But we are far from the point where we would say a major transaction deal would be done entirely in-house.

LeHocky: For all disputed matters we have a commitment to early engagement with the other side. That doesn't necessarily mean early settlement or writing a noticeable check. We still have outside counsel helping us on almost all litigation matters, but it's at different points in the mix, which produces a lot of efficiencies.

Jaffe: On transactions, we are doing more and more inside. We will use outside lawyers where there's one of two things: A substantive area that requires expertise such as banking or credit cards - the outside counsel may negotiate that part of the transaction while the in - house lawyer manages the whole transaction. The other area is where it's such a large deal that we need the resources of an outside firm.

On litigation, we do smaller claims in-house. We don't have in-house litigators per se, but we manage all litigation in-house, including IP, employment, and commercial issues. When we go outside, it tends to be in small, medium-size, and large firms. Class actions we tend to use larger firms, but typically it's not necessary.

Seeger: Over the past two years, we've significantly increased our internal staff in the litigation and the mergers and acquisitions area. In litigation, we didn't add attorneys to try the cases themselves, but we increased the size of our attorney staff so that we could more closely engage in every dispute. We participate in the decisions about how many depositions are taken, what positions to take, and we closely manage the budget. Also in the litigation area, we added a number of paralegals and have performed more and more of the discovery processes, internal reviews, and collections ourselves, because we identified that as one of the biggest drivers of increasing external litigation fees.

On the mergers and acquisitions fronts, we are now taking our own dealings up to a certain size. Our lawyers, who have so many years of experience at big M&A shops, will handle the negotiation. We only go outside for transactions over $50 million up to a couple billion.

Moderator: Are you changing which law firms you are engaging, for example, shifting to smaller firms that cost less?

Seeger: We have enough data to look at what different firms in different parts of the country charge for similar transactions or similar lawsuits. We do not have a policy of going to a small firm versus a big firm per se, but we have sent more work over the past two years to firms that have provided the best value and results. They may be in different markets than California because their billing rates may be lower for the same attorneys. One of the challenges that lawyers in California have, especially in a metropolitan area, is competing with the cost structure of large firms in Virginia, Georgia, or even Chicago. But we do use several large California firms.

Our law department has one full-time and one part-time financial analyst whose job is to know all the budgets for every matter that will generate fees over $100,000. The vast majority of monthly invoices are in our electronic billing system, and then our finance people do all the accounting work. We've gotten a much better view of whether or not a firm's initial budget is slipping. We have earlier and more direct communication with the external legal counsel, and then either re-baseline the budget or find out what's behind the additional expense.

Moderator: For major projects, do you send out formal RFPs to invite firms with whom you have not had previous relationships to submit a proposal?

Seeger: We absolutely have done that. We have used an informal, matter-specific RFP. When a very significant new matter or transaction comes up, we look at the characteristics of it. We consider our existing outside firms, but we also invite other firms that we have not had a lot of experience with. Through our peers, we know these firms have a special expertise on an issue or a very talented litigator in a particular jurisdiction. We have selected some of those RFP participants.

Moderator: How many law firms have you invited to submit an RFP?

Seeger: Never more than three, typically two. We do not want to necessarily inconvenience too many firms, so we've gone through an internal process to identify who we think are the best lawyers or firms for a particular matter, met with them, and given them time to think through the matter.

Moderator: So of the three firms, one would be one that you haven't worked with before?

Seeger: Correct. Sometimes two.

LeHocky: I was very happy with the results of firms I hired based on a recommendation from another general counsel. I will say, the bigger the matter, the more I would like to start with a firm that I've had an ongoing relationship with, especially a relationship partner that you have confidence in, because it's really potential exposure. But that doesn't rule out looking at new candidates.

Visibility means a lot of different things. It could be adverse press, a damage award, internal consternation. We try to manage all those things. It's more sophisticated attorneys, long-term relationships that we have the highest faith in; people who can help us figure out that it's something big that they need to handle very carefully and apply both efficiency and creativity. Those are the people that you go back to.

Moderator: But if you have a major strategic matter where, for example, you'll be explaining it to the board, there really is something to choosing a name-brand firm that the board would have heard of. You want to have the confidence that this person is presentable to the board.

LeHocky: I've definitely seen that phenomenon play out. I was with a boutique firm before I went into the GC world, and with those kinds of beauty contests, if I didn't get the business, I would often ask for an explanation. Some of them would say, "Here is why: because the other firm said it would be this easy and be this cheap."

Gordon: We've invited firms that we've never worked with to bid on new pieces of business. And we've selected those firms. I don't feel a lot of pressure to make the selection that won't be second-guessed. If I have good reasons for selecting a firm to do the job, I think it's defensible to the board.

Jaffe: Similarly, where we've had new geographies and new subject areas, we've always interviewed three or four firms to try to pick new firms. Sometimes in an area where we've already had litigation, we will go to firms that we haven't worked with before and ask them to make a proposal. We are very open with everybody involved about why we are doing that. As Bob [Gordon] said, if I'm very comfortable with the firm, then our board will be comfortable.

Seeger: We had an RFP for providers several years ago, and that RFP focused on only a few areas: M&A, and intellectual property litigation and prosecution. We selected five or fewer firms to drive the majority of that work to. Over time, matters would come up that for one reason or another-geographic location, the nature of the company we were trying to acquire, the unique specialty of a lawsuit, certain practice areas-was lacking in those firms. So we have the flexibility to go to other firms across the country. Still, at least 60 percent of our spend is with those [original] RFP firms during the relevant period. We never make commitments to give minimal amounts of work to them, but part of the reason why we stayed with them is because we have experienced cost savings from our investment in them.

We constantly reevaluate who we should go to. It's very helpful to spend the time to tell these firms what our rules are and to demand an advocate within the firms. We've experienced efficiencies if we have an advocate - someone who is evaluating who's put on our files, knows our personality, looks at our bills, knows how the work is performed, and complies with our rules. Other firms have to compete with our RFP firms who have a strong relationship and good results. However, every firm has a shot.

Moderator: Did you have a formal assessment of those RFP firms after some period of time?

Seeger: Yes, we evaluated the discount arrangements that were included when we selected them. We considered the diversity of their population and the results of our experience with them. One firm did fall out, and we expanded work with another firm not originally selected because it had handled some litigation matters and we had become very comfortable with that firm's style of practice, which was very complementary to our in-house legal staff. We look at our firms' performance every year.

In litigation, we are now finding partners at different firms who are more efficient than others and still produce the same results, which may not have anything to do with the billable hour rate but more to do with the expertise, the way they handle cases, and their focus to getting a resolution. So we found ourselves driving more litigation work to a group of five to ten firms.

Moderator: Do any of you have alternative fee arrangements, and do they represent a significant portion of your legal spend?

Seeger: Last year, about 10 percent of our legal spend was through alternative fee arrangements, and that was the high point. Last year was an exceptional year where we imposed caps and flat fees for the year even on lawsuits. It is unlikely to increase beyond that percentage, and it could drop down to the national average, which is around 5 percent.

We do have a couple of regulatory-counsel alternative fee arrangements that are flat fee for the year. We have an unlimited number of calls to them. We've also had some alternative fees in the M&A area on larger transactions, where we've had a floor and a cap in order to appropriately budget.

Jaffe: I'd say alternative fees haven't gone much more than 5 to 10 percent. I would like it to increase, but it won't grow unless it absolutely makes sense for our company. The concept is important, but I'm disappointed that the people who should be the experts haven't been more creative in suggesting them. Very frequently, I hear, "Sure, if there's something you have in mind, we'll try it." I told our outside law firm, "You should be thinking about this because this is your business. Bring us your best thinking."

When we have a certain amount of repetitive work, a flat fee for a period can work well for us. In some larger situations - transactions, for example - a cap with a hold-back and a bonus depending on performance is something that we like. We've used it with some success.

LeHocky: About 80 to 90 percent of our engagements are billable-hour arrangements. We are not saying no to considering fixed-fee models further in the future, but most of our efforts in the past three years have focused on what we are getting and what we are spending. We are also looking at speed toward resolution as evidence of value, especially in the litigation area.

Gordon: We are maybe a dinosaur in this area: firm believers in the billable-hour approach. We do have a number of plaintiffs cases on contingency fees, but other than that, we are 100 percent billable hour.

Moderator: How do you find out when a firm is going over budget? Will they proactively come to you and tell you?

Jaffe: Occasionally we will learn about it when we see the bill, which is not the favored way to learn about it. We recently had a discrimination case, and this plaintiffs lawyer announced that she was going to depose 50 to 75 witnesses, including everyone from our CEO on down, and was going to bring every possible motion that she could. We decided to fight the case and bring a motion for summary judgment, which we did and we won. The budget needed to be revised upward because of the plaintiffs' unreasonable tactics. So we will sit down with the law firm and reassess whether or not we want to change our approach.

When a law firm goes way over budget in ways that were controllable, they will either not get any future work or they will not get paid for some of the work that we feel is inappropriate. We have very straightforward discussions about that, and we may take over parts of the matter ourselves.

Gordon: We will question whether the work was necessary, and if not, demand refunds and negotiate with the law firm over the appropriate amount. If there are deviations from the budget that cannot be explained by what's going on in the case, we need to impress the importance of setting a date to talk to the law firm about not charging us.

LeHocky: It's a problem if the outside counsel aren't keeping the in-house attorneys up to date about changes in a case that have a budget implication. I hold outside counsel responsible for letting us know as early as possible why things are going to be different. Those conversations may lead to a change in outside counsel going forward, and lead to a conversation about whether the bill gets paid.

Moderator: Do you have a guideline or a policy for the outside firms with whom you work that they are not to use first-year or second-year associates on your matters?

Gordon: We don't have a hard-and-fast rule that says no first-year associates or no second-year associates. I can imagine cases where they might be the most efficient provider in certain tasks, and we are happy to use them. We expect all our in-house lawyers to be involved in staffing decisions on matters in which they are involved and making sure that they think the outside staff is appropriate for the matter involved. Obviously, we are not interested in paying for peer training, such as taking this associate to the deposition just so the associate can see how you take the deposition.

LeHocky: We don't have a hard-and-fast rule, but my legal staff is expected to be discussing on a per-matter basis who is working on the file and understand why. It's a challenge, coming right out of law school, to fit into the work stream and understand what the client is expecting. Law schools are not particularly good at training people to actually practice law.

Jaffe: We think there's often a role for the junior associate, but we should not be paying for their education. We are very involved with who's staffing our matters, and that's an opportunity to ensure that your matter is being handled most efficiently. We have told them who we think would be most appropriate for a matter.

Seeger: We have a general rule that no summer intern or first-year attorneys can bill time on our files. We communicate that to law firms in advance of retaining them, and then we also like to approve in advance who the timekeepers will be and understand their roles on a matter before they start. If a firm is going to add another timekeeper, we require them to have a discussion with us about why.

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