Creating a Value-Based Relationship with Your Outside Counsel

Michael Roster has been a vocal advocate for re-thinking the management and philosophy of running a legal department for many years. He began developing his innovative strategies while serving as a partner at Morrison & Foerster, managing the firm's Los Angeles office and serving on its policy committee.

He was able to put these ideas into practice in 1993 upon being named General Counsel of Stanford University, Stanford Medical Center and Stanford Management Company. Well before the idea was even close to fashionable, Roster moved nearly all of Stanford's outside legal work to a handful of law firms working on fixed price retainers for both counseling and litigation. But more than just an initiating an economic strategy, Roster integrated these attorneys into the fabric of the legal department to create a value-based relationship that incorporated his vision of how to maximize efficiency and function. He supplied Stanford's outside firms with on-site offices so the attorneys could attend the weekly staff meetings. In addition, these attorneys were listed in the telephone directories as though they were formal members of the law department staff. In short, outside counsel were embraced as part of the team instead of keeping them at arm's length.

After leaving that position, Roster served for seven years as Executive Vice President and General Counsel of Golden West Financial Corporation, and is currently a director of MDRC, a New York-based nonprofit corporation that evaluates the effectiveness of government and other nonprofit programs. He also teaches an upper level contracts course at the University of Southern California Law School that aims to elevate students to an associate level in contacts by the end of the course.

For the past four years, Roster has co-chaired the ACC Value Challenge Steering Committee, an initiative designed to re-integrate value into the cost of legal services. Incorporating the same thought process Roster advanced at Stanford, the ACC Value Challenge recognizes and attempts to bridge the disconnect between many law departments and their outside counsel. It is an attempt to create a dialogue that will foster a greater sense of trust and enhance the true value of the relationship between inside and outside counsel.

Roster recently gave the keynote address at the annual Customer Conference for the LexisNexis matter management and e-billing solution, CounselLink, where he discussed meeting the challenges of value-based relationships. While at the conference, I had the opportunity to interview Michael Roster. The following is a Q&A on the subject of creating meaningful value-based relationships with outside counsel.

Q. What do you see as the biggest challenges facing GCs and corporate legal departments today and how has this changed from, say, five years ago?

A. The obvious challenge is to do more with less. Many corporate law departments try to solve the problem by seeking discounts from their firms. That is a very short-term and largely short-sighted solution that will eventually catch up with them. In the long term, the challenge is to re-engineer the entire legal function, which any of us who have done it can tell you isn't easy, but if you survive the transition is well worth it. Five years ago, most companies accepted the concept that legal costs would just keep escalating. That is ancient history and an attitude that probably will not be repeated.

Q. What are the top ways that legal departments are assessing value today?

A. I think most law departments, like most law firms, are still struggling with how to assess value. That's a key reason we set three targets for the ACC Value Challenge, because at the end of the day, all three are easily understandable, are achievable and should be priorities for any entity:

1. Reduce legal costs (that is, both inside and outside combined since just squeezing the law firms isn't a long-term solution) by 25% or some similar number. That can be from a recent base year or, alternatively, from an industry benchmark. And it can be for specific types of matters, whole portfolios (for example, all employment matters) or the company's total legal cost for everything.
2. Provide near certainty (that is, fixed pricing).
3. Significantly improve outcomes (for example, reduce the number of employment disputes by 25%, reduce average cost of settlements or verdicts by some amount, etc.).

Other approaches include budgeting by stages of matters, contingency and incentive fees, caps and collars where both the upside and downside are shared (with the disadvantage that this approach still slavishly relies on billable hours), and fixed prices for specific types or stages of matters.

Q. What are some examples of common inefficiencies in corporate law departments that can make it difficult for them to control spending?

A. I'm going to surprise you with my answer: The biggest inefficiency is to be responsive. As a general counsel, I was startled when one of my CEOs made this point, since most good lawyers like to be responsive to their clients. But my CEO was making a different point: Instead of reacting to whatever legal issues come along, a general counsel, as the senior manager of the legal function, needs to assess why various legal issues arise and then implement ways to reduce them, or when they arise, to anticipate and manage them better.

This also means the in-house lawyers need to stop micromanaging the law firms (in itself a costly and usually minimally productive process), but instead create relationships where the firms are automatically incentivized to deploy expertise rather than hours and to be rewarded for delivering the intended results.

Q. Do you favor or see value in the use of project managers? If so, is this in all cases or primarily larger, more complex matters?

A. I think project management is useful when it has a purpose. Doing it for the sake of doing it is actually counterproductive (and the unfortunate fact is, lawyers love process so may miss this point). Doing project management to help achieve the three targets I've mentioned above, on the other hand, gives it a purpose.

I also think project managers can be very useful, but not necessarily matter-by-matter, although there's a role here, especially for very large matters. Real value comes when project managers work with both in-house and outside counsel to map out what the lawyers are doing and then help develop more effective approaches, track those approaches, identify what is working and identify what can be improved.

Q. What are some of the most effective practices that GCs can or should be using to exert tighter control over their spend on outside legal counsel and to analyze and benchmark their own legal costs and budgets against industry best practices?

A. I'd again refer everyone to the three targets discussed above. Most industries have trade associations that can provide some benchmark numbers. With few exceptions, total legal expenses range between .3% and 1% of a company's annual revenue. Once you know your benchmark number, and after you take into account the company's culture, you have a target to try to undercut.

Q. The notion that hourly billing disincentivizes efficiency and tends to protract matters has given rise to the expanded use of AFAs. In general, do you feel that their use has created actual value for legal departments? How?

A. Talking about alternative fee arrangements is a good starting point, but inevitably, anyone who is serious about making improvements realizes it isn't about how to measure a fee, but rather how to manage resources, which ultimately requires a real partnership between the in-house and law firm attorneys. Virtually every company that has made the breakthrough achieves the same number: they've reduced total legal cost by 25%. It's weird, but that number keeps showing up.

Q. Are there certain AFAs that you feel are more successful across the board?

A. Every matter and every company is different, so there's no one approach that fits all. Personally, I favor giving firms entire portfolios (like all employment matters, all product liability matters, etc., including both counseling and litigation), since that puts the emphasis on results and it has the firms taking responsibility for managing resources and budgets. After the first year, which is always difficult, the results are usually quite extraordinary, and for both sides.

Q. Regardless of the payment method, an effective relationship with outside counsel should ultimately seek to create a value proposition for both parties. How might AFAs be used to foster such a mutual value proposition and properly incentivize both parties?

A. It isn't about writing detailed contracts (our contracts at Stanford were 1-1/2-page business letters) and negotiating fees. It's about managing resources. In other parts of a company, we are regularly on-site with our vendors, we work with them to bring down the cost of production while improving quality, and we are happy if their profitability increases as a result. The lawyers need to stop nickel-and-diming one another and thinking that this is good management. It isn't. That's why I again prefer talking about value-based relationships, not alternative fees. As long as the arrangement achieves the three targets, it's fine that the firms are equally or even more profitable. In fact, that should be a goal.

Q. How and to what extent are GCs and corporate legal departments making better use today of data and technology to manage their portfolio of legal matters, and to collaborate more effectively with outside counsel?

A. Some are spending a lot of money on technology and data, but without a purpose. On the other hand, if they get focused on the three targets, or something similar, they start using technology and data to drive down cost, provide predictability and/or significantly improve outcomes and in ways where the data confirm what is being accomplished.

Q. Can you offer any suggestions of how legal departments can help demonstrate success to the organization as whole? Are there tools that might help promote such a strategy?

A. Again, I need to refer back to the three targets. Management will readily understand the targets and agree they are the right ones. So once the general counsel and others commit to at least one of the targets and eventually all three, they now also can start showing management (whether it's the CEO and CFO at the top, the heads of individual profit centers, or whatever) what the targets are and how far along the legal department is in achieving the targets. This also makes it possible for the internal business clients to be more focused and actually help achieve the targets. In the end, they because much better clients and much better users of legal resources.

Adam J. Schlagman, Esq., is Editor-in-Chief of this newsletter.

Michael Roster has been a vocal advocate for re-thinking the management and philosophy of running a legal department for many years. He began developing his innovative strategies while serving as a partner at Morrison & Foerster, managing the firm's Los Angeles office and serving on its policy committee.

He was able to put these ideas into practice in 1993 upon being named General Counsel of Stanford University, Stanford Medical Center and Stanford Management Company. Well before the idea was even close to fashionable, Roster moved nearly all of Stanford's outside legal work to a handful of law firms working on fixed price retainers for both counseling and litigation. But more than just an initiating an economic strategy, Roster integrated these attorneys into the fabric of the legal department to create a value-based relationship that incorporated his vision of how to maximize efficiency and function. He supplied Stanford's outside firms with on-site offices so the attorneys could attend the weekly staff meetings. In addition, these attorneys were listed in the telephone directories as though they were formal members of the law department staff. In short, outside counsel were embraced as part of the team instead of keeping them at arm's length.

After leaving that position, Roster served for seven years as Executive Vice President and General Counsel of Golden West Financial Corporation, and is currently a director of MDRC, a New York-based nonprofit corporation that evaluates the effectiveness of government and other nonprofit programs. He also teaches an upper level contracts course at the University of Southern California Law School that aims to elevate students to an associate level in contacts by the end of the course.

For the past four years, Roster has co-chaired the ACC Value Challenge Steering Committee, an initiative designed to re-integrate value into the cost of legal services. Incorporating the same thought process Roster advanced at Stanford, the ACC Value Challenge recognizes and attempts to bridge the disconnect between many law departments and their outside counsel. It is an attempt to create a dialogue that will foster a greater sense of trust and enhance the true value of the relationship between inside and outside counsel.

Roster recently gave the keynote address at the annual Customer Conference for the LexisNexis matter management and e-billing solution, CounselLink, where he discussed meeting the challenges of value-based relationships. While at the conference, I had the opportunity to interview Michael Roster. The following is a Q&A on the subject of creating meaningful value-based relationships with outside counsel.

Q. What do you see as the biggest challenges facing GCs and corporate legal departments today and how has this changed from, say, five years ago?

A. The obvious challenge is to do more with less. Many corporate law departments try to solve the problem by seeking discounts from their firms. That is a very short-term and largely short-sighted solution that will eventually catch up with them. In the long term, the challenge is to re-engineer the entire legal function, which any of us who have done it can tell you isn't easy, but if you survive the transition is well worth it. Five years ago, most companies accepted the concept that legal costs would just keep escalating. That is ancient history and an attitude that probably will not be repeated.

Q. What are the top ways that legal departments are assessing value today?

A. I think most law departments, like most law firms, are still struggling with how to assess value. That's a key reason we set three targets for the ACC Value Challenge, because at the end of the day, all three are easily understandable, are achievable and should be priorities for any entity:

1. Reduce legal costs (that is, both inside and outside combined since just squeezing the law firms isn't a long-term solution) by 25% or some similar number. That can be from a recent base year or, alternatively, from an industry benchmark. And it can be for specific types of matters, whole portfolios (for example, all employment matters) or the company's total legal cost for everything.
2. Provide near certainty (that is, fixed pricing).
3. Significantly improve outcomes (for example, reduce the number of employment disputes by 25%, reduce average cost of settlements or verdicts by some amount, etc.).

Other approaches include budgeting by stages of matters, contingency and incentive fees, caps and collars where both the upside and downside are shared (with the disadvantage that this approach still slavishly relies on billable hours), and fixed prices for specific types or stages of matters.

Q. What are some examples of common inefficiencies in corporate law departments that can make it difficult for them to control spending?

A. I'm going to surprise you with my answer: The biggest inefficiency is to be responsive. As a general counsel, I was startled when one of my CEOs made this point, since most good lawyers like to be responsive to their clients. But my CEO was making a different point: Instead of reacting to whatever legal issues come along, a general counsel, as the senior manager of the legal function, needs to assess why various legal issues arise and then implement ways to reduce them, or when they arise, to anticipate and manage them better.

This also means the in-house lawyers need to stop micromanaging the law firms (in itself a costly and usually minimally productive process), but instead create relationships where the firms are automatically incentivized to deploy expertise rather than hours and to be rewarded for delivering the intended results.

Q. Do you favor or see value in the use of project managers? If so, is this in all cases or primarily larger, more complex matters?

A. I think project management is useful when it has a purpose. Doing it for the sake of doing it is actually counterproductive (and the unfortunate fact is, lawyers love process so may miss this point). Doing project management to help achieve the three targets I've mentioned above, on the other hand, gives it a purpose.

I also think project managers can be very useful, but not necessarily matter-by-matter, although there's a role here, especially for very large matters. Real value comes when project managers work with both in-house and outside counsel to map out what the lawyers are doing and then help develop more effective approaches, track those approaches, identify what is working and identify what can be improved.

Q. What are some of the most effective practices that GCs can or should be using to exert tighter control over their spend on outside legal counsel and to analyze and benchmark their own legal costs and budgets against industry best practices?

A. I'd again refer everyone to the three targets discussed above. Most industries have trade associations that can provide some benchmark numbers. With few exceptions, total legal expenses range between .3% and 1% of a company's annual revenue. Once you know your benchmark number, and after you take into account the company's culture, you have a target to try to undercut.

Q. The notion that hourly billing disincentivizes efficiency and tends to protract matters has given rise to the expanded use of AFAs. In general, do you feel that their use has created actual value for legal departments? How?

A. Talking about alternative fee arrangements is a good starting point, but inevitably, anyone who is serious about making improvements realizes it isn't about how to measure a fee, but rather how to manage resources, which ultimately requires a real partnership between the in-house and law firm attorneys. Virtually every company that has made the breakthrough achieves the same number: they've reduced total legal cost by 25%. It's weird, but that number keeps showing up.

Q. Are there certain AFAs that you feel are more successful across the board?

A. Every matter and every company is different, so there's no one approach that fits all. Personally, I favor giving firms entire portfolios (like all employment matters, all product liability matters, etc., including both counseling and litigation), since that puts the emphasis on results and it has the firms taking responsibility for managing resources and budgets. After the first year, which is always difficult, the results are usually quite extraordinary, and for both sides.

Q. Regardless of the payment method, an effective relationship with outside counsel should ultimately seek to create a value proposition for both parties. How might AFAs be used to foster such a mutual value proposition and properly incentivize both parties?

A. It isn't about writing detailed contracts (our contracts at Stanford were 1-1/2-page business letters) and negotiating fees. It's about managing resources. In other parts of a company, we are regularly on-site with our vendors, we work with them to bring down the cost of production while improving quality, and we are happy if their profitability increases as a result. The lawyers need to stop nickel-and-diming one another and thinking that this is good management. It isn't. That's why I again prefer talking about value-based relationships, not alternative fees. As long as the arrangement achieves the three targets, it's fine that the firms are equally or even more profitable. In fact, that should be a goal.

Q. How and to what extent are GCs and corporate legal departments making better use today of data and technology to manage their portfolio of legal matters, and to collaborate more effectively with outside counsel?

A. Some are spending a lot of money on technology and data, but without a purpose. On the other hand, if they get focused on the three targets, or something similar, they start using technology and data to drive down cost, provide predictability and/or significantly improve outcomes and in ways where the data confirm what is being accomplished.

Q. Can you offer any suggestions of how legal departments can help demonstrate success to the organization as whole? Are there tools that might help promote such a strategy?

A. Again, I need to refer back to the three targets. Management will readily understand the targets and agree they are the right ones. So once the general counsel and others commit to at least one of the targets and eventually all three, they now also can start showing management (whether it's the CEO and CFO at the top, the heads of individual profit centers, or whatever) what the targets are and how far along the legal department is in achieving the targets. This also makes it possible for the internal business clients to be more focused and actually help achieve the targets. In the end, they because much better clients and much better users of legal resources.

Adam J. Schlagman, Esq., is Editor-in-Chief of this newsletter.