How the business of law is affecting the businesses of lawyers

In the US there has been an insourcing trend since 2008, perhaps as a function of the financial crisis. Back then, 66 percent of the total corporate legal spend was directed to external lawyers. By 2014, that figure had fallen to 60 percent, representing a reduction of a whopping $1 billion in external legal fees.

This being the state of the legal sector, it is little wonder that one of the most popular sessions at this year’s Legal Marketing Association conference was a facilitated panel discussion with three general counsel, each of whom had been chosen to represent a small, medium or large-size in-house team:

• 3M (large, with an in-house team of around 100 lawyers)
• CareFusion (medium, with 40 lawyers) and
• Petco (considered small, with just 10).

The three panel members spoke candidly about the challenges faced by general counsel, convergence in the sector, and the need to achieve more with less. Excerpts of remarks made during this session by 3M’s Managing Counsel, Joe Otterstetter follow.

How does 3M think about resourcing and staffing its legal department?

We’re in the process of shifting cost from the outside in. We’ve gone from two-thirds outsourced to two-thirds insourced. Our budgets have held flat and with constant pressure on costs we have to figure out ways to do more with less. I saw some research recently which indicated the average cost for a large department in-house legal team is US$211 per hour. I can’t get a paralegal for that at one of the large law firms. We’ve moved work inside that we can do at a lower cost and more efficiently than outside counsel. 

What is the driver for insourcing at 3M?

We try to run our law department as a business. We look at the work and ask ourselves does it need to be done inside and if so is it best done by a paralegal, by an associate, by a colleague overseas, by a technical solution or process improvement? When we do settle on doing something internally we start the process of figuring out if we have enough core demand there to justify a permanent resource.

In 2014, 3M conducted an intensive tender process. How did you manage that process and what was the outcome?

Convergence, like insourcing, is nothing new – Dupont started the ball rolling in 1992. Last year 50 percent of US legal departments used 10 firms or fewer for 80 percent of their legal spend. 3M had 165 firms providing litigation and M&A services. We set about the consolidation process to save costs by switching to “value firms”, but also to build our relationships and shore up resources where we were thin inside. We divided our work up into seven portfolios and ultimately sent out about 300 (in hindsight, probably too many) RFPs. 

Some firms were invited to tender for just one portfolio; others for multiple. There’s a lot to be said for brevity in RFPs so we pared ours way back. The process was two-part and in my view the real value was in the interviews because during those we got a pretty strong indicator of each firm’s appetite to partner with us.

We made the decision to go slow to go fast. By that I mean we invested a lot of time at the front end – looking at the data, slicing it up, getting the perspective of the ACC (Association of Corporate Counsel), and of around 10 law firms and 20 companies. If anything, we were over-inclusive. We put each of 3M’s practice group leaders in charge of the selection. My rule was to select at least 25 percent non-incumbents and include at least two “value-firms”. I’m not going to tell you how we define a “value firm” but let’s just say it probably doesn’t have a Manhattan address. One of our first principles is we wanted to add firms that share our values including to pro bono and diversity.

We would up with 39 firms across the seven areas and last year 95 percent of new matters went to one of our new panel firms. We’re really benefiting from having fewer firms – communication is way better, the firms are investing more in the relationship, and we’re keeping the work ‘in the family’.

What observations can you make about value-based fees?

Larger companies are twice as inclined to use value-based fees but there’s a high level of variability with regard to value-based fee agreements. 

In 2014, about 11 percent of our matters and 7 percent of our overall billings used Conditional Fee Arrangements (CFAs). Today, more than 50 percent of 3M’s matters are on non-time billing arrangements.

Value-based fees (I reject the term alternative fee arrangements) make a lot of sense for 3M. I’m a firm believer if you provide incentives for success you have more success, as opposed to buying hours or activities. I get that there’s a comfort and safety in hourly billing but moving to non-hourly billing has made our reduced panel of firms feel more like part of the team and less like a vendor. When I’m working with a law firm on a success fee or phased fee I love that I don’t have to get into the nitty gritty of their staffing decisions. It takes a lot of the tension out of the relationship and aligns us well.

We typically look at the matter and talk at the very front end about the business decision and our objective, be it certainty of outcome, timely resolution, getting the deal done. Outside law firms are trained to do everything perfectly but sometimes good is good enough and sometimes it’s what the client wants.

Value-based fee arrangements are about paying fair value for services rendered, not about squeezing every dollar. What I like about flat value-based fees is they drive efficiency. They prompt firms to consider how they can do the work to our quality standard but at less cost. We also give success bonuses and impose “bust up” penalties. We sometimes have incentives based on milestones - get us a summary judgment and we’ll double the fee! Our attitude is if you can deliver the results sooner we’re happy to write bonus cheques.

How do you measure your external legal firms?

We’re still evolving our feedback process. Where we need to get better is in specific engagement feedback – end of matter assessments. I want to instill a discipline in our team so we pause with our firms and reflect on how we did, what we could do better. Right now we use a standardised form which goes out twice per year and which records the number of matters, receptivity to CFAs, the value-adds that have been delivered, their pro bono record, the diversity of the team assigned to our matters and so on.

This article was first published in Lawyers Weekly, April 2015.