PAY FOR VALUE, NOT EFFORT: GENERAL COUNSEL MUST TAKE THIS OPPORTUNITY TO MOVE AWAY FROM THE BILLABLE HOUR

 “Crisis is opportunity” is supposedly an ancient Chinese motto.  Regardless of origin, the statement is true: tough times force us to question what we are doing, and to try to do it better.  For general counsel, the current economic crisis has resulted in their companies simply having a lot less money.  This means general counsel feel more pressure than perhaps they ever have before to reduce costs in what many non-lawyers in their companies already consider the “cost center” of a law department.

General counsel have an opportunity in this crisis to work better, a lot better, with outside counsel.  This is the time for general counsel to cultivate more sensible billing arrangements with outside lawyers (specifically, to run away from the near exclusive reliance on the billable hour), to use outside counsel better suited for their company’s litigation matters, and even to turn their law departments from so-called “cost centers” into profit centers for their companies.

The means are simple: in the right cases, especially those where general counsel believe that they are forced to sue – and are not simply responding to a lawsuit – company lawyers should choose lawyers with low out of pocket fees who have billing arrangements which align the interests of the company with those of the lawyer.  The end result is better company-outside counsel relationships, lawyers – including the in-house attorneys – spending their time better, and simply better results.

THAT CURSED BILLABLE HOUR
The billable hour provides the wrong incentives and is horrible for general counsel-outside counsel relationships.  The arrangement encourages effort over value: put in more time (whatever the results) and make more money.  There is no way of escaping this reality, one made worse by the spoken or unspoken minimum billables at many of the big firms with which general counsel generally work.

And outside counsel do not want cases to end if they get paid by the hour.  Even lawyers who genuinely want the best for their clients cannot help but wince when a great “earner” case, the one that has been generating hours month after month, settles.  Great result for the client, perhaps; but bad for the outside lawyers who now need to find other work to generate all those hours, and keep all those associates busy.

More, the billable hour forces in-house lawyers to be auditors, rather than the lawyers they want to be.  General counsel must waste their time reviewing reams of billing sheets, month after month, in an effort to reign in outside counsel.  And this mind-numbing task is followed by difficult calls with outside lawyers, who generally bill their time in good faith, asking for cuts in the hours here or there, or absurd conversations about whether an issue in a brief really merited 18.2 hours of research or 13.2 hours of research.  No one enjoys those calls or e-mails.  And otherwise good lawyer-client relationships can be soured by both sides believing that they are being wronged.

NEW FIRMS ARE OPEN TO NEW ARRANGEMENTS, BUT OLD FIRMS CAN BE, TOO.
Our trials and investigations law firm, which represents plaintiffs and defendants in federal and state court in trial and appellate matters, is relatively new.  Thus, we’re not encumbered by doing things the way they have been done forever.  We rarely charge by the hour and almost always work out other, value centered billing arrangements.

But the old line firms cannot hide behind the excuse that they must use the billable hour because they always have (or, at least, have for so long no one remembers the time when they did not).  And general counsel certainly do not need to accept the “that’s the way we do it” excuse to maintain the billable hour arrangement.

ALIGNING FINANCIAL INTERESTS
This has to stop, and only will once lawyers’ financial interests are tied to clients’ interests.  One simple, if different, solution is a mix of a sensible, and fairly low, monthly fee, which itself gets credited against a conditional fee or success fee.

The success fee should be directly linked to the value obtained by the client.  In a litigation where a client must sue, this can be some kind of percentage of the recovery, if any, and can depend not only on the size of the recovery, but when the recovery is achieved.  In a defense matter, the client and lawyer can agree on the potential exposure and pay the outside lawyer more for a lower settlement – if the client saves money, the lawyer gets paid more, providing proper incentives.  Other benchmarks can be used: win a motion to dismiss, get a success premium.  Settle the case within a specified period of time, get a success premium (and, thus, smile, rather than wince).

General counsel know what is important to them.  They can properly incentivize their outside lawyers, getting those lawyers to focus on specific results, by rewarding those lawyers for obtaining those results, and not for billing 2500 hours a year.

LAWYERS SPENDING THEIR TIME AS LAWYERS FOCUSED ON WINNING
This arrangement is even better for law firm attorneys.  Outside lawyers would be focused on the client’s needs, not racking up hours.  The billable hour forces an outside counsel to think, “How much time do I need to put into this case?”, with “need to” often defined by things like how many associates the lawyer must keep busy, or how many hours the lawyer wants her firm to generate.  No client wants her lawyers to think this way.

But an outside counsel who knows a bigger recovery means a bigger fee, or a quicker result, or victory in a motion results in a success premium, will ask the question every litigator should ask – the ONLY question about a case a litigator should ask – “How do I win?”  Give outside counsel the right incentives, and they will focus on winning – and enjoy it – with in-house counsel defining what winning means.

BETTER RESULTS: COST CENTER INTO PROFIT CENTER
For most companies, winning will not only mean resolving lawsuits against the company as quickly, cheaply, and cleanly as possible, but will also mean knowing when, how, and who to sue.

A general counsel faced with partner hourly rates approaching four digits will find it hard to justify initiating any action, no matter how meritorious it may be, no matter how much money the company may be due.  The in-house saying goes that, “No one was fired for hiring [insert Top Ten Law Firm here].”  True, but Top Ten Law Firm’s partners charge nearly a thousand dollars an hour – even if they win, a company may have spent an enormous amount of money to achieve victory.  And if they lose, well, that aforementioned in-house saying’s accuracy may be tested.

RISK SHARING FEE ARRANGEMENTS ARE PERFECT FOR PLAINTIFF MATTERS
This crisis thus frees in-house lawyers who must initiate lawsuits in particular to hire lawyers who are relatively cheap out of pocket, rewarded for value, and used to representing plaintiffs in the first case.  Top Ten Law Firm generally defends cases, and is not too good at suing (besides being extremely expensive out of pocket).  But plaintiff’s lawyers already are used to asking the question, “How do I win?” and would prove more flexible and amenable to non-hourly billing arrangements.

Our small firm increasingly represents bigger companies in plaintiff’s matters because those companies simply do not want to pay Top Ten Law Firm rates when they must initiate a matter.  Hiring the big name in a case which has press exposure, or which may require the huge resources of the big firm – such as in a securities class action or similar case – may make sense.  But it also makes sense to go beyond the usual suspects of large firms, to more plaintiff focused, trial oriented firms willing to share the risk, when a general counsel must decide whether to sue.

Our new president tells us we’ll be stronger after this crisis, and anyone who cares about the Nation or themselves hopes he is right.  But companies can be stronger, and smarter, in how they do their business, including in how they hire their lawyers, and even when they sue.  General counsel should find the opportunity in this crisis to hire lawyers on a basis where outside counsel share a client’s risks and interests, and do what they are good at doing.

It may take time, but the Nation will hopefully be stronger in a few years. And so will smart companies with smart general counsel.

John G. Balestriere is an attorney at Balestriere Fariello, a trials and investigations law firm which represents business clients in risk sharing litigation.  He can be reached at jbalestriere@balestriere.net.