Working Effectively with Outside Counsel

1. Working Effectively with Outside Counsel Erik Feig, General Counsel MRIS Steve Bell, CMO, Womble Carlyle John Rider, Director of Practice Mgt., Womble Carlyle Eileen Kett, Sr. VP and General Counsel, Club Med WMACCA Small Law Department Initiative December 5, 2013

2. What’s up at law firms?

3. Things have gotten, ahem, complicated.

4. Cash Accounting • Few hard assets • No cushion • Investments (i.e. change) challenging at best • Revenue declines felt instantly and must be addressed IMMEDIATELY

5. Law firms are horizontal • Multiple owners, each with a “say” • Sometimes resembling “line” businesses, but to an extent resembling co-located individual proprietorships • Complete consensus difficult • Management by dictate untenable

6. Market economics are real • Reduced buyer demand since at least 2008 • Supply increasing every year • New-normal competitors (e.g. LPOs, technology) adding still more pressure and variety on the supply side • New business formats focused on new metrics (e.g. triple bottom line) creating new expectations about sharing and collaboration

7. Buyers of legal services feeling increasingly pressured/empowered • C-Suite resolve • Focus on value • Adaptation of manufacturing quality initiatives • Diversity • Pro Bono • Social responsibility

8. So, law firms talk about • In the context of client delight: • PPP • Maintaining Rates • Cost Control • Leveraging the fixed costs • Revenue • Becoming more businesslike and corporate • Differentiation

9. Outside Lawyers • Devoted to clients • Resistant to change • Justifiably proud • Guardians of professionalism • As a generality, lacking in sophisticated business acumen and entrepreneurialism

10. And by the way • Most IHC were once outside counsel • Not exactly the optimum crucible for creativity, boldness and positive change

11. Examples of law firm adjustments • PPP • Process Management • Project Management • Maintaining Rates • Focus on “client experience” • Focus on relationships • Adding value not billed

12. Examples of law firm adjustments • Cost Control • Paperless • Technology • Staff ratios • Physical space • Out-sourcing, farm-sourcing, all kinds of -sourcing • Leveraging fixed costs • Mergers, roll-ups, vereins • Engagement staffing models, including paraprofessionals, contract lawyers, nonlawyers

13. Examples of law firm adjustments • Revenue • Law-related businesses • Document review • Obscure specialties such as immigration • Ancillary businesses • Building ownership • Economic Development incentives • Management/technology consulting

14. Examples of law firm adjustments • Becoming more businesslike and corporate • Account managers • Pricing specialists • Business service provision • N/C for costs once billed (postage, telephony, etc.) • Strategic communications

15. How law firms are adjusting • Differentiation • Segmentation • Openness • Relationships • Connections to clients (e.g. Sharepoint, OnRamps) • “Best” adherence to IHC/client social values • Flavor of the month

16. Alternative Fees Sharing of Risks/Rewards

17. A few concluding thoughts • IHC have leverage • IHC have not yet learned how to fully apply this leverage • Law firms working hard to fill the gap and have created a number of tools. (Do IHC know about these tools and how to utilize them?) • Law firms acknowledging client rights • IHC have created their own tool kits, e.g. ACC • What other tools are needed? • How can we work together to do so?

18. Working Effectively with Outside CounselA Small Law Department Perspective Eileen Kett, Esq. Senior Vice President, General Counsel Club Med Management Services, Inc. Eileen.kett@clubmed.com

22. Association of Corporate Counsel • 30,000 in-house lawyers from over 10,000 companies (and 75 countries) • Value Challenge launched in September 2008 • Everyone agrees there must be dialogue and change on both sides

23. The Problem In recent ten-year period, costs to U.S. companies went up 20% . . . except legal costs, which went up 75%. Legal expenditures constituted .4% of GDP in 1978 . . . and rose to 1.8% of GDP by 2003.

24. Client satisfaction is declining • Only 31.4% recommend primary law firm (down from 35.9% in 2012, 42.3% in 2011) • Clients give the following reasons(actual quotes): • Secondary law firms now provide substantially better client service than my primary law firm. • Primary firms do exactly what is asked—nothing more. • Primary law firms are married to their own ways of doing things and won’t change. • My law firm used to be much more flexible…. • I am trying to change my approach to managing the legal department; my primary law firm does not seem as excited as I am in getting the changes done. Source: BTI http://www.btibuzz.com/buzz/2013/6/25/after-5-year-upward-march-client-satisfaction-plummets.html

25. In-house counsel say • 82% - Employ AFA’s (94% of firms say they use AFA’s) • 75% - Requested discounts • 71% - Firms aren’t responding to clientbusiness needs • 68% - Shifted to regional and boutique firms • 68% - Requested alternative fee arrangements • 61% - Dissatisfied with outside counsel rates (Fortune 1000 GC’s) • 49% - Shifted law firm work to lower priced firms • 47% - Moved more work in-house • 41% - Using alternative fee arrangements • 36% - Reduced total amount of work sent to outside counsel Sources: Consero Group 2013 Spring GC Survey; 2012 Altman Weil CLO survey and Corporate Counsel reports; December 24, 2012 National Law Journal; 2011 ACC CLO survey; other

26. 3 main objectives for using Alternative Fee Arrangements • Reduce legal costs by 25% • Provide high predictability • Improve outcomes While firms maintain and even enhance profitability….. You’ve got to meet at least one objective to stay in the game. You will need to accomplish all three to win.

27. It hasn’t always been by the hour • Until 30 years ago, legal work was done at fixed prices, contingency fees, long-term retainers and similar arrangements • Firms often functioned as client’s general counsel • Billing legal work solely by hours is a recent invention

28. Hours are inherently contradictory Perform two competing functions: • Monitor production • How many hours needed to perform the work • Goal should be to reduce both the hours needed and the cost of each hour • Generate profits • Firm benefits by increasing hours for a task or matter • Likewise benefits by regularly increasing hourly rates AFA’s bring this longstanding tension to the forefront.

29. Concepts that need to change • “The only thing firms have to sell is hours” • Should be selling expertise and skill instead • Focus on the three Value Challenge targets (reduction in cost, predictability, outcomes) • Stop using shadow hours • Inherently lose-lose • If would have been less with hours, client thinks got bad deal • If would have been more, firm management says AFA’s don’t work • Focus instead on the three Value Challenge targets

30. As a small law department:How do I work more effectively with Outside Counsel and how do AFA’s fit into the picture? • Focus on Adding Value (Huron Chart) • Ensure your legal spend is being used on the right matters • Use AFAs: Start with law firms you have an existing relationship or a defined scope of work. Key Component is TRUST

31. Small Law Department Challenges • Typical Small Law Department Objections: • We don’t have the leverage to influence the law firms • My CFO thinks fixed fees are too expensive • How do I price the work? • How do I know if it was successful?

32. I don’t have any leverage… • First step is to make sure you are using outside counsel for the correct matters. • Work with senior law firm attorneys who have the expertise you need AND a business mindset. • Avoid the TRAPS: • Asking for a discount on hourly billing; or • Requesting the law firm to assign a lower price attorney You will pay for it eventually in your own management time • Bundle work together to make it interesting to the firm • Try a Pilot Program and agree to re-evaluate and adjust periodically during course of the matter

33. Some examples of Value Based Fee Structures

34. Real estate development project for condo-hotel project, including bundle of services such as letter of intent review, drafting of agreements, and filing for regulatory approvals. • Project based pricing set out in phases, including initial phase of LOI and due diligence, governmental approvals, drafting of agreements and title work. • Includes targets for government subsidies and concessions. • Able to shift costs into time frames necessary to meet budgetary constraints.

35. Retained services agreement for general advice and scope of work for geographic area (e.g. Mexico). • Annual fixed fee retainer, payable on a monthly basis. • Client is entitled to certain services (e.g. telephone call advice, corporate filings, simple contract review) each month under the retainer. • Matters that pass a threshold (e.g., labor matters that proceed beyond Labor Board level) get kicked out of the retainer umbrella and are tracked and invoiced separately. • Periodically review new services that are being provided and adjust retainer on an annual basis (e.g. increase in labor costs versus prior year). Lead law firm attorney is part of my “in-house team” and participates in monthly legal meetings with operations, human resources and legal department

36. Immigration services including application and follow-up for visas and permanent residency (green cards) • Simplified flat rate for all major visa categories from initial questionnaire and filing of application (including responses to requests for additional information) and consulate appointments. • Flat rate is charge back to company department as a “cost of hiring” similar to a recruiter’s fee. • Only additional costs billed are the government filing fee. • Also includes limited phone calls for general immigration questions.

37. Remember – there are 3 objectives • Reduce legal costs by 25% • Provide high predictability • Improve outcomes • Focus on adding value – are you allocating internal and external resources correctly? • Strategic and regular use of AFAs You have the leverage – NO excuses – just GO FOR IT.

39. Thank You and Additional Resources • Thank you to: Michael Roster – Co-Chair of the ACC Value Challenge Steering Committee Catherine Moynihan – Director of Legal Management Services at ACC Huron Legal