Top-Down Focus and Training Leads to Eye-Popping 70 Percent of Spend on Value-Based Fees
United Technologies’ path to alternative fees began in 1999 with the initiation of the UTC Outside Counsel Management Program. Featuring engagement guidelines, matter management, spending analysis and an approved network of law firms, the program has enabled UTC to transition away from the billable hour for more than 70 percent of its external spend.
“Buying legal services based on an hourly rate rewards inefficient law firms; the price for any particular task shouldn't increase simply because it took longer to perform the task. True value is performing the same service at a lower price, more efficiently, without sacrificing necessary quality or accepting increased risk,” says Charles D. Gill, senior vice president and general counsel.
Kimberly Townsan, senior manager of legal administration, was brought in to assist in implementing UTC’s new counsel management program.
“We have taken a real building-block approach of continuous improvement and evaluation,” she says, noting that refinements have been made in three key phases:
Engagement guidelines became standards that emphasized value billing and included a chart of alternatives. They were initially distributed to 800 to 900 firms; “There was some pushback,” Townsan says.
Next came convergence: a concerted effort to reduce firm count. “Even as our revenues more than doubled, we were able to cut our firm count in half,” she notes. “While we have grown through acquisitions, we didn’t let the number of firms increase.” Rather, UTC implemented a process for reviewing requirements to leverage existing preferred and recommended firms within the network.
Third was the adoption of new key metrics, which included reporting AFAs at the business unit level, individual attorney level and firm level. “This was more of a challenge with our activity outside the United States, but we’ve definitely achieved momentum there,” Townsan says.
To educate firms and expand use of value-based fee arrangements, Associate General Counsel Paul Beach conducted training sessions in the United States, Europe, and Asia. Providing the “UTC Alternative Fee Toolkit,” he highlighted examples of successful arrangements and recognized attorneys and firms who had implemented them. The training sessions communicated these key principles:
- Quality comes first, commensurate with risk.
- Early case assessment is crucial.
- Play fair and respect relationships.
- Bonus opportunities reflect risk.
- It’s OK for firms to make more profit as long as UTC achieves lower costs.
Since 2011, business unit attorneys have collaborated with Steven Greenspan, Associate General Counsel Litigation, on strategy for all significant litigation. His experience as a partner in a major law firm has enabled rigorous evaluation to determine appropriate firm selection and fee arrangements. UTC also worked with matter management vendor LT Online to incorporate specifications into the Lawtrac application that facilitate the tracking of alternative fee statistics at the firm level.
In 2012, UTC’s billing standards announced to outside firms that the percentage of their billings under value-based fee arrangements would be a major consideration in granting rate increases. “If at least 60 percent of their billings, on a dollar basis, were under AFAs, we would grant reasonable rate increases,” says Townsan. If not, increases would be limited to the wage inflation rate of the firm’s jurisdiction.
“If firms can’t meet the requirements, they are evaluated for removal from the network,” Townsan continues. “It really emphasizes the importance of value-based billing to UTC. We must have a commitment from external counsel that they are willing to invest in this relationship. In return, we make a commitment to them that they will get the work.”
The benefits of value-based fees are not only hard dollars, she emphasizes. UTC Legal has found that AFAs provide sustainability (the effect of personnel changes is minimized) and internal time savings—reduced non-value time spent on invoice reviews, budget reconciliations and discussion of invoices.
With UTC’s robust attorney rotation program, use of AFAs ensures that the project plan and agreed upon costs are memorialized in the event there is a change of personnel, either on the firm side or within the UTC matter team.
AFAs also provide
administrative efficiencies. “In one area, we had over 2,800 invoices from a single firm on an annual basis. Now that’s down to 800,” Townsan says.
Budgets are more predictable, too, as over 70 percent of UTC’s outside counsel spend in 2011 and 2012 was under alternative arrangements.
“There is risk, but firms have the opportunity to improve their margins. AFAs drive efficient project management on a matter,” Townsan says. “It’s also really important how matters are structured. It’s never our intent for a firm to lose big or win big.”
New attorneys who come to work at UTC receive training on the Outside Counsel Management Program as part of their onboarding experience. It’s likely that they also learn of Gill’s quote from UTC’s 2005 meeting of their worldwide attorneys:
“Billable hours are the last resort.”