Just over five years ago, TL1, the internal legal department of Toyota Motor North America (TMNA), began its march toward value with outside counsel convergence. Through RFPs and interviews, the department created its TL1 Partnering Program with about 60 firms. Next came e-billing, as the department strove to streamline, improve efficiency, and manage costs. Once equipped with the resulting, valuable pool of data generated by several years of e-billing, TL1 partnered with the Counsel Management Group (CMG) to take its pursuit of value to the next level.
“We have always been committed to delivering the highest quality legal services to our internal clients,” says Ellen Farrell, vice president and deputy general counsel. “We wanted to do a better job of managing legal fees while still meeting our quality goals.”
Using Toyota’s formal continuous improvement process PDCA (Plan, Do, Check, Act), the team devised the necessary steps to enhance its new partnering program with the application of value-based fees.
Recognizing that a common obstacle in implementing value-based fees is a lack of reliable data on the cost of legal work, TL1 partnered with CMG to analyze historical invoice data and build cost models showing how much different phases and components of work should cost, from the client’s perspective. Examples include cost per expert, per fact deposition, and per dispositive motion across various types of matters.
“The theme was already on the legal team’s mind: to leverage data to supplement their in-house experience and judgement,” says Frederick Paulmann, principal of the Counsel Management Group. “The key is to make this exercise powerful for outside counsel too. It must be viable for them, and they can use the shared information and comparative data.”
The goal was to go beyond hours times rates to forecast the expected “all-in” costs for key items of work such as depositions, expert workups, and significant motions. This information, along with TL1’s assessment of the value of these units of work within the matter, help inform the fee structure.
“Toyota are experts at process management and engineering,” Paulmann says. “This approach was a great match with the way the business runs.”
Vague scope assumptions are another obstacle to value-based fees, with clients and firms often unsure about how changes in matters should affect fee structures. The team began to track scope assumptions more effectively to move away from using hours as the prime measure and improved their ability to analyze key scope assumptions at the beginning of the budget year. This information helps articulate baseline assumptions and quantify the impact of material changes in scope proactively rather than reactively.
“This step enables us to have realistic conversations with firms, which are used to budget on a matter basis, about what can happen. Scope is especially challenging to define in alternative fee arrangements, but these expectations and goals help us focus on what needs to happen,” says Farrell.
By tracking the progress of scope assumptions on a quarterly basis, TL1 can better identify scope changes that may have a material impact on the fee structure. At year end, the fee structure can be adjusted where there was a material change in scope. This was intentional from the beginning, says Farrell, who notes, “It’s challenging to deal with variation among matters and between years, but frequent revisiting is not a fixed fee; it’s an estimate.”
Traditional budget estimates can sometimes be very law firm-centric, Paulmann adds, but notes, “It’s not a win to come in way under budget.” The team’s goal is to have scope and cost materialize to within 10 percent of initial assumptions, resulting in no change in fee structure. This has brought not only improved budget predictability but average savings of 17 percent per year.
For other in-house departments contemplating similar initiatives, Farrell advises a commitment to data and rigor as prerequisites, as well as a culture that features an appetite for change. She acknowledges that the project was an investment of time and effort but emphasizes that the gains in years two and three have returned that investment multiple times over.
“It’s a great illustration of the definition of value. It’s not just about savings on legal fees,” says Paulmann. “TL1 can track and demonstrate return on investment to the TMNA Finance department. This project captures the changes going on in the legal industry and represents the next generation of thought on legal value.”
“The progress we’ve made on value-based fees demonstrates how organizations can leverage data to help improve results for their clients and strengthen relationships with their partner firms. It’s a win-win situation, and I’m so thankful to our legal department and partners for their effort and commitment to challenge what’s possible,” concludes Sandra Phillips Rogers, general counsel, chief legal officer, and chief diversity officer of TMNA.