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Johnson Controls GC: AFAs Are Overrated

May 29, 2015, 4:37 PM

It’s no secret that corporate clients aren’t big fans of the billable hour. On the surface, lawyers are simply paid for their time, like many other professionals, but in practice the billable hour system can create incentives for law firms to as inefficiently as the client will tolerate.

Large companies used to delivering goods and services for a set price often have the same question: Why can’t firms be more like corporations?

One obvious and increasingly popular answer has been to fix, or at least limit, a law firm’s bill for a particular matter in an alternative fee arrangement. According to Altman Weil’s 2014 Chief Legal Officer Survey , almost 60 per cent of corporate legal departments used AFAs last year to control costs.

Brian Cadwallader, Vice President, Secretary, and General Counsel at Johnson Controls , believes the billable hour puts firms fundamentally at odds with clients, but he doesn’t think alternative fee arrangements are a true fix, either.

[caption id="attachment_2415" align="alignleft” width="243"][Image “Photo of Brian Cadawallader” (src=https://bol.bna.com/wp-content/uploads/2015/05/Brian-Cadwallader-_high-res_1.jpg)]Photo of Brian Cadawallader[/caption]

“Very often there are kickers in the arrangements, whether it be success fees or discounts for certain items, and there is almost always a debate about whether they apply or not,” Cadwallader said. “It’s hard to say you really save money.”

In Part II of a three-part series, Cadwallader spoke to Big Law Business about why, exactly, law firms are so tied to the billable hour, his antipathy for AFAs, and the ways technology has changed the Johnson Controls legal department. Read Part I here .

Part II Excerpts:

I do think as long as the billable hour is king at a law firm, firms will end up being at odds with in-house legal departments. It’s just an inherent conflict.

It’s amazing how often you get a budget from a law firm and they have no intention of being held to that budget. You get halfway through the case and they’ve already spent the entire budget.

[Firms] always have excuses, and some are valid, but on the other hand, if this is their 35th employment class action in the last 5 years, for example, you’d think they might know roughly how to quote it. But they never seem to know how, and they want us to bear the risk.

To the extent they allow the firm to stay in control of the file or the matter where they are the senior partner, [alternative fee arrangements] never work that well, or at least not as well as advertised.

I don’t mind spending the money, even if it’s a 750 dollar an hour rate for that advice. But I don’t want everything else that comes with it. I want to continue to control the file. That’s the only way, in the end, to really wrest control of the fees from outside counsel.

Below is an edited transcript of the second installment of our three-part series with Cadwallader.

Big Law Business: In addition to cost advantage, another advantage of in-house lawyers is their knowledge of the business. General counsel frequently complain to us that lawyers don’t understand the business context in which legal decisions are made. Is that a complaint you have? What are some practical solutions?

Cadwallader: I do struggle with that. I think every general counsel and associate general counsel that is worried about staffing, and trying to pick law firms, spends hours wondering why firms don’t understand the company better. So yeah, we have the same complaint.

What can outside counsel do better to learn about us? That’s a difficult question because in many ways they’re motivated by different things than we are. They’re motivated by making sure they have a good stream of billable hours. That’s how they get paid.

But I’m more worried about a practical outcome — not just that we followed a process appropriately, but that the process didn’t get out of control and didn’t become a black hole of billing, that we actually got somewhere that benefited the company.

That seems to be a constant struggle. Even though almost all outside counsel will tell me they understand this dilemma, when we get down to talking about staffing files and controlling costs, they’re not necessarily sitting on my side of the table.

Lawyers are also business people, so I get it. But that dilemma always seems to get in the way — firms are trying to make sure they can make their payroll, and I’m trying to make sure I’m getting the effectiveness and efficiencies that, increasingly, GC are required to produce on behalf of the corporation.

It’s difficult to say there’s one way for firms to get to understand our business. Are they listening to our analyst calls? Are they listening to the strategies being described by the chairmen and CFO? Are they reading as much about the company as we’re reading internally? Do they even come see us and say, “Hey, this isn’t about a matter, but can we just talk about what’s going to happen over the next 6 months and how we can help you achieve those goals?”

I don’t get a lot of meetings like that. I get meetings on specific matters, but I don’t get a lot of meetings from outside law firms where they want to talk about our strategy or about how they can help us in a particular area they’ve been reading about.

Big Law Business: Are law firms tied to the billable hour forever? Or will it eventually go away?

Cadwallader: Well there’s an awful lot of momentum for the billable hour to stay, and it’s all driven by the pyramid structure of law firms, where the senior partners who have paid their dues, and even bought their partnership shares, are now reaping the benefits of their 20 years of hard work to get to the top of the pyramid.

So it’s a momentum that’s difficult to overcome, but I do think as long as the billable hour is king at a law firm, firms will end up being at odds with in-house legal departments. It’s just an inherent conflict.

Some of the professional rules make it hard to change, and law firm structures make it hard to change, but you almost want to see more of a corporate structure, where firms are looking at particular projects and assignments instead of how many hours they can bill.

Change would mean firms coming in and meaningfully quoting what they can do a particular matter for, and then holding themselves to that. It’s amazing how often you get a budget from a law firm and they have no intention of being held to that budget. You get halfway through the case and they’ve already spent the entire budget.

They always have excuses, and some are valid, but on the other hand, if this is their 35th employment class action in the last 5 years, for example, you’d think they might know roughly how to quote it.

But they never seem to know how, and they want us to bear the risk. When you really think about it, it’s often different how cases start, but it’s typical how they end up.

So you shouldn’t just look at the complaint, but ask yourself how these cases typically go, and then quote based on that analysis and stick to the budget. You don’t find firms doing that very often. They say they will, but invariably they’re sitting at your desk and asking for an adjustment.

Big Law Business: Do you use alternative fee arrangements?

Cadwallader: We’ve tried them all, and they all have strengths and weakness. To the extent they allow the firm to stay in control of the file, they never work that well, or at least not as well as advertised.

Really, it comes down to changing the relationship, and having in-house departments take over ownership of the matters, and then use the outside lawyers on something like an assignment basis. That’s the only way, in the end, to really get control of the rising costs of outside counsel.

Big Law Business: Why don’t alternative fee arrangements work as well as advertised?

Cadwallader: Very often there are kickers in the arrangements, whether success fees or discounts for certain items, and there is almost always a debate about whether they apply or not, so you still end up negotiating the fee at the end. It’s hard to say you really save money.

Sometimes, if you go and analyze the hours spent and the hourly rate versus the alternative fee arrangement, I’m not sure in many cases you’re ahead. You can’t just say, “Normally we would’ve cost you a million dollars to do the case, but we’ll do it for 750.” You’ve got to go analyze the math, look at the hours, and look at cases over a period of time. When you do that you wonder if the alternative fee really ends up saving money.

Big Law Business: So for you it’s more about building trust.

Cadwallader: It’s more about using outside counsel for the appropriate part of the file. I don’t mind spending money on a true expert, or somebody that really understands a local jurisdiction, somebody that is a plumber and really understands the pipes.

I don’t mind spending the money, even if it’s a 750 dollar an hour rate for that advice. But I don’t want everything else that comes with it. I want to continue to control the file. That’s the only way, in the end, to really wrest control of the fees from outside counsel.

Big Law Business: E-billing is obviously one, but what are some other ways technology has changed the relationship between inside and outside counsel?

Cadwallader: E-billing obviously offers a lot of audit power to in-house counsel if they’re willing to use it. We can see what’s going on in the bills much more effectively than when I first started practicing.

Back then, you’d have a stack of bills, and some of them would be 100 pages long. Trying to find the pea under the mattress was difficult. Electronic billing allows us to run them through filters and do audits and find ways to save money.

That’s been a powerful thing, but that was 10 years ago. There really hasn’t been that much evolution in e-billing in the last 10 years.

And even now, electronically sharing files so that you have one matter on one system where the all the fees are charged electronically, all the communications come through the system, and all the documents for the particular matter are served on one system — that certainly has increased efficiency.

But that’s kind of old news now. It hasn’t moved beyond being an efficient document management methodology. That’s really what it is.

Big Law Business: Are there any technological changes within the last few years you could point to that have changed the relationship?

Cadwallalder: What we’re using more internally — and it has helped, especially given the fact that we have lawyers in 16 offices around the world — is work process flow, where we’re trying to move documents through a review and approval process and keep track of them globally.

That has actually helped a lot, even getting signatures to make sure we have the right signature authority. I don’t know if it has helped outside counsel, but it has certainly helped us. It’s also been eye-opening, because you have to sit down and look at all the steps of a certain process and ask yourself why you’re doing something.

In many ways our goal is to stop lawyers from doing non-legal work. I don’t mind paying lawyers to do legal work. I just don’t want them to be spending their entire day reinventing the wheel or pushing paper around.

Part III of the Brian Cadwallader series will include: Cadwallader’s take on legal marketing, why law firms are lagging behind corporate departments in diversity, and how to get along with Green Bay Packers fans.

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