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McGraw Hill GC: ‘Gut Checks’ Are Better than AFAs

April 10, 2015, 1:38 PM

Lucy Fato, Executive Vice President and General Counsel at McGraw Hill Financial , is focused on reducing legal costs, but not necessarily with alternative fee agreements. Fato said she prefers having an occasional “gut check” conversation if a firm is spending too much.

In the final installment of a two-part series in Big Law Business, Fato shares what McGraw Hill Financial is doing to rein in legal costs, sounds off on law firm lunches, diversity, and her hometown football team, the Pittsburgh Steelers.

Part II Excerpts:

Getting better control over who we’re spending money with, how they are staffing deals, how much time is being spent on matters ... is more effective over the longer term than trying to do alternative fee arrangements.

It’s eye popping even for me, and I’ve been doing this a long time, when I see an hourly rate that’s over $1,000 an hour. I look at that and think, “Really?”

Law firms are still big on lunches, but I’m not a huge fan. They tend to be very long, and it’s hard to have a real conversation.

Another thing that’s important, and that’s often overlooked, is having diverse teams. When I get invited to lunch and I’m the only woman at the table, that doesn’t always go over so well.

Below is an edited transcript of the final installment of our two-part series with Fato.

Big Law Business: Has McGraw Hill Financial upped its use of alternative fee arrangements as a way to rein in costs?

Fato: What I’d like to do is have arrangements where we do case assessments early on and say how do we think it might proceed. There are ways you can look at the lifespan of a matter and structure the payments accordingly.

But I wouldn’t say it’s a high priority for me. Getting better control over who we’re spending money with, how they are staffing deals, how much time is being spent on matters — taking a hard look at those types of questions is more effective over the longer term than trying to do alternative fee arrangements.

At the end of the day we’re trying to build a relationship with the firm. I don’t want to be viewed as someone who’s trying to nickel and dime people. I’d rather just do a gut check every now and then and say, “Hey, it looks like we’re paying too much. Let’s figure out a better way.”

Big Law Business: Those conversations about costs can be tricky. What’s the proper mindset for a firm?

Fato: Having an open mind about it is a good thing. My view is that in-house legal departments are much more advanced in this area than law firms. Now, firms are not as incentivized to become more modern in this respect, because it’s not necessarily consistent with their business model.

I have a COO in our legal department who is basically in charge of the day to day relationships with the firm. Law firms similarly have CFOs and other people behind the scenes who manage this stuff, and those people can talk to each other.

People like me and the senior partners only need to get involved if there’s a disagreement, or I want to call and say, “Look, this is a really important matter to the company. We’d like to strike a deal here.” I don’t have to do that in the early stages. Someone else can.

Big Law Business: Do law firms need to be more open minded about their business models?

Fato: Firms are just so tied to the billable hour. It’s in their DNA. It’s how productivity is measured, it’s how associates are measured, so it’s very hard for law firms to get away from it.

But I will say it’s gotten a little out of control. It’s eye popping even for me, and I’ve been doing this a long time, when I see an hourly rate that’s over $1,000 an hour. I look at that and think, “Really?”

We haven’t put our guidelines together yet, but many companies have a policy where they won’t pay over $1,000 an hour for anyone, no matter who it is. There’s just something about crossing that threshold that some people just find in appropriate. I think firms need to be a little more conscious of that sort of thing.

As lawyers, we see the difference between a lot of the firms. We see the value in going to people with specific subject matter expertise. But the business people don’t always see the difference.

Firms have to be mindful that their client is not just the lawyer. It’s also the business person. Some of these hourly rates are pretty high. Especially when you compare them to consultants and other kinds of advisory firms that we use. Just being mindful and conscious of that is something firms still need to work on.

Big Law Business: What firms are you working with?

Fato: Cahill Gordon does a lot of litigation work for us because of the First Amendment history here. Floyd Abrams in particular has played a very significant role in providing advice to the company. Clifford Chance does a lot of our litigation and corporate work outside the U.S. Proskauer Rose and Shearman and Sterling have traditionally provided a significant amount of employment and benefit advice. When I joined McGraw Hill Financial, I added Davis Polk to the mix. More recently we’ve done work with Goodwin Procter and Dentons as well.

Big Law Business: What are you looking for when hiring a firm?

Fato: My philosophy on outside counsel is not that different from my philosophy on hiring internal counsel. I want to find the best available people for the particular matter. Expertise is very important.

It’s also about the people and the relationship. You want to work with people you like working with.

There are a lot of law firms out there, and there are a lot of very good lawyers. For me it’s not so much about the name of the firm or the reputation. There are sometimes niche firms that are quite good at certain things.

I also think it’s good to build relationships with a small number of firms so they get to know your business better. If you spread it too thin you get a lot of one-off situations, and firms don’t really have the ability to connect dots for you because they’re only seeing a slim segment of what you’re doing.

Big Law Business: If a firm were wanting to reach out to you, what would be the best way?

Fato: As I said, when I first arrived a lot of people just said, “We’d like to help.” I think it can be good to just say, “Tell us where you have gaps. Let’s try and think creatively about how to fill them.”

Law firms are still big on lunches, but I’m not a huge fan. They tend to be very long, and it’s hard to have a real conversation. Firms tend to bring a lot of people, and it’s hard to keep track of who does what.

Again, the secondment idea is a great idea. I sometimes say to people, “I don’t need a lot of outside counsel help right now. What I need is more internal resources.”

So having people say, “We have some really good people. We’d be happy to give them to you for six months. We’ll send over three or four, and you can interview them and see who might be a good fit.” Sometimes it’s a money losing proposition, but if a firm is willing to make an investment, that sends a very strong message.

Another thing that’s important, and that’s often overlooked, is having diverse teams. When I get invited to lunch and I’m the only woman at the table, that doesn’t always go over so well.

Of course diversity comes in different forms. I don’t just mean women. But it’s interesting to me that a lot of firms still don’t seem to think about that. They don’t see that if I’ve built a diverse team, maybe that’s something that’s important to me, and maybe that’s something firms should be trying to do as well.

That’s actually something I’m going to think about in terms of our billing guidelines. A lot of companies say, “We expect your teams to be diverse. We’re not going to tell you what diversity means, but if everyone on your team looks the same, chances are it’s not as diverse as we’d like it to be.”

Big Law Business: You went to Pitt for undergrad and for law school. You must have a soft spot for Pittsburgh.

Fato: I was born and raised there. My parents were Italian immigrants. They had three daughters. I’m the youngest. They didn’t really want us to go away to school.

I had a part time job through college, and I had to work on the weekends. So when I decided to go to law school it was just convenient to stay. Plus I made the decision late in my senior year. I didn’t have the option to apply to a lot of law schools. Pitt was the only one I applied to.

Big Law Business: Do you still maintain a strong connections to your hometown?

Fato: My mom and one of my sisters still live there. I was just there for a week over spring break with my family. I go home once or twice a year. Pittsburgh is really a great city. It’s a nice place to be from. It’s got a great cost of living, a lot of history, and it’s very diverse.

Big Law Business: How are the Steelers looking next year?

Fato: Good. You know they re-upped Big Ben. He seems to have gotten his act together, hopefully. I actually think they’re a team that’s very much in transition, because they still have some older players that they’re trying to decide whether to keep or not.

So, we’ll see. I think the rumor is they’re considered a Super Bowl contender this year, but that may just be coming from people like me.

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