Capped fees, limited innovation

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To the well-known list of companies that have consolidated their roster of outside counsel to one firm (DuPont, Tyco, and Linde, most prominently), you can now add Pfizer, which Corporate Counsel magazine reports has given all its employment litigation work to Jackson Lewis and its 500 lawyers across the US. But this one comes with a twist: in exchange for its sole counsel designation, Jackson Lewis is capping all its fees to Pfizer, issuing one invoice a month containing one-twelfth of its annual fee and an accounting of its its time spent on Pfizer matters in the last 30 days.

There are three interesting points to take away from this story. The first is to note that when Pfizer’s GC was asked to list the reasons why Jackson Lewis won this ten-firm competition, the first thing she cited was trust: “We were putting all of our eggs in one basket. Before, we had a choice among ten firms. Making this decision meant that choice was gone.” Never mind the economics: you don’t win a contest like this unless the client has the utmost faith in your reliability and wisdom.

The second is to observe what happens in the absence of trust: tucked away in a sidebar at the bottom is an account of Pfizer’s frustration with fat, vague law firm invoices that didn’t comply with the department’s well-established billing guidelines. So the company hired a legal bill assessor called Legal Cost Control, which found that Pfizer’s outside counsel were billing for things like making copies, sleeping on airplanes and assembling budgets. Now Pfizer sends all outside counsel invoices to a billing review team — and it’s fair to assume that firms submitting questionable bills won’t be in that trusted inner circle, if they remain counsel at all.

But the third, and most significant, aspect of this story is that while Pfizer is combining two innovations here, convergence and capped fees (well, UK law departments wouldn’t call law firm panels exactly innovative), it missed an opportunity to add a third when it retained the right to recoup Jackson Lewis’s unspent fees at the end of the year.

As was pointed out by, of all people, the denizens of the WSJ Law Blog, this actually creates an incentive for Jackson Lewis to maximize the amount of billable time its lawyers produce on Pfizer files, in order to make sure not a single penny is left on the table. If Pfizer had given up this right, the law firm would have been motivated in exactly the opposite direction: to reduce the number of hours its lawyers spend on Pfizer matters, freeing them up to be used for other clients. Jackson Lewis would have an incentive to become more efficient, eventually spending less time on Pfizer than the capped fee envisioned.

Now, Jackson Lewis still must report its monthly activity to Pfizer, and it wouldn’t take the GC long to figure out that this more streamlined law firm was making money off the arrangement. But Pfizer could simply revisit and reduce the capped fee amount every year in accordance with the firm’s actual legal spend, setting up a virtuous circle by which the firm annually gets more efficient and the company annually saves more money. Pfizer missed a chance to build in a mechanism to continuously push down costs.

But perhaps more to the point, what Pfizer passed up here was an opportunity to reward its partner law firm. Lawyers should benefit when the work they perform comes in under budget; but under the current arrangement, Pfizer reaps the rewards of Jackson Lewis’s efficiency. Far better to let the firm keep some or most of the savings accrued through efficiency gains at the end of each year, in order to increase the motivation to pursue those efficiencies.

Had Pfizer and Jackson Lewis come up with a way to both encourage savings efficiencies and split the resulting rewards fairly, we’d really be talking about some serious innovation. But even at that, this is still another nice step towards a rational approach to legal services purchasing.

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