In-house law departments and trust

When I published the results of our national survey of alternative fees, one of the most discouraging sections concerned the lack of trust between in-house law departments and the firms that serve them.  Although the interviews were focused on alternative fees, the findings also have implications for hourly work.

If you made a list of the most common characteristics of successful lawyers, would you put trust near the top of the list?  Me neither.  An inherent predisposition to be suspicious is a barrier to agreeing on alternative fees and to making them work:

In the past, where we have proposed unilaterally various fixed fee arrangements, the clients have turned them down because they think that if we proposed them, there must be something wrong with them.

We have proposed ten alternative fee arrangements for every one that is accepted.  Maybe in-house counsel are afraid that outside counsel will sandbag them by building inefficiencies and excess margins into the fixed fee quotes.

I think that people often spend a lot of time putting together an alternative fee arrangement and the in-house counsel ends up rejecting it because they have as great a fear about the risk as the outside counsel do.

The larger problem with RFPs and alternative fees in general is really the trust issue.

Law firms have gotten such bad reputations over the last several years, and I think that’s probably due to their bragging about how much money they make. So you really can tell that there is an uneasiness in dealing with in-house counsel that didn’t exist five years ago. And I suspect a lot of it is due to purchasing agents, CEOs and others saying, “These guys make way too much money.” So now you have a whole different situation.

Several participants mentioned the distrust they had seen in meetings they had attended as part of the Association of Corporate Counsel’s Value Challenge:

One of the interesting things I heard at the ACC meeting was [a message from GCs that] if you came to me with an alternative fee proposal, I would assume you had come up with it in a way to screw me. And if that’s where you start, it’s going to be really hard to do anything. So I think there’s got to be a suspension of distrust.  I was surprised at how much distrust was evident [at that meeting].

There are such low levels of trust out there between in-house counsel and their law firms. Whenever I’ve gone to ACC events, that’s the one thing that I see in spades. There are very low levels of trust.

Another participant compared alternative fee negotiations to playing poker:

When you see me pushing all my chips into the middle of the table in a very eager and active way, you have to form a reaction to that. And when I say to you, “Yeah, that’s great, we’ll absolutely do it for x,” you probably have a moment where you think, “Gosh darn it, maybe it won’t cost them x. Maybe it wouldn’t cost me x if I just had them count their hours carefully.”

Others made the same point in different ways:

These are risk-averse buyers.

When law firms say, “The alternative fee basis on which you are proposing that we do this work is fully acceptable to us.  When can we start?” there is some sense on the part of the client, “Wait a minute, maybe that’s not the best way for me to go if there is so much interest on the law firm’s part in doing it.”

In the end, alternative fees will work best in long term relationships where there is an atmosphere of trust:

If you understand and believe that the relationship is long-term, you don’t get obsessed with short-term fluctuations that may be below or above what you anticipated in any given year.

These kinds of strategies work a whole lot better if you’re working with clients with whom you have a deep, trusting, long-term relationship, so that neither one of you wants the other party to be adversely affected by the arrangement and both of you understand that it’s a bit of an experiment. And with experiments, you may have to have change orders. You may have to make the client whole if it turns out that it didn’t cost nearly as much as you thought it would, or they may have to make you whole if it costs way more than had been anticipated. This doesn’t work so well with a client with whom you have a limited relationship.

Alternative fees work best with existing clients where we share a history of trust.  However, sometimes it makes sense to take a chance on a fixed fee with a new client.  You may win or lose on these, [and] anybody can get screwed if an agreement applies to just a single year.  If that happens, the firm upholds its end of the bargain, then fires the client.
In all of these alternative fee arrangements, we work in a quarterly review where we sit down with [the client] and look at [the arrangement] and make sure it’s fair. All of these agreements have a provision that provides for that. If one side’s getting killed, we’re going to do something about it on a quarterly basis. [In order] to do these things with big clients and big matters, you’ve got to have a relationship you can depend on.

These situations don’t always work out perfectly, but if clients and firms are willing to work things out when they go wrong, then their relationships will grow stronger.

This post was reproduced from The LegalBizDev Survey of Alternative Fees.  See our web page for a free executive summary, an order form, or to purchase the $395 complete report online.