The following post originally appeared on Forbes | July 7, 2014
In 2002, FMC Technologies had $1.8B in total sales, which were protected and facilitated by an 8 lawyer team, with $14.3M in legal spend ($2.8M internal and $11.5M external), of which, 20% was spent on alternative fee arrangements (AFAs), and held a 2.8 average firm evaluation.
In 2013, FMC Technologies had $7.1B in total sales, which were protected and facilitated by a marginally-larger, 12 lawyer team, but with only $9.5M in legal spend ($3.1M internal and $6.4M external), of which, 95% was spent on AFAs, and held a 3.3 average firm evaluation with a 7% average bonus going to the firms.
I received these interesting numbers in an email sent to me by Jeffrey Carr, senior vice president, general counsel and secretary for FMC Technologies, Inc. In it, he also went on to describe his thoughts on the shifting landscape of the legal services industry:
In my view, the VC’s in this space and the start-ups are still looking at the periphery—the “what can be outsourced that lawyers now do” model—not the new platform that destroys the traditional model of what lawyers today do. The true gist is:
- “Big Law” or “Old Law” (aka a traditional law firm) is not in the business of solving legal problems – it is in the business of billing hours to solve legal problems.
- “New Law” (e.g., LPO’s, Axiom, Huron, etc.) is in the business of billing lower cost hours to solve legal problems.
- “Enlightened Law” (e.g., Riverview, Valorem, etc.) is in the business of solving legal problems effectively and efficiently.
- “Next Law” is the business of preventing legal problems from ever arising.
… In-house counsel teams are uniquely situated to understand and deliver on the prevention focus—precisely because that’s what a high performance legal team does. The problem is that most in-house teams are just as risk-averse as outside counsel and generally overwhelmed with reactive work. As such, I think very few are actually focused on my vision of Next Law.
While $7.1B in sales doesn’t place FMC Technologies at the top of the Forbes 2000 list, it is certainly large enough to turn some heads. And when coupled with such a dramatic shift in legal spend numbers and Carr’s interesting thoughts on the evolving landscape, I needed a closer look. See our exchange below:
On Motivations And Beliefs
Parnell: I see that you were a speaker at ReInvent Law. And, based on your email, I can also see that you’ve put quite a bit of thought into the evolving legal services industry. What is driving this?
Carr: Well, first, I believe very strongly about the profession, and I worry about it a great deal. I believe it is on a collision course if it doesn’t change. Many people in the legal profession right now refuse to see the realities that are coming in hopes that they can maintain the status quo. … I think that change will occur, and it already has occurred, and is continuing. It is all over the map. It is not going to be one sector; it’s not going to be one model.
And what is troubling about it, I guess, is when you look at it from a fundamental standpoint—just take the US—we’re pumping out 50K lawyers a year into a market that doesn’t need them. We’ve had 40-50K lawyers fired or de-equitized in their firms over the past several years. We’ve got customers that are increasingly reluctant to pay the cost of legal services. And we’ve got providers that are myopic and resistant to change. When I throw all of that together, what I see is a market that is ripe for change, and ripe for disruption.
Parnell: You’ve spoken about preventative law. Hypothetically speaking, if I am an in-house attorney, and a preventative-law consultancy can reduce costs, why wouldn’t a GC jump at that?
Carr: Yeah, they should. But I think there is an inherent distrust in consultants. And especially if they are not lawyers: “How do you know what I do?” So, I think there is some professional resistance; there’s some personal resistance; it is an attack on what I do; it is an attack on how I define myself as a person and as a professional.
Lawyers tend to be high performance, individual contributor types with a bit of a St. George outlook: “I am here to rescue people. I am here to save people. I am here to be a hero.” After all, everybody likes heroes… Don’t we like firefighters a heck of a lot more than the insurance guy that comes in and tells you what you should do to avoid fires? We venerate the hero and the hero thrives on that role. Indeed, they excel within that role. It’s the fighter pilot versus the mission planner who gets all of the glory.
On Resistance to Change
Parnell: So, what I am hearing is that while firms are resistant to change—which is quite understandable—there is at least some level of resistance to change in GCs as well.
Carr: I absolutely agree. In fact, I believe that the largest part of the problem is on my side of the table. When I am not being careful with my words, I call it a failure of leadership or a failure of vision. From my perspective, for example, as a GC of FMC Technologies, $3M of cost reduction or $3M in revenue is the same thing. $3M of legal costs reduces our profits; $3M in recovery increases our profits. … In my view of the world, if I am not doing everything that I can to either reduce legal costs or bring in legal revenue, I am breaching my fiduciary responsibilities to our shareholders.
So, I think a lot of in-house lawyers get kind of confused, and say, “Well, I am satisfying my fiduciary responsibilities by reducing risk. And I am reducing risk by using top-shelf law firms; I am reducing risk by managing litigation well; I am reducing risk by having a robust compliance program; I am reducing risk by having a robust IP portfolio.”
I believe a more appropriate and forward looking attitude is to reduce risk by better processes and procedures that keep the company out of litigation, that result in patents that have value to the company, and by a compliance program that fosters a culture of compliance and responsibility as opposed to an audit mentality.
Parnell: So what do you think will really invoke a larger shift?
Carr: There was an article on the front page of The Wall St. Journal a few years ago about Amy Schulman at Pfizer … and it was talking about the Pfizer legal model, which was, frankly, a lot like the FMC legal model. I found myself thinking, “finally, a catalyst for change.” For you see, I’ve long maintained that change is not going to occur in this industry until a CEO walks into a GC’s office, throws down The Wall St. Journal—the Financial Times, Forbes, orFortune—on their GC’s desk and says, “When are you going to do this? When are you going to change your department? When are you going to change the ways that you do things?”
And so far, with very few exceptions—your article is one of the few exceptions; the WSJ article is one of the few exceptions—most of this debate is raging in the professional journals about law, and not in the general business press.
I don’t know why that is. Maybe it is because even though the legal costs are high, they don’t, actually, makeup a huge percentage of a company’s revenue. And maybe that is the ultimate explanation: the difference between the best performing legal team in the country and the worst performing legal team in the country is, maybe, 0.8% of the revenue. The numbers are big, but don’t really move the needle. And if a GC says, “Yeah, I can go do this if you want me to, but recognize that we are taking more risk, and I wouldn’t recommend it,” that is probably the fundamental resistance to change: The perceived risk of doing things in a non-traditional way is not justified.
I don’t believe that personally, and, that is why I am the person I am, and it is the kind of performance that my team has had. But, you know, there are not a whole heck of a lot of GC’s that would articulate this the way that I do.
On Value-Based Billing
Parnell: What are your thoughts about AFAs?
Carr: A lot of people think that an effective alternative fee arrangement is either fixed-price legal fees, or they say discounts are an effective alternative fee. I don’t think that either of those are particularly effective. Discounts are not alternative fees; they are just discounts. If my normal rate is $300 dollars an hour and I charge you $280, I’ve given you a discount. I haven’t given you an alternative fee. It hasn’t changed what I do, or how I do it, or anything else. It has just changed the pricing of it. And studies I’ve seen indicate that fee discounts do not reduce over all spend; somehow, the hours tend to go up, thus offsetting any expected cost savings from fee reductions. After all, if one pays for service by the hour, you purchase hours, not service or results.
Second, a fixed fee is a form of an alternative fee. And my definition of an alternative fee—the hallmark of an alternative fee—is that it is a budget with consequences. The firm bears the risk that the matter will take more effort than expected, and the customer takes the risk that the matter can be completed with less resoruces. Fixed fee arrangements represent a classic zero-sum game, but with certainty. As such, fixed fees can be really useful, but the only thing that I am certain of is the fixed fee: I know what it is going to cost me as the customer; I have no idea what the quality is going to be, what the efficiency is going to be.
Parnell: It is certainly possible that value, or let’s say, “quality,” is going to be impacted with fixed fees. There can be a conflict: time and profit are inversely correlated.
Carr: Absolutely. We define value as achieving the objective effectively and efficiently. And, so, when we use fixed fee arrangements, we will always use a hold-back approach to help ensure the delivery of value. So if the engagement is going to cost $100K, we hold back 20% and we pay the firm 80%. We then give a report card with an assessment of 6 different factors. Based on that report card, the firm gets between 0-200% of the amount withheld. That is our standard fee arrangement, this report card system. And what that means is that this gives me a way to have a feedback loop to my outside providers, and it solves one of the biggest problems in the legal community: The disconnect between compensation and delivered value.
On Opportunities in the Legal Market
Parnell: If you were to leave FMC Technologies today, what would you do?
Carr: I’d go to the beach with my wife and we’d relax and travel. Then, I’d write my book about how to run a high performance legal team, and I’d focus on my other passions: racing cars and jazz piano. But I’d probably get bored and want to get back in the game—perhaps not in another GC role, but from a completely different platform. I would ask each CEO I could meet to “Tell me what your legal spend has been for the last 5 years.” I’d then look them straight in the eye and say, “I will do all of your legal work for you at 80% of what your average spend has been. And of that 80%, you only pay me 80%, and then you give me a report card on performance and link that to payment of 0-200% of the hold back. With that upside/downside approach, ultimately I will make 80-120% of what I bill you. In your worst case scenario, you will pay me exactly what you have been paying on average for the last five years. But you would only do that if you were absolutely delighted.”
How can I do that? I am absolutely convinced that there is enough inefficiency in the way that [companies are] currently providing or accessing the legal system that we can eliminate that. And over time, we can drive year over year performance gains by focusing on prevention as opposed to focusing on reaction.
Parnell: Rather than simply preventative legal services, this sounds like a full organizational overhaul.
Carr: It is a full overhaul. But there are also a bunch of different ways to approach the opportunity: One type of work, a portfolio of work, or the entire legal team scope. And by doing the work for a series of companies, you can start leveraging the content and process approach to prevention and drive efficiency in operations to actually reduce legal expenses through prevention. After all, let’s face it: Most companies face precisely the same legal challenges, and most legal challenges relate to pretty basic blocking and tackling on contracts, IP, HR, governance, and compliance. But to date, since legal services are delivered and based on activity—on hours—as opposed to value, there’s been little-if-any incentive to go beyond how to reduce the cost of the hour as opposed to eliminating the need for the legal hours in the first place.
On Aggregate Purchasing and the Dupont Consortium
Parnell: Interesting…. Are there any other ways to attack the current market?
Carr: Back in 2001, there was something we referred to as the Dupont Consortium. It’s actual name was the Legal Solutions Network. Tom Sager of Dupont pulled together some like-minded GCs. There were 12 of us from vastly different companies—manufacturing companies, an oil company, a bank, an insurance company, an auto company—none of whom competed with another. But the [common] characteristic was that you had GCs that thought similarly. And the idea, back then, was can we start a buyers’ club? Can we aggregate our buy? Can we share processes to leverage value—not sharing “best practices,” but instead, actually sharing resources to drive down costs. We started from the premise that all companies have the same questions, so why do we keep paying people inside and outside to answer these time and time again? One of my favorite sayings is, “The only thing I hate more than answering the same question twice, is paying to have the same question answered twice.”
It was a really interesting concept, but it was probably a bit before its time. The technology platforms were not available to help us collaborate and share information. And there was resistance to change if that meant sharing service providers each of us had developed relationships with in our own networks. But today, the technology platforms to facilitate this kind of collaborative, cooperative workplace do exist and are more robust, more secure, and more accessible. Whether using something like Legal OnRamp or just other cloud-based solutions, the tools are just so much more powerful. And now we’re starting to see the application of artificial intelligence tools that can really change the practice of law.
So what if you could take 10 companies today and aggregate their knowledge base on the basic blocking and tackling of legal services? The 80-85% of work that lawyers in companies do, today, for their companies. What if you could marry that with some sort of process control on internal procedures from a preventative law standpoint? If you had better control, better HR practices—all of those kinds of things—you can vastly reduce the amount of failure in the system. And failure is what causes the fire, and you have to call in the firefighters to put out the fire. What if you could build something like that? I think that is possible as well. … If you could take the mentality of high-performance in-house teams and provide that on a shared-services-base, you could change the way that legal services are provided in this country.