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July 1, 2013

UTC lauded for alternative legal fees

Kim Townsan, senior manager of legal administration, UTC
Mark Dubois, president-elect, Connecticut Bar Association
Steven Greenspan, associate general counsel for litigation, UTC
Charles Gill, general counsel, UTC

Hartford conglomerate United Technologies Corp. received an award in June for embracing a new method of legal spending, moving 70 percent of its outside counsel expenses away from the billable hour model.

The national Association of Corporate Counsel honored UTC along with 11 other international companies for coming up with alternative legal spending arrangements such as fixed and phased fees, and bonus payments for results in hiring law firms for legal matters.

“This is a much more effective way to manage your legal spend,” said Kim Townsan, UTC senior manager of legal administration. “I hope other companies follow suit.”

The movement away from the traditional billable hour model is not terribly new, but it is taking over a greater portion of the industry, said Mark Dubois, president-elect of the Connecticut Bar Association.

About 25 to 30 percent of law firm revenues now are with alternative fee arrangements, Dubois said.

“It is not big and breaking, but it is like a tsunami washing over the legal industry,” Dubois said. “There has been a lot of shakeout and fallout from this.”

The billable hour structure has been the foundation of law firms and their business model for several decades. Firms charged clients based on how many hours an attorney worked on a case, regardless of result. This led to easy economics for the industry, such as paying a young lawyer out of law school $60 an hour and charging clients $100 an hour for his or her work. The more experienced a lawyer became, the more charged per hour.

Alternative fee structures have forced law firms to perform work as efficiently as possible, which includes not hiring younger lawyers and only focusing on capturing seasoned attorneys from other practices, Dubois said.

“It is changing loyalty,” Dubois said. “You have a more easily changing culture.”

UTC started looking at alternative fees in 1999 in its patent department, establishing fixed fees with outside counsel through competitive bidding.

“We are buying quality legal representation,” said Steven Greenspan, UTC associate general counsel for litigation.

Today, the UTC patent division operates 90 percent of its legal spending on fixed fee structures. The move saved millions of dollars over what the conglomerate would be spending today on just that one practice area, Townsan said.

Because of the success in patents, UTC spread the practice out globally to all its locations and subsidiaries. The company worked with 900 outside law firms before it switched to alternative fees. Today, it works with 430 firms.

“UTC has a laser-like focus in pursuing relationships with its outside counsel based on alternative fee arrangements,” said Veta Richardson, president and chief executive of the Association of Corporate Counsel. “By implementing more than 70 percent fixed fees, UTC is a leading role model for how organizations can move away from the billable hour and establish a strong link for delivering high-value legal services.”

UTC still wants to build positive relationships with its firms by providing them enough business and working with alternative structures, Townsan said.

“We are not afraid of our firms improving their margins, as long as we decrease our legal spend,” Townsan said.

The change toward alternative fee structures has created interesting changes in the legal industry, Dubois said.

A company like Axiom Law of New York City, also honored by the Association of Corporate Counsel, has 900 lawyers ready to serve law firms’ needs at a moment’s notice. So, if a firm needs 10 lawyers to work on an antitrust case in St. Louis, they can call Axiom and have that team working remotely via today’s technology, Dubois said.

“Frankly, I think it is cool because there is a lot of money to be made,” Dubois said.

The change will continue to be tumultuous for law firms and the ways they have operated for decades, but firms that figure out how to operate in the new system will excel, Dubois said.

“It is a challenging time for law firm managers,” Dubois said. “It is a whole different world.”

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