Data analytics and decisiveness drive dramatic cost cutting
A key way to get greater value for legal spend is harnessing and analyzing data to understand where the dollars have gone in the past, and to make evidence-based decisions on where they should go in the future. BASF Corporation leveraged data analytics as part of a multi-pronged cost containment and efficiency initiative that also included revamped relationships with outside counsel, governed by new engagement guidelines; focused budgeting and decision-making; and increased insourcing. Begun in early 2016, these approaches have yielded impressive results for the company.
When Matt Lepore joined BASF as senior vice president and general counsel in 2014, he was invited by the CEO to take a hard look at the in-house legal department and investigate ways to do things differently, especially around outside counsel spend. The approximately 100-person legal department is organized by groups including IP, commercial/mergers and acquisitions, compliance, regulatory, and litigation, and supports 18 operating divisions in North America. Lepore, who worked previously at Pfizer, was familiar with outside counsel programs that were focused on results and efficiency; he wanted to bring similar discipline to BASF's engagements. He also had a certain conviction.
"I am a huge proponent of alternative fee arrangements and a vocal critic of the hourly billing model. I think it's a false metric, designed around inefficiency," he says. Whereas BASF had virtually no AFAs in place prior to Lepore's arrival, he saw the opportunity to shift toward paying for value. But how does a client assess outside counsel efficiency?
Lepore started by hiring a controller, Kala Bhatt, the first time a finance-focused person was embedded within legal. She, along with Jessica Pronesti, the administrator for the department's e-billing system, collected and analyzed several years of invoicing data from BASF's e-billing and matter management system. "We wanted to go to market with our own knowledge and opinions about what the work is worth," says Lepore. He also began to manage outside counsel spend as one single budget for the legal department in North America, as opposed to individual legal budgets with each operating unit. This allowed him to prioritize the use of outside counsel based on the greatest need, or opportunity for value, across the company. This flexibility in budget became very important for the in-house attorneys to effectively negotiate AFAs that made sense.
Vincent Montalto, senior counsel for litigation, made the compelling argument that cases could be bucketed and offered to the market, fostering competition. To facilitate comparisons, he developed an innovative efficiency algorithm that considers cost to reach case resolution; hours billed to reach case resolution; and calendar days to reach case resolution; and adjusts for such variables as type of allegation, alleged damages, jurisdictions, and staffing.
Now, as part of its outside counsel guidelines, BASF requires firms to submit AFAs for each new matter. Remarkably, given the short time frame, over 80 percent of its annual legal spend is now under AFAs. They are not discounted hourly fees but a range of creative structures including fixed fees, cuff and collars, phase-based fees, holdovers, success fees, and others. "If a firm tells me they can't give me an AFA, I will probably go to another firm," Lepore says. As a result, but not an objective, a degree of convergence has occurred. BASF has concentrated work with firms willing to shift to the new paradigm, drastically reducing its overall number of law firms. Lepore estimates that twenty-five firms now do more than half of the work. The company has also streamlined its outside counsel guidelines to reduce superfluous content and to emphasize that BASF expects billing for actual legal work and not administrative tasks.
BASF has also converted a great deal of its regional mass tort work to AFAs. This required the buy-in of firms and insurers alike. The company conducted several in-person meetings and calls with insurers and firms to discuss the shared value of the AFA concept. Including the insurance companies was crucial, says Lepore. "Insurance companies have been late to the game when it comes to AFAs, but they also understand value and predictability. By bringing them to the table, we gained their support and demonstrated that their bottom line was improved with AFAs."
The legal department has also experimented with reverse auctions, putting out an RFP to three firms to bid on the national coordinating counsel role in a mass tort litigation. This structure yields market efficiency while preserving the company's ultimate decision-making authority. In its current form it does not, however, account for other important considerations such as firm diversity.
The company further reduced its outside counsel spend by handling the launch of a new brand and the divestiture of two global businesses internally within the past year, while continuing to handle almost all of BASF's transactional work in-house. In total, BASF has reduced its legal budget by 48 percent year over year.
"We make sure that we are only hiring outside counsel because we need their expertise, not because we are too busy. Overall, these initiatives represent a positive change in how we do business as a legal department at BASF." says Lepore.