GlaxoSmithKline has made enormous strides towards revamping the way that they pay for outside legal services by implementing value-based billing wherever possible. When Dan Troy was hired as GC in 2008, he immediately began to push for an alternative to hourly billing. Collaboration with key members from GSK’s finance, procurement, and IT departments yielded a plan in which a reverse auction process would be initiated for any matter with a price tag over a certain amount. Since the implementation of the alternative fee structure, the use of value-based billing has increased from less than 3% in GSK’s outside legal expenditures to 68%. Additionally, cost savings are in the tens of millions, at least. GSK’s head of U.S. litigation would only describe the total savings as “extremely significant”.
While value-based billing – also known as alternative fee arrangements – has supplanted the billable hour in many industries, the legal profession has traditionally been hesitant to embrace it. Some lawyers feel that placing such overt emphasis on the cost of legal services ultimately leads to declines in the quality of work product. Some feel that it just isn’t the right fit for complex legal services. And finally, on the extreme end, some feel that it demeans the profession of law. However, results like those seen by GSK are extremely compelling to other corporations looking to change the way they approach their outside legal arrangements.
Implementing value-based billing requires cooperation within the company and also between the legal department and the law firms it works with. Companies which have serious clout, financial or otherwise, have it a bit easier when they want talk to their legal providers about alternative fee arrangements; it can be more tricky to convince a law firm to move away from the sacred hourly billing system if you’re small. Communicating expectations clearly, being open to traditional fee arrangements for certain matters, and giving law firms feedback about their bids all helped GSK make the transition smoothly. So far, 80 law firms have participated in the online reverse auction process, and 57 legal matters have been bid upon.
Can GSK’s wildly successful implementation of value-based billing for legal services be duplicated? As more and more law firms embrace the system, it looks like the answer is “Yes!”.