Biglaw, Billable Hours, In-House Counsel, Litigators, Money, Partner Issues

Inside Straight: Creating The Wrong Incentives

When we create rules, we want people to follow them. When we build incentives into rules, we want people to be motivated by those incentives. But the rule-makers cannot foresee all of the consequences of the rules they create. In the end, we're counting on people to act in good faith and use common sense. Will that work?

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on

I won’t say whether I actually heard these conversations or I just dreamt them.

First: The head of the business unit confronted with a new litigation matter:

“This is an outrage! How could they have accused us of this? We want to fight! Fight! Fight!”

“The defense costs will be charged to your business unit, which will reduce your bonus pool.”

“Settle!”

Second: One partner at a law firm — who wants to visit a client, make a presentation, and take the client to dinner — to a second partner — who is the relationship lawyer for the client:

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“There’s no way our practice leader will authorize me to spend $1000 to fly out there, take Smith to dinner, and stay overnight at a hotel. I’ll just bill the cost of this trip to the client, and you can then write off that expense at the end of the month, so the client doesn’t actually pay for it. Can you give me a client and matter number for that charge?”

Third: A law firm and a corporation enter a flat-fee agreement, so the corporation will pay an annual fixed fee and the law firm will defend all litigation matters for that sum.

At the law firm, the partner: “Assign more first-year associates to those matters. We have to minimize the fees we record for that client, and we have to train the associates somewhere.”

Meanwhile, the in-house lawyer at the corporation: “The plaintiff made a very reasonable settlement demand. Let’s reject it. Under the flat-fee deal, it doesn’t cost us anything to try the case, so we might as well put the plaintiff to the test. Besides, if we try some cases, we’ll prove to other potential plaintiffs that we’re tough.”

Fourth: A corporation holds the law department responsible for a travel and expense budget, which includes all travel costs incurred by in-house lawyers. But the corporation does not hold the law department accountable for outside legal fees and settlements, because the law department should not be unfairly penalized if, say, negligence in the business units leads to a surge in litigation and increased defense and settlement costs. Year-end is approaching, and the law department is about to exhaust its travel and expense budget:

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“We could send an in-house lawyer to L.A. to prepare the witness, stay overnight, and defend the deposition. That would cost us $1000, which would put us over-budget on travel and expense, reducing our bonuses. Or we could hire an outside lawyer to fly to L.A. and handle the deposition for us. That would cost us about $7500, but it wouldn’t hit our budget. Which outside firm should we call?”

When we create rules, we want people to follow them. When we build incentives into rules, we want people to be motivated by those incentives. But the rule-makers cannot foresee all of the consequences of the rules they create. In the end, we’re counting on people to act in good faith and use common sense.

That will work, won’t it?

Mark Herrmann is the Vice President and Chief Counsel – Litigation at Aon, the world’s leading provider of risk management services, insurance and reinsurance brokerage, and human capital and management consulting. He is the author of The Curmudgeon’s Guide to Practicing Law (affiliate link). You can reach him by email at inhouse@abovethelaw.com.

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