This approach was commended by the Financial Times when it named Allen & Overy as being the Most Innovative Law Firm in Europe . 

Background

Allen & Overy devised a collaborative and flexible billing strategy based on legal product output rather than billable hours. Allen & Overy's creative fee structure enabled entrepreneurial UK start-up Markit Group to obtain the heavyweight legal advice required to support what has gone on to be a key element of its success: Markit RED. Founded in 2001, Markit is already the leading provider of independent pricing, reference data, portfolio valuations and OTC derivatives trade processing for the global financial and commodities markets. Markit's product, RED (Reference Entity Database), is an online service that provides subscribers with critical, verified data on reference entities and reference obligations that are frequently referenced in OTC credit derivatives transactions. Data verification by Allen & Overy lawyers ensures that the data contained in RED is of the highest quality, which contributes significantly to enhanced legal certainty in the credit derivatives marketplace worldwide.

As a start-up organisation, Markit needed to be able to manage its costs and minimise initial expenditure. For Allen & Overy, however, supporting the legal content of a database as large as RED is a highly labour intensive task requiring input from a dedicated team of partners, associates and paralegals week in, week out.

The RED process involves obtaining prospectuses and other offer documents relating to issues of bonds as well as organisational or  constitutional documents for the issuers of those bonds (which could be organised in many different ways and in many different jurisdictions around the world). The obligation and jurisdictional documents are then subjected to a multi-tiered review process which involves extracting, and then cross-checking, the critical data which will ultimately find its way into RED.

RED is also an expanding process. Not only because Markit is constantly seeking to add new reference entities and reference obligations, but because the work is recurring. Data must be reviewed and refreshed at least annually, and often much more frequently.

For Markit, obtaining this level of legal input could, applying a chargeable hours model, have been prohibitively expensive. In addition, the initial development of RED required a significant contribution from lawyers familiar with the capital markets and, in particular, the credit derivatives markets. Markit could not pay lawyers for the level of input required at the research and development phase at a time when RED was not producing an income stream.

Implementation

Both Allen & Overy and Markit realised that a traditional hours-based billing arrangement would not be feasible as the costs for Markit would be too high and too unpredictable. Allen & Overy proposed a novel fee arrangement: the firm's lawyers would assist in the research and development phase of RED for a substantially discounted fee when measured in the “by the hour” standard, but post-development Allen & Overy would earn a fixed fee for each delivery of verified data for a reference entity and/or a reference obligation. The fixed fee amount would be scaled to reflect the type of data provided, and whether the data was being provided for the first time or was simply being reviewed and updated. In contrast to a billable hour methodology, however, the fee would not vary according to complexity or time spent. Allen & Overy's innovative billing arrangement was an attractive solution for Markit.

Impact/Results

Allen & Overy' s creative and flexible billing arrangement, which took into account the start-up nature of Markit's product RED, enabled Markit to achieve its twin goals of minimising legal costs and ensuring predictability. However, Allen & Overy only stood to benefit under the agreed billing arrangement if enough customers were convinced that the quality of RED was worth the subscription fee. The quality of RED itself was dependent on the quality of Allen & Overy's legal input. In other words, Allen & Overy's success would depend on its client’s success – but without any possible temptation to compromise the quality of legal advice. Most importantly, although there is a limit to the number of hours in the day, the potential growth in the number of customers and in the coverage of RED and other related products meant that Allen & Overy could potentially earn more than under a traditional time-cost model. Markit's growth and ultimate continued success depends on whether RED's customers believe that they can, by effectively sharing costs with other subscribers, obtain high quality data at a lower price than they would have to pay to obtain that data on their own. Allen & Overy's billing arrangement with Markit ensures that Markit subscribers will obtain the desired data at a price lower than any firm could obtain the data on its own.

Allen & Overy's legal services ensure that the information will be of the highest quality. Ultimately, as RED proved to be a highly successful product and the volume of Allen & Overy's work increased, the billing arrangement offered Allen & Overy a stable and profitable cash flow. Unusually (nowadays), the arrangement has also ensured that the periodic collection of fees is an uncontroversial and largely administrative task which ensures that work in progress is converted into cash quickly and efficiently.

Allen & Overy’s relationship with Markit enables the firm to be aligned with, and involved in, a growing business that is already a key brand name in the credit derivatives markets. The strategic alignment complements Allen & Overy's leading position in this strategically important product area and reinforces its reputation in the market as counsel to the derivatives industry as a whole. Markit RED has been a cornerstone of Markit's success to date – and has been a major factor in Markit winning a number of industry awards, most recently Credit magazine's award for Best Operational Services Support Provider.

Allen & Overy's flexible billing arrangements have played a vital role in that success and contributed to a unique feeling of partnership between law firm and client that gives Allen & Overy the opportunity to play an integral role in the development of new products and services to be offered by Markit.

Further information

Find out more about innovation at Allen & Overy .

For more information contact Jane Foley   jane.foley@allenovery.com or Guy Nicholls guy.nicholls@allenovery.com .