Legal Business Development

Alternative Fees (Part 17) – Costs

Alternative fee arrangements can help law firms to survive and thrive in the current economy.  Aligning the interests of lawyers with their clients produces more stable long-term relationships, and can help firms improve their competitive position.

But these benefits come at a cost.  The process can require significant investments, starting with the day firms plan their bids. 

According to Guy Halgren, chairman of Sheppard Mullin:

Many law firms...have a hard time pricing bids that work for their clients and are profitable, too. For example, when a firm is asked to bid on a single-plaintiff employment case, it has to know staffing, plus procedural and other costs. Sheppard Mullin has three alternative-fee ‘czars’ for transactions, litigation and regulatory practices. These attorneys look for opportunities to utilize alternative arrangements.

Large law firms that have made a commitment to alternative fees have also found that it can take significant effort to convince clients to act.  When an Inside Counsel article explained how Jackson Lewis won Pfizer’s U.S. labor and employment work for 2008 and 2009 on an alternative fee basis, it quoted Pfizer’s general counsel as follows: 

Jackson Lewis got [the work] because they recognized that we needed to find some alternative to billing by the hour. They actually brought it up before we did.

The article went on to describe all the hoops Jackson Lewis had to jump through before they got the work, including:  

[Kevin] Lauri [of Jackson Lewis] evaluated the geographic spread of Pfizer cases throughout the country and identified the best partner in each of Jackson Lewis's 36 offices to head up Pfizer's matters in that location. He also compiled a detailed roster of Jackson Lewis's experts in various areas of employment law such as wage and hour compliance, ERISA, and affirmative action. Lauri put all of this data - as well as information and documents for each existing Pfizer matter handled by the firm - on an extranet site dedicated to Pfizer.

Jackson Lewis brought 19 lawyers...from its offices around the country to...[a]  meeting with the client. "Without bringing the entire firm, we wanted to make sure Pfizer knew we were dedicated to the process," Lauri says.

The article does not say what all this cost, but it clearly wasn’t cheap.  That entire investment would have been lost if Pfizer had decided to continue with hourly billing and multiple firms, or had chosen a different firm for its transition to alternative fees.

Significant new investments in marketing and bidding seem especially difficult at a time like this, when law firms are being forced to cut costs.  Some firms have been cutting costs for years. According to Ralph Baxter, the chairman at Orrick:

"We’ve got to adapt to changed times."  Orrick has changed its staffing model, hiring less costly nonpartner lawyers. In addition, in 2002 it consolidated its back-office staff in Wheeling, West Virginia, to conduct electronic research and prepare transcripts, among other tasks. The firm has been examining how it performs nearly everything it does, to better understand its costs of providing services.

And then there is the matter of risk.  Lawyers hate risk.  They try to minimize it in clients’ lives, and in their own.  But alternative fee arrangements force firms to act more like entrepreneurs, and accept the risks of pursuing many new clients, in the hope of signing a few.  I’ll talk more about risk next week, in Part 18 of this series.

For a summary of this series and more, see the second edition of the free LegalBizDev Guide to Alternative Fees, in the Alternative Fees section of our web page.  The third edition will be released in July.

Alternative Fees (Part 16) – Win-win, or win-lose?

When a law firm agrees with a client on an alternative fee arrangement, both sides usually see it as a win-win for the long term.  That’s why they reached the agreement. 

But what about the short term?  Are fixed and contingent fees a good way for law firms to produce greater short-term profits while clients simultaneously pay less?    

Of course, the answer varies from case to case.  But when law firms talk publicly about the topic, they often focus on the win-wins.  For example, when Howrey represented Chinese cell phone battery maker BYD, an article on alternative fees noted that:

[Partner Henry] Bunsow said Howrey was confident that it could get a favorable outcome defending BYD and felt comfortable agreeing to a hybrid contingency. The terms were that Howrey would charge a discount on its estimate for the trial and receive a bonus if either they prevailed in court or reached a low-cost settlement.

The decision paid off.  In 2005, the case settled before going to trial for "less than the value of one day's production" at BYD's battery plant, Bunsow said. That earned the trial team a celebratory trip to China and a cool million-dollar bonus, which bumped the firm's revenue from the case 50 percent higher than it would've been with plain old billable hours, he said.

Similarly, when the New York Times wrote about alternative fees a few months ago, they quoted Carl A. Leonard, a former chairman of Morrison & Foerster and now a senior consultant at Hildebrandt about its profit potential:

In one case... Morrison & Foerster negotiated a fixed fee for defending a company in court, covering work up to the point of a motion for summary judgment.

On top of the fee, if the case settled for less than what the company feared having to pay if it lost in court, the law firm got a percentage of the amount saved. The arrangement made sense when the goal was to resolve the dispute quickly...

Lawyers on the case negotiated a settlement for much less than the client’s worst-case number, Mr. Leonard said. "The effective hourly rate was something like 150 percent of our hourly rates," he added. "We made money, the client was happy."

Although it is possible to make more with an alternative fee, these days most firms don’t.  When Altman Weil released their Law Firms in Transition survey last month, they reported that:

When asked about the profitability of non-hourly work, only 15% of firms reported that non-hourly projects were more profitable than those billed at an hourly rate.

At the other extreme, 24% of the 208 respondents said alternative fees were less profitable.  When the results were broken down by firm size, large firms did even worse.  Six of the firms who responded to the survey had more than 1000 lawyers, and three of them (50%) said alternative fees were less profitable than hourly work.

As discouraging as those figures are, I suspect they seriously underestimate the problem.  Asking business people about profits is a bit like asking gamblers about their trips to Vegas.  Due to selective memory and selective reporting, you are likely to hear much more about wins than losses.

In explaining the survey’s results, Altman Weil’s Tom Clay noted:  “Most [law firms] still haven’t figured out how to structure and staff projects so they are more profitable – which they can be, if done right.” 

While this is certainly true, in my 24 years of experience running fixed price and hourly projects in my own business, I have found that consistently profiting from fixed fee work is an enormous challenge, and a struggle that never ends.

Lawyers have been rewarded for their entire careers for putting in extra hours to analyze every risk from every possible angle.  Most lawyers will have a hard time delivering the quality they are comfortable with when they must work within hourly limits.  And large firm managers will have an even greater challenge when they try to juggle staff on dozens or hundreds of projects with constantly shifting deadlines.  Traditionally, firms expect lawyers to be consistently productive 1600 or 1800 or 2000 hours per year.  If firms shift a significant portion of their work to a fixed price basis, many will find those goals unreachable.

At the same time, it is also getting harder to protect profits as competition increases, prices go down and margins get squeezed.  As noted in last week’s post, in the current economy buyers are the ones with the power.   And they often use that power to cut costs. For example:

By working with outside counsel on alternative-fee arrangements, Cisco has managed to reduce its legal fees as a percentage of the company's revenue by more than 20% during the past five years, according to Mark Chandler, Cisco's general counsel.

Similarly, Pfizer has reported:

“substantial double-digit reductions in spending" even though matter counts had more than doubled from 2005 to 2006, and then jumped by close to a third from 2006 to 2007. How did Pfizer keep spending down?  "Flat fees, volume discounts, and value-based assigning..."

When both inside and outside counsel talk about alternative fee arrangements, I predict they will continue to accentuate the positive, and focus on win-wins.  People will speak most freely about the matters that make them feel good and look good, whether in terms of higher profits compared to hourly rates, or in terms of other benefits.  But in my experience as a business owner, when one side wins a revenue concession, the other side loses money, at least for the short term.

In competitive markets, business people expect to invest in new business and to take risks.  Pharmaceutical companies invest billions in drugs that never make it to market.  But most law firms have done very well for themselves while minimizing risk.  In 2007, the average profit per partner at AmLaw 100 firms was $1.3 million. Change will come hard.  As Richard Susskind notes in his book The End of Lawyers (p. 280), “It is not easy to convince a group of millionaires... that their business model is wrong.”

But a few leading law firms have started to prepare for a new and more challenging future.   Last week, the subscribers section of the National Law Journal web page included an article entitled Kirkland expands use of special fee structures which said:

During the past three years, the firm says it has given away more than $100 million worth of billable hours, but it hopes to make the revenue back through follow-up work from those clients.

Naturally, Kirkland did not want to reveal all the details of its strategy to competitors, so the article left readers with many questions.  How much of the $100 million “give away” was based on fixed and contingent fees and how much from the types of blended rate discounts that all large firms are forced to offer every day?  How many of those dollars represented new out of pocket costs, and how many came from associates and partners simply working more hours for the same base salary?  But whatever the answers are to questions like these, the fact remains that a $1.6 billion firm is making a massive bet that the future will be tougher, and that they need to invest more in client relationships.

It’s too early to report formal findings from the survey we just started of the AmLaw 100’s use of alternative fees.  But I can say I’ve been surprised by what I’ve heard so far.  In the first two weeks of the survey, I’ve spoken to five Am Law 100 firms – two chairmen and three senior partners.  All five predict that alternative fees will increase in the next few years.

When I asked for an estimate of the percentage of revenue that would be entirely or partly fixed (e.g., capped fees) five years from now, four participants were willing to go on record.  The lowest prediction was 10-15%, and two of the participants tied for highest by predicting 50%.  Let me repeat that: leaders of two of the largest firms in the US believe that five years from now, half of their revenue will come from non-hourly work!  If they are anywhere near right, there’s a huge number of lawyers out there who have a whole lot to learn about bidding and managing alternative fee projects.

We live in a world that is changing rapidly.  Large law firms like Kirkland are investing heavily in new tactics, and legal clients like Pfizer are paying less while doubling the work.  In this environment, I believe that alternative fee arrangements should not be seen primarily as a win-win way to increase profits.  But they are an absolutely essential tactic to generate cash flow and to survive in an ever more competitive world.

For a summary of this series and more, see the second edition of the free LegalBizDev Guide to Alternative Fees, in the Alternative Fees section of our web page.  The third edition will be released in July.

If you’d prefer to read my blog in Russian...

Be sure to see Ivan Timshin’s blog Legal Gleanings for translations of selected items, starting with a post I wrote about listening a few years ago.  Here's the Russian version.

A panel of experts discuss alternative billing

If you’d like to hear a panel of experts discuss “Alternative Billing: How to Implement Sustainable Programs for the Long Run”, you can listen in from your PC on July 29, 12:30-2 PM EDT. 

This is the third webcast in a series of panels I have organized for West LegalEdcenter  I will be moderating the discussion, and the panelists will include:

o    Lisa Damon, Managing Partner of the Boston office of Seyfarth Shaw
o    Bryan Ives, co-chair of the Corporate Transactions & Securities Group at Alston & Bird
o    Kerry Notestine, a shareholder at Littler Mendelson

In the long run, the use of alternative fees will grow only if arrangements can be structured in a sustainable way that makes business sense for both sides.   These panelists have extensive experience winning and managing business with alternative fees.  They will discuss the real world lessons learned in hundreds of matters, including:
o    the risks and rewards of alternative fees
o    bidding strategies that get the business and protect profitability
o    how to manage the work to assure high quality and client satisfaction while staying within budget

If you missed the first two panel discussions in this series, you can listen to recordings on the web:

How Boutique Firms are Delivering Greater Value with Alternative Billing 

Panelists:
Jim Hassett - LegalBizDev
Fred H. Bartlit, Jr. - Bartlit Beck  
Patrick Lamb - Valorem Law Group 
Bruce H. Raymond - Raymond & Bennett 
Jay Shepherd - Shepherd Law Group

How Large Firms are Delivering Greater Value with Alternative Billing (April 2009)

Panelists:
Jim Hassett - LegalBizDev
Fred H. Bartlit, Jr. - Bartlit Beck  
Robert E. Fields - Womble Carlyle 
Richard G. Rosenblatt - Morgan Lewis 
Harry P. Trueheart - Nixon Peabody

Bad Advice on Lowering Fees

I rarely read newsletters on weekdays.  But I could not resist reading the June 10 edition of Rain Today when I saw the headline:  “What to Say When Your Clients Ask for Lower Fees.”

Rain Today is written for lawyers and other professional service providers, and the lead article -- “You Can't Back Down When Your Back Is Against the Wall” -- began with these words:  “One of the most consistent questions I'm asked... is, ‘What do I say when they want a reduction in fee?’... You say, ‘No.’”

The author -- consultant Alan Weiss -- goes on to explain that reducing fees is usually a mistake and that people who consider doing this often suffer from underlying doubts, including:  “Poor self-esteem: who am I to ask for this much?”

When it comes to lawyers, I think this is bad advice.  If you asked a thousand people who work inside law firms to list their employers’ personality flaws, I don’t think a single one would accuse the average attorney of poor self-esteem.  And we are talking about a profession that has shown little reluctance to ask for more.   Last December, with the economy deep underwater, the American Lawyer reported in its annual survey of law firm leaders that 97% of AmLaw 200 firms planned to increase their rates in 2009.

Generally speaking, I try to follow Dale Carnegie’s advice in How to Win Friends and Influence People:  “The only way to get the best of an argument is to avoid it.”  And I certainly don’t want to pick a fight with Alan.  I’ve respected his work for many years, and often consult his website for its excellent advice.  I even think the concept of standing firm on price is often right.  But for lawyers in this economy, it can be downright dangerous. This is the wrong time for lawyers to take a hard line on fees.

Many lawyers recognize how serious the price pressure is, and are already cutting their rates.  But some don’t, and this advice could cause them to lose business.

The underlying economics remind me of the housing market.  A few years ago, I loved tracking the price of my home, as it went up and up, and then up some more.  But if I tried to sell it today for the peak price, no one would buy.

Price pressure has been building on law firms for a long time.  In 1992, DuPont established a “convergence process” to increase efficiency and reduce cost by using fewer law firms.  In the first four years, they reduced the number of law firms they used from 350 to 42.

When I started this blog four years ago, my very first post was about Tyco reducing the number of law firms it used in product liability matters from 167 to 1.  166 law firms lost Tyco as a client because they were unable to meet its needs, largely on price.

Since then, other large clients have substantially reduced the number of law firms they use including The Linde Group, Brady Corporation, Pfizer, and Honeywell.  Hundreds of law firms have lost millions of dollars of business with these clients, largely because they were unwilling or unable to offer lower fees, and alternative fees.

And then there is the economy.  As Forbes noted a few months ago, “The sudden lack of liquidity has led to a dearth of transactions, killing demand for many legal services. At the same time, clients facing their own financial pressures are increasingly scrutinizing budgets and demanding more value for their legal expenses.”

Another recent article summed up the result, “GCs [are].. dropping law firms, and demanding lower bills and fixed fees from the ones they keep.”

Over the past few years, AT&T asked all of its outside law firms to accept across-the-board cuts.  According to Patricia Diaz Dennis, senior vice president and general counsel, only the ones who “agreed to share our pain ... are still with us today.”

And if refusing to lower prices costs you the wrong client in this challenging economy, it will take a long time to recover.  As Steve Barrett, a legal consultant and former CMO, put it:  “Once you lose the trusted advisor role, you are on the outside, and it could take five years to get back in.”

The world is a complicated place, and broad generalizations don’t apply to everyone.  The idea of holding the line on prices is actually good advice for the small number of lawyers who are in a strong bargaining position due to their expertise and reputation.

The problem is that there is a very large number of lawyers who THINK they fall in that category, but don’t.  The world has changed, and they haven’t.

So my general advice to lawyers is simple: listen to your clients and provide more value, even if it means cutting your rates. As Mary Ellen DeWinter, Director of Practice Development at K&L Gates put it: “By being open to a conversation about fees and demonstrating your value as a trusted advisor, you can retain clients and provide a ‘win-win’ opportunity for you both."

Alternative fees (Part 15): The LegalBizDev survey

In a recent survey conducted by the Association of Corporate Counsel, 60% of general counsel and chief legal officers said that the best way for outside counsel to improve relations is to offer more alternative billing arrangements.  77% would like to increase the percent of their budgets spent on alternative fees.

However, in the long run, the use of alternative fees will grow only if arrangements can be structured in a sustainable way that makes business sense for both sides.   It takes two to tango, and law firms must lead the dance because the personal risks and rewards are far greater.  While inside counsel are negotiating with their employers’ money, law firms are risking their own.

Surprisingly little is known about how large firms are implementing alternative fees these days.  As a result, my company LegalBizDev is now announcing our own survey of alternative billing and the AmLaw 100. 

A few weeks ago, I recruited a Survey Advisory Board (Lisa Damon of Seyfarth Shaw, John Dragseth of Fish & Richardson, Richard Rosenblatt of Morgan Lewis, and Harry Trueheart of Nixon Peabody) to get insights from senior partners into the questions to ask, and the best way to approach large law firms. 

These days, most surveys are based on questionnaires posted on the web.  We wanted to get deeper information, and more assurance that we were listening to the most qualified sources.  So we decided to start by approaching the chairman’s office at each firm, describing our national survey of alternative fees, and asking whether the firm would like to participate.  First we email a standard description of the survey to the chairman, then we follow up by calling the assistant up to six times until we get a decision one way or the other.  When firms agree, we ask the chairman for the name of the most appropriate senior partner to interview.

The interviews started last week: open ended discussions of what works for alternative fees and what does not.  Each 30-minute interview focuses on the areas of greatest interest to a particular senior partner including RFP requirements, bidding, managing the work for quality and profitability, future trends, and more.

After each interview, the lawyer will be sent a written summary of the discussion and will have the option to approve it to be included in the final report “as is,” or to fix any details before publication.  All interview statements will be considered confidential and proprietary until the written account has been approved.  Firms will also have the option of commenting on sensitive matters anonymously, or of making public statements.  While these steps may not sound like a hard-hitting journalistic investigation, they do help assure that the maximum number of firms will participate, that they will speak openly, and that they will be quoted accurately.

I will post occasional survey updates in this blog, and will publish a final report next fall.  It will include a list of the AmLaw 100 firms that chose to participate in the survey, and those that did not.  I will also present the findings to senior legal executives from companies across North America at the 4th Corporate Counsel Exchange next December in San Diego.

For a summary of this series and more, see the second edition of the free LegalBizDev Guide to Alternative Fees, in the Alternative Fees section of our web page.  The third edition will be released in July. 

Alternative Fees (Part 14): In-house counsel’s reluctance to switch to non-hourly billing

A few weeks ago, after I wrote Why has change been so slow?, I saw some fascinating comments on the post from leaders in the profession.  But you probably missed them, because the exchanges were on Legal OnRamp, a private website for in-house counsel and others, accessible by invitation only.

I felt the remarks were so important that I wanted to share them with a broader audience. So I contacted each person, and got their permission to reproduce the edited comments below.

Pat Lamb, co-founder of the Valorem Law Group, kicked off the discussion:

“The reasons clients have been slow to move to alternative billing are complex. Inertia is a factor, as is fear of the unknown, and the fact that alternatives typically require a bit more upfront investment of time. It's easier, in some respects, to just send someone a copy of a complaint and wait for the bills to arrive than to work to find out how serious the matter is and work out an appropriate fee (an exaggeration to be sure, but it illustrates the point). But these obstacles are being surmounted more and more, with push coming from the CEOs and CFOs of the corporate world. One of the things they are finding is that performance actually improves when the payment scheme values experience and results rather than body count. This, more than anything, provides the comfort inside counsel are looking for.  So does the fact that most lawyers who use alternatives as the core of their model are typically willing to trust the client when it comes to determining the final fee amount.”

The next comment came from Caren Gordon, Executive Director of the Legal and Governance Practice of the Corporate Executive Board:

“Alternative fees have been slow to catch on for a number of reasons. The most dominant drivers from my observation are that they require more time to set up, more internal research into historical expenditures or conversations with outside counsel about what a matter truly costs, monitoring to ensure that they work, and final determination at the end.

That said, when the structures are perceived by both parties to be more easily deployed (i.e., 'We have a method for calculation. This is the way we do business. We provide transparency to you as to up and down side.' etc.), we see them gaining traction. The critical component is having aligned incentives, making sure that both parties have the same stake in achieving positive and/or quick, optimal outcomes.

Given the recent downturn, General Counsel are under much more pressure to manage cost with a discipline that re-opens the investigation into how and why alternative fees might work.”

Jeffrey Carr, General Counsel at FMC Technologies took a stronger view

"Despite constant whining and complaining from the client, not much has changed. In my view, the reason for inside counsel's resistance is really rather simple -- the in house community has abdicated its responsibility to drive efficiency as well as effectiveness because of the widely held belief that law and legal services are somehow 'different'. Whether fear, complacency, risk aversion, inertia, lack of creativity or vested interest in the status quo has gotten us to this
heinous place doesn't really matter.  The question is have we really decided to move?

I submit that we have and that a growing number of in-house counsel are joining the effort. The ACC Value Challenge is perhaps the most visible and important manifestation of that effort and movement -- but it's not the only one.  Each GC needs to make a focus on value the driving force
of the legal function and each and every in-house lawyer needs to engage in open, honest communication with their outside firms about expectations, performance, value and compensation.  Absent those actions, the more things change, the more they'll stay the same."

Advice on breaking the logjam was added by Robert Badal, a partner at WilmerHale:

“I think two things would help enormously in breaking the client-dependency on the existing billable structure (even as clients condemn that structure). 1) Stop comparing the alternative fee structures to what the company would have spent on a regular billing basis. By using the normal billing structure as the measure of comparison, you import into the calculus the very thing you're trying to avoid and you lose the potential for creative billing solutions. (2)  Really commit to long-term relationships with outside counsel so that price inequities can be worked out over time.”

But will the switch come soon?  Casey Flaherty of Holland & Knight says:

“There are numerous reasons [that progress on alternative fees has been slow], but to me the biggest seems to be the understandable focus on the short term (this case, this quarter, this fiscal year) by both clients and law firms. Immediate needs are, well, immediate. Alternative fees, by contrast, recommend considerable long-term structural changes. Such changes are often incongruent with the focus on immediate needs. Thus, they get pushed till ‘later’.

Law firms, like most institutions, are given more to punctuated equilibrium than gradualism. Now may in fact be ‘later’ - a moment where stasis gives way to radical change. We shall see.”

There is no doubt this discussion will be going on for a while.  In December, I will be moderating a panel discussion on alternative fees by inside counsel at the Corporate Counsel Exchange.   I can’t wait to hear what inside counsel are saying about this by December.

For a summary of this series and more, see the second edition of the free LegalBizDev Guide to Alternative Fees, in the Alternative Fees section of our web page.  The third edition will be released in July. 

It’s time to get serious about marketing

“I’ve been a lawyer for 31 years, and I’ve never seen it like this.  Do you have any words of wisdom for me?”

The question came from a practice group leader at a 1,300 lawyer firm who subscribes to this blog.  She had just finished reading my book, and was looking for more.  At the time, I was not sure what I could add to what she had already read.   

As I thought about this later, the answer came to me:   It’s time for lawyers to get serious about marketing.  It may not be a magic solution, but it is an unavoidable fact of life.

Rainmaking has always been important to financial success in the legal profession.  These days, it is becoming a matter of life and death for both firms and for individual lawyers.

When AmLaw 100 firm Wolf Block dissolved a few months ago, the Philadelphia Inquirer asked former Duane Morris chairman Sheldon Bonovitz what would happen to its partners and associates.  “Lawyers with solid business generation are going to be highly sought after....”, he said.  “[Others] will have a hard time, unless they are part of a group.”

When the Wall Street Journal blog interviewed consultant Peter Zeughauser a few weeks ago about job security at large law firms, he said “I think you’re going to see underperforming or poorly performing partners managed out... When I talk about poor performers... I’m referring not just to hours and billable rates, but also their ability to attract clients. I hear from a lot of managing partners the lament that ‘my partners don’t act like owners.’  I think these partners — the partners who ‘don’t behave like owners’ — are going to struggle.”

To thrive in today’s increasingly competitive environment, most lawyers need to spend more time on marketing.  This year, we recommend at least one hour a day.  We encourage more, but will settle for any improvement.  To participate in our coaching programs, lawyers must agree to spend an absolute minimum of three hours per week on marketing.  I know that these are high figures for many lawyers, but I also think that putting in the time has become a necessity in these challenging times.    

Law firms will also need to spend more on marketing, just to keep up with their competitors.   Traditionally, legal marketing budgets have represented about 2% of revenue, which is very low compared to other businesses.  The figure is typically in the range of 6-8% for professional service firms such as accountants, consultants, and architects and, and much higher in other types of businesses.  I am not sure what will happen to the percentage in 2009's stressed environment, but have no doubt it is heading up over the long term.

And no matter what their total budget, law firms need to get smarter about how they spend their marketing money.  I wrote last week about how large firms are analyzing the ROI (return on investment) of each marketing expense, and putting more of their budgets into items which can be directly linked to results.

The day that post appeared, the Wall Street Journal published a great article about increased spending on legal business development.  Maybe I loved it so much because of this quote:

“In the last few months, law firms have become increasingly aware that training lawyers in marketing and business development is a key way to drive business. According to a February survey of 120 marketing directors at large law firms -- conducted by legal market researcher, BTI Consulting Group -- business development is one of the few marketing areas where law firm executives are most willing to increase spending. Nearly 70% said they planned to provide more marketing coaching to lawyers.”

Or maybe the reason I loved it was that it highlighted the work of LegalBizDev coach Tom Kane, the co-founder of our LegalBizDev Network. 

Whether you decide to hire a coach or not, in this environment every lawyer needs to get more serious about analyzing the return on their marketing time.  For example, one lawyer I worked with recently was spending much of his marketing time in a leadership role at his local Chamber of Commerce.  The Chamber was trying to attract new industry to his city, and the lawyer was spending this time working with startups and undercapitalized firms that would not need legal help for quite some time.  So when he sat back and analyzed how soon all this work this might lead to new business, it became clear that he needed a faster payoff.   He decided to substantially cut back on Chamber meetings, and spend the time instead with current clients.  He is already starting to see results.

The down economy (Part 10): The Boston Roundtable meeting

A few weeks ago, senior business development professionals from some of the largest firms in Boston gathered for the quarterly meeting of the Boston Roundtable on Legal Business Development.  Our topic this time was “Developing new business in a down economy:  Challenges and opportunities.” 

Most people agreed that things are still getting worse.  As one put it: “The cataclysm is coming... Big firms are reaching down for more clients and small firms are reaching up.”  In this economy, every client is looking for greater value and “we all need to have a better understanding of what is in clients’ heads.”  (As in previous posts about the Boston Roundtable, all quotes have been checked by participants to insure accuracy.  However, names have been omitted to protect confidentiality and assure a frank discussion.)

The silver lining in the recessionary cloud is that it forces law firms back to basics, and makes them consider whether each item in the marketing budget is a solid investment in new business. 

“At a time like this,” said one person, “you shake out the things that are not important and the places where people hide.”   Said another:  “I’m certainly not enjoying this, but it’s a natural part of the business cycle.”

“The economy puts a new urgency on proving your worth, every day,” said a third participant.  She had recently switched roles within her firm, and now spends more time helping key practice groups to bring in new business in the short term.  The change will be good for her firm, and good for her job security.

There’s also more emphasis on measuring results.  One firm is adding a dashboard to its CRM to make it easier to keep track of the sales pipeline.  Another has begun circulating a spreadsheet listing every lawyer in the firm, and their deadlines for marketing action items. This type of transparency increases both accountability and results.

The firm with the spreadsheet also requires lawyers to “sign a contract” whenever a marketing expense is approved.  For example, lawyers who want marketing funds to pay for a trip to a conference must commit to what they will do before, during and after the conference to maximize the chances of bringing in new business.  Another firm holds coaching sessions with lawyers who plan to attend a conference, to help them figure out how to follow up, and to insure that they do.  “It’s a huge cultural shift to question lawyers’ participation in any conference,” said a third participant.  “But for the first time I am able to get lawyers to commit to specific steps to use conferences to build relationships.”

If a particular lawyer won’t agree to follow up, or doesn’t have a good marketing reason for traveling to a particular conference, the down economy has put the marketing people in a stronger position to refuse to pay for it. 

Sponsorships are also being evaluated more carefully than in the past.  When one lawyer wanted to use $10,000 from the marketing budget to sponsor a conference, the marketing person from our group said to him, in the nicest possible way:  “You should expect me to scrutinize requests like this. It’s my job to save the firm money.  Would your partners agree to pay for something like this?  Would you write a personal check?”

She did not say it out loud to the lawyer, but admitted in our meeting that she thought that sponsoring this particular program was a waste of money last year too.  But when the economy was strong, expenses like this were routinely approved.  The new, more competitive environment has forced law firms to look harder at expenses, and weed out the ones with the lowest return on investment.

One participant summed it up this way:  “We are in a process of behavior modification. To some extent, we created the monster by not fighting harder when the economy was strong and lawyers wanted to spend marketing money on the wrong things.  Now everyone expects to make a business case for every expense.” 

The transition to hard-headed analysis may be painful, but in the long run it will be better for marketing departments, and better for law firms.

Alternative Fees (Part 13) – Why has change been so slow?

Throughout this series, I’ve been writing about the ways that alternative fees can save clients money and help lawyers build stronger relationships with their clients.

 

The panelists on my recent West Legal Edcenter webcast on alternative fees at large firms are among the best known proponents of this approach. But when they talked about the speed of change, their views ranged from guarded to discouraged.

 

Harry Trueheart noted that at Nixon Peabody “We got involved in alternative fees more than two decades ago.  When people started talking about this, we got out in front.  We wanted to go with the flow and not resist.  But the flow was not as strong as we expected.”

 

Similarly, Fred Bartlit reported that when he left Kirkland & Ellis to found Bartlit & Beck 16 years ago, he thought that once the benefits became known, change would come quickly.  It didn’t.

 

Other experts have offered similar observations.  Last November, Law.com interviewed Susan Hackett, general counsel of the Association of Corporate Counsel, about the progress the ACC Value Challenge was making in promoting alternative fees.  According to Hackett, “Lots of clients' lips are moving, but their feet aren't moving.”

 

On the West panel, Richard Rosenblatt reported that at Morgan Lewis,  “We are pursuing alternative billing very aggressively.  We offer a veritable smorgasbord of billing options, and we believe that virtually all matters can be structured with alternative fees.  The biggest challenge is that clients are nervous about entering new territory.  They always ask, ‘Will this cost me more or less than hourly billing?’”

 

Of course that’s a perfectly reasonable question for a client to ask, and Morgan Lewis has devised several ways of minimizing the risk for both sides.  Some of their fixed fee arrangements include “risk collars” which compare the fixed fee to the actual hourly expenses.  In one example, “If the hourly expense is less than the fixed price, we offer a rebate.  If it’s more than 20% over, the client gets the first 20% free, but might pay half of whatever is over 20%.”

 

According to Rob Fields of Womble Carlyle, fees “must be transparent so the client can see that they won and they can defend the cost to their business people.”

 

Unfortunately, in some cases it can be very hard to prove that fixed fees lead to lower costs than hourly rates.  For example, alternative fees sometimes represent a paradigm shift in which clients are more likely to avoid legal problems by seeking early advice.  But how could you prove that problems were avoided and money saved?  Ultimately, fixed fee arrangements must be built on a foundation of trust, and trust is not the long suit for many lawyers.

 

Fields reports that at Womble Carlyle the deals that have worked out the best are the ones that were client-driven.  “It doesn’t mean the client has to come with the nuts and bolts of how this works.  The law firm may have those answers, but the client has to bring to us a clear idea of what they expect to achieve.”   

 

Although progress may be slower than some would hope, all panelists believe this is the wave of the future.  As Fields summed it up, “Alternative fees are necessary, a good thing, and inevitable.”

 

For a summary of this series and more, see the second edition of the free LegalBizDev Guide to Alternative Fees, in the Alternative Fees section of our web page.  The third edition will be released in July.