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January 21, 2009

Alternative fees (Part 3): What your competitors are doing

A growing number of visionary firms are leading the charge to alternative fees.

Last year, Patrick Lamb, author of the widely read blog, In Search of Perfect Client Service, founded a Chicago litigation firm which takes its name from the Latin word for value:  Valorem Law Group.

The animation that greets users to their website begins by announcing “The billable hour is dead.”  Then it asks a question “How many lawyers does it take to screw a client?”  After a short pause, the answer:  “On a billable hour basis, only one.”

One of Valorem’s most interesting innovations is their “value line adjustment”:

“On each bill, you have the right to make any adjustment to our proposed fee that you feel is needed.  We provide value or you adjust the bill, it’s that simple.

We do this to give you the ultimate check on our unwavering commitment to client service, and to eliminate the concern that our level of service will wane once the work we’ve performed exceeds a given flat rate or capped fee allotment.

Some have said that the Value Adjustment Line is extremely risky. We agree. If we aren't willing to risk our own fees on our service, do you really want us advocating for you?”

While Valorem is one of the best known firms to move away from the billable hour, it does not claim to be the only one, or even the first.  When Pat Lamb announced the founding of the firm last January, he noted that many of its features, including the value line adjustment were “shamelessly copied” from his friend Ralph Palumbo of Summit Law Group.  Palumbo’s vision of “Creating the Law Firm of the Future”  describes his approach to “getting away from the billable hour” and much much more.

Another firm that takes a position on its website is Shepherd Law Group, founded by Jay Shepherd in Boston to specialize in employment law:

“Hourly billing pits the interests of the client against the interests of the law firm. If a project takes longer to complete — which is bad for the client — the law firm makes more money — which is good for the law firm. And most firms have annual billing requirements for their lawyers, who don’t receive bonuses if they fail to bill a certain number of hours. With that kind of pressure, how hard are your lawyers going to try to keep your billable hours down?"

The Shepherd Law Group does all its work based on “Up-Front Pricing”: 

“Up-Front Pricing is our approach to helping clients control their legal expenses. You will always know how much our work is going to cost before we do it. It’s our solution to the problems of hourly billing.”

A number of other lawyers and firm have announced their commitment to this approach, including:

• Chris Marston, founder of Exemplar Law Partners in Boston, “the first corporate law firm in the nation to exclusively adopt a fixed price model” and author of an article in the most recent edition of The Complete Lawyer entitled “Why Adopt Fixed Value-Based Pricing Now?”

• Mark Chinn, founder of Chinn and Associates, a family law firm near Jackson Mississippi that promises a “method of pricing that is relatively unique to divorce practice and is designed to foster extreme customer satisfaction.”

• Michael Grodhaus, a litigator at the Columbus Ohio office of Waite, Schneider, Bayless & Chesley  and author of the blog The Alternative Fee Lawyer

• Bruce Raymond founder of Raymond & Bennett, a Connecticut firm that specializes in business and personal injury litigation.

A few weeks ago, Raymond founded a group for Alternative Fee Lawyers on LinkedIn.  Last time I checked it had 47 members, and was growing. 

Not surprisingly, AmLaw 200 firms have been slower to change the way they bill.  In a 2007 article entitled "Are Big Firms Warming Up to Alternative Fee Deals?", Law.com reported some progress, including the fact that alternative fees then accounted for 10% of the work at Howrey (with over 500 lawyers), 10-25% of the work at Fenwick & West (over 200 lawyers), and 40% of the work at Morgan Lewis (over 1,500 lawyers).  

In the last few months, Seyfarth Shaw (over 750 lawyers) has been publicizing its approach through the ACC Value Challenge.  They got interested in the topic through their work for DuPont, a company famous for its commitment to reforming the legal profession through what has become known as the DuPont Legal Model.  A few years ago, Seyfarth managing partner Steve Poor and other lawyers went out to dinner with DuPont General Counsel Tom Sager to discuss how to increase efficiencies.  Sager’s advice was crystal clear:  You can have an enormous impact if you do this right, but you should not start down this path unless top management is 100% committed to making it work.

Seyfarth decided to make that commitment in 2006, and started the Six Sigma program which I described in this blog a few weeks ago.  Every lawyer on the executive committee has gone through Six Sigma training and been certified as a “green belt.”  Seyfarth has made an enormous investment in this system, and it is starting to pay off.

According to Lisa Damon, the managing partner of Seyfarth’s Boston office and the head of the Six Sigma program: “Traditionally, lawyers have applied the piecework model:  the more they produce, the more they are paid.  Through Six Sigma, we are learning how to practice an entirely different way.  If you get a group of lawyers and staff into a room to discuss how to make things more efficient, it’s very easy to find savings.”

So that’s what they’ve done.  Seyfarth has collected and analyzed an enormous amount of data about past projects in such categories as M&A transactions, real estate acquisitions, real estate leasing, single plaintiff employment litigation, summary judgments, commercial litigation and more.  In each category, groups of up to 40 lawyers and staff have held meetings over several months to define efficient processes, and establish guidelines for how long each step should take.  To date, Seyfarth reports that they have developed proprietary processes which have reduced costs by 13% to 50% on more than 75 legal matters, some of them with alternative fees, and some on an hourly basis.

This data analysis has also helped them to discover some interesting and counter-intuitive trends.  For example, many general counsel believe that longer negotiations tend to produce better settlements, because it pays to be tough.  In fact, when Seyfarth systematically analyzed data from past cases, just the opposite was true:  the less time a case was open, the less clients typically paid. 

“Clients love it,” Damon reported.  “Not only do they save money, but they also get higher quality legal work.  And the effect on morale is unbelievable, because this approach gives lawyers permission to do right by their clients."

However, firms that use fixed fees are still the exception, not the rule.  ACC General Counsel Susan Hackett has estimated that more than 95% of legal work is still billed on an hourly basis.  But no one knows for sure and she also noted in an interview with Law.com that as part of its Value Challenge, ACC has started “some surveying of firms and corporate counsel, to create a baseline so we can go back in a year and see if we¹ve moved the needle on any area.”

Which brings us back to earth, and to the central question for next week’s post:  What should you do about alternative fees?

To review a draft of this complete series, see the LegalBizDev Guide to Alternative Fees, in the free resources section of our web page.

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