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January 28, 2009

Alternative fees (Part 4): Why every lawyer needs to consider alternative fees now

In 2009, every lawyer should consider offering alternative fees.  If your clients are worried about the economy, the reason is obvious:  it’s a great way to offer more value.

Last year, you could have gotten by with less radical solutions.  When I started writing about marketing in a down economy in January 2008, I recommended offering clients a free meeting to learn more about their business.

With some clients that is still a good idea.  But with others it is too late, because your competitors got there first, and they don’t have time to chat.  As the economy continues to deteriorate, some clients will only want to talk about one thing: how to save money.  

For example, consider the list of New Year resolutions Gartner proposed for its customers. This list was aimed at Chief Information Officers in Britain, but the basic ideas could easily be applied to General Counsel:  “Suppliers will be keen on staying in close touch, working hard to attract [managers] off-site for ‘face time’, so [managers] must resolve to politely decline vendor courtesy trips in 2009.... [Managers] should identify the senior... leader in each of their key vendors... and invite them to lunch or dinner at a chain-restaurant venue that sets a starkly thrifty tone to discuss the value driven cost optimisation that both be required to deliver in 2009.”

This year, marketing is all about offering value.  Clients are more motivated than ever to look for ways to reduce their legal bills.  And when competing law firms lose business, some will inevitably get more aggressive about their own pricing to try to replace the clients they’ve lost.  When the pie shrinks, someone is going to go hungry.

To date, most large law firms don’t seem worried.  They may be cutting staff (see Layoff List), but they are not cutting prices, at least not in public.  In December 2008, the American Lawyer reported in its annual survey of law firm leaders that in 2009, 97% of AmLaw 200 firms planned to increase their rates.

At a time when clients are experiencing the most significant financial trauma since the Great Depression, public relations experts may question whether price increases are the best way to show clients how much you care.  But if this survey result says nothing else, it certainly makes the point that large law firms believed they were in a strong bargaining position when they were surveyed last fall.

They’d better be right.  Because being wrong could be catastrophic. 

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 as Steve Barrett, the former CMO at Drinker Biddle put it:  “Once you lose the trusted advisor role, you are on the outside, and it could take five years to get back in.”  If you have any doubts about what happens to law firms that start losing large clients, just ask lawyers who used to work for Heller Ehrman, Thelen, or Thacher Profitt, three AmLaw 200 firms that have been dissolved in the last few months. 

So if any of the changes in the economy and the legal profession have you worried, now is the time to consider alternative fees.

But what if you’re not worried?  What if you are one of the lucky few whose practice has never been stronger?  I still recommend that you consider fixed price arrangements, but for a different reason:  as a way to maximize revenue.  

In 2007, David Lat wrote a piece in the New York Times Dealbook entitled “When $1,000 an Hour Is Not Enough” explaining that when “the boom rolled on, law firms specializing in mergers and acquisitions increasingly engaged in premium billing, charging fees in excess of their total hourly billings.” 

One of the firms Lat spotlighted was Wachtell Lipton, whose profits were typically around $4 million per partner during this period.  They had “moved beyond billable hours to the flat fee preferred by bankers.. A former Wachtell lawyer described a typical bill as follows: “There’s a paragraph stating something like, ‘For legal services rendered in connection with Transaction X,’ then a dot leader, then a number followed by six zeros.”

In Adam Smith Esq., Bruce MacEwen recently offered another reason why very successful lawyers should consider fixed fees:  “If financial services comprise a substantial part of your clientele, look forward to their being more heavily regulated than before. With congressional oversight. Care to explain to, say, Barney Frank, why $1,000/hour is a fair and economically justified rate? Wouldn't you far prefer to explain why (say) $750,000 as a flat fee on a $50-million transaction is reasonable?”

So I believe that in 2009 every lawyer should consider alternative fees.  The next few posts in this series will explain how.

For a preview of the major conclusions from this series, see the LegalBizDev Guide to Alternative Fees, in the free resources section of our web page.

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