Alternative fees (Part 10): Today and tomorrow

Legal gurus have been incorrectly predicting the rise of alternative fees for so long that there is widespread skepticism about how quickly change will occur, or even if it will occur.  When The American Lawyer published its Law Firm Leaders survey a few months ago, they noted that while there was a lot of confusion in the marketplace, “The one thing of which managing partners are certain is that alternative fee arrangements will not unseat the billable hour, even in economic turmoil. ‘Stop writing that story, it's never going to happen!’ exclaims one managing partner of a West Coast firm.”

And while there is undeniably a lot of talk about alternative fees these days, there is no hard data proving that the percentage is going up.  As the New York Times article on “Billable hours giving ground at law firms” put it, “The evidence of a shift away from billable hours is, for now, anecdotal, as few surveys exist.”

There is, however, survey data showing that alternative fees are already more common than some lawyers realize.  At the 2008 conference of the Legal Marketing Association last March, BTI Consulting reported a survey of corporate counsel in which 10% said they use alternative billing for more than half of their work.  All told, 69% of this same group used alternative fees at least some of the time.  There were wide differences between practices, with the greatest use in litigation (35%), followed by M&A work (12%), corporate finance (8%), and labor and employment (6%).  When alternative billing was employed, the most common approach was fixed fees (35%), followed by success based contingency fees (16%), negotiated rates (11%), capped fees (7%), and retainers (2%).

When Altman Weil conducted a survey of 115 general counsel last November, they used a more restrictive definition of alternative fees, and asked people to “exclude not only hourly work but also discounted or blended hourly rates.”  By that definition, 17% of respondents reported that they spent more than 10% of their budgets on alternative fees.

Some people argue that these numbers are bound to go up, because so many legal clients are dissatisfied about the way firms currently operate.  As Susan Hackett summed up the problem in an American Lawyer interview about the ACC Value Challenge: 

“Take a look at the cost of legal services and the fact that they've been rising 6, 7, 8 percent a year, for as long as anyone can remember. But the services remain pretty much the same. And at the same time that outside firms' costs are rising, the in-house law departments are getting better at their efficiencies and at lowering their costs. But they don’t see the law firms with any motivation to increase their efficiency.”

This cuts to the very heart of the matter.  The billable hour model led to enormous profits when the economy boomed.  In 2006, for example, the average bonus for a partner at an AmLaw 100 firm was $1.2 million.  Unless the firm was headquartered in New York.  Then the average was $2.05 million.  (The American Lawyer, May 2007, p. 107) 

For many years, law firm work practices, recruiting, and compensation models have all been built around billing more hours.  If firms decide to change to a business model that stresses fixed fees and rewards efficiency, many other things will have to change.

As the New York Times article put it, “The biggest stumbling block may be the managing partners at law firms, who will have to overhaul compensation structures to reward partners and associates for something other than taking a long time to do something.”

Clearly, this would be a huge change.  If I managed a law firm, I would do everything in my power to resist it.  With hourly billing, lawyers almost always make more money.  To succeed with fixed fees, lawyers will require strong project management.  But anyone who’s ever worked at a law firm knows that most lawyers don’t want to manage or be managed. 

In an article entitled “Are Law Firms Manageable?” David Maister argued that this problem will not go away any time soon because “legal training and practice keep lawyers from effectively functioning in groups” due to:
o “problems with trust;
o difficulties with ideology, values, and principles;
o professional detachment;
o and unusual approaches to decision making.”

Not to mention the fact that law firms are partnerships.  It is remarkably easy for most lawyers to take their book of business across the street in a lateral move to another firm.

Given this context, no managing partner wants to open a discussion on how to split a shrinking pie differently.  Therefore, I believe that very few managing partners would push alternative fees unless they felt they had no other choice.  At this moment, the evidence is ambiguous.

Many law firms that have made a commitment to the approach are still waiting for definitive proof of the payoff -- that more clients will come to them with more business.  One law firm told me off the record about an RFP competition that they are currently involved in.  The firm had explained their alternative approach, and the client seemed convinced that the total cost of a project was more important than the average hourly rate.  But then the procurement people got involved, and the RFP said that whoever bid the lowest hourly rates would win the work.

This sort of mixed message is not uncommon in times of transition.  Alternative fees are at the pioneer stage, and there’s an old saying in venture capital circles that “pioneers are the ones with the arrows in their backs.”

There is no question that law firms can significantly lower client costs by changing their approach.  But the jury is still out on whether they can overcome the conservatism of inside counsel who are accustomed to hourly billing.  According to Steve Nelson of the McCormick Group, “Efforts to embrace value billing are often opposed by in-house counsel, who often fear that value billing is a way for outside counsel to boost fees in a way that can evade effective oversight.”

And, as Seyfarth’s Lisa Damon put it,  “The whole revolution rests with the client... If clients change the buying process, it will forever change the way law firms do business.”  Damon believes that this is a critical year for seeing whether the change actually occurs, given the pressures of both the ACC Value Challenge and the economy.

Any lawyer who has been on the treadmill to deliver 1,800 or 2,000 or 2,200 billable hours per year knows that the billable hour model comes with steep costs of its own.  As one article put it, “It’s like a pie eating contest where the prize is more pie.”

In an excellent summary of the key issues, Bruce MacEwen quoted Jeff Bleich, president of the State Bar of California:

“Strong economic forces will continue to favor billable hours... If a better and equally lucrative alternative existed, it would have been adopted by now. So this will not be an easy problem to solve. But we will eventually reach the outer limits of human endurance and the upper reaches of client tolerance, and if we do not begin addressing the issues now, it will be too late when we do...  as a profession, we need to start finding billing methods that will reduce distrust and damage to our client relationships, that will refocus young lawyers on being problem-solvers again, and that will remind us of — rather than distract us from — why we are lawyers in the first place.”

If this transition does come, how long will it take?  According to alternative fee proponent Jay Shepherd (quoted in The Washington Post), “Before the financial crisis happened, I thought in 10 years the billable hour would be on the way out. I now think that will be sped up.”

My prediction is for a growing period of experimentation, in which more lawyers try alternative fees more freely, even when they would rather not. This will continue at least for as long as clients remain under financial pressure.  But if it ever hits a tipping point, watch out.  Alternative fees have the potential to totally transform the legal profession, from the way legal matters are handled to business models and compensation.   And if large numbers of clients insist on them, the firms that only know how to deliver billlable hours could collapse as suddenly as Heller Ehrman or Thelen.

On a day to day basis, most lawyers care little whether alternative fees will become commonplace in five years, or in ten, or in 100.  What they care about is more immediate:  should I discuss alternative fees with my clients today?

My answer is absolutely yes.  If you don’t talk to your clients about this, someone else will. 

You could get started by reviewing the self-assessment checklist on page 34 of Winning Alternatives to the Billable Hour or in Joel Rose’s online article “Implementing an Alternative Billing Program.”

Or you can just jump right in.  Because it is a mistake to approach this issue like a lawyer, trying to craft the perfect agreement and close all the loopholes.  Approach it like an entrepreneur who is willing to do whatever it takes to bring in new business, and can’t wait to get started.

Get out of the office, and talk to clients about what they want and need.  That will be a good idea even if the economy heads up.  And if it doesn’t, communicating better with clients could become a matter of life and death.

For a single document with the content of all ten parts of this series, see the LegalBizDev Guide to Alternative Fees, in the free resources section of our web page.

Comments

[Adine]

Lawyers who embrace technology will have an easier time transitioning to alternative fees. If quality work can be produced in half of the time, both the client and the firm will win.

[Gary Mitchell]

I would totally agree that there are many hurdles in adopting alternative billing arrangements with clients. And I also totally agree that NOW is the time to be talking with your clients. Even if they don't choose to change your arrangement, just the fact that you are listening to them and working to understand them more will go a long way in strengthening your client relationships.

[lucas law center]

I agree with you Adine, technology is a big help in our daily life or even in our work.

LLC