Legal Business Development

Wolf-Block goes under - Rainmakers move on, others don’t

Wolf-Block, a 300 lawyer firm in Philadelphia, had survived through good economies and bad ones for more than a century.  But now it has joined Heller Ehrman, Thelen, and Thacher Proffit as the latest casualty of the 2009 downturn.

An ABA Journal article a few days ago explained the background, and ended with this: 

Job-hunting will be difficult for WolfBlock staff members and lawyers who don't have a book of business, observers predict.

But "I would say that for lawyers with solid business generation, they are going to be highly sought after. "For those that don't, they likely will have a hard time, unless they are part of a group," former Duane Morris chairman Sheldon Bonovitz tells the Philadelphia Inquirer.

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.

Alternative fees (Part 9): Hybrids

When I started working on this series, I hoped to find a single definitive list of all possible types of alternative fees.  But I’ve given up.  There are too many lawyers creating new variations.

Consultant Ann Lee Gibson convinced me that it helps to analyze legal fees in terms of four fundamental building blocks:
1. hourly billing
2. fixed fees
3. contingent fees based on results
4. retrospective bonuses based on client ratings of value

These can be combined in a large number of ways to form hybrids.  Winning Alternatives to the Billable Hour lists fifteen of the most common hybrids (p. 97), and a quick web search will turn up many more.

My personal favorite was first mentioned in Part 3 of this series:  with value-adjusted hourly billing, legal matters are billed in the traditional hourly way, but at the end of the matter the client is invited to subtract or to add any amount, in order to reflect the value received.

Isn’t that risky?  You bet it is. 

But in his article “Creating the Law Firm of the Future”, pioneer Ralph Palumbo, reports that it has worked extremely well for the Summit Law Group:

“Our experience with value-adjusted fees has been terrific. Our customers have voluntarily paid us tens and even hundreds of thousands of dollars more than our proposed fee in matters where the value of our product substantially exceeded the fee proposed. Other customers have asked us to raise our hourly rates in order to better reflect our value. We even benefit when a customer discounts our proposed fee (a rare event) because we get immediate notice that something is wrong and we have time to fix the problem and save the customer relationship.

An unexpected benefit of our value-based pricing is that it has significantly reduced our accounts receivable. We get our bills out by the 10th of every month and ask to be paid promptly. Most of our customers respond -- we believe in part because it’s hard to object to paying a fee that the customer can adjust to any amount the customer believes fairly reflects value.”

Palumbo says that one key to success was building this approach into the firm’s culture: 

“No lawyer or staff member wants to be embarrassed by having a customer significantly reduce our proposed fee. The result is that our lawyers take more care to work with customers at the beginning of the engagement to define the scope and cost of the legal product to be provided. And they take more care to ensure that the cost of our legal product matches the customer’s objectives.”

If you are not ready to invite clients to subtract from fees, you could consider hourly rates plus a contingency, which supplements the traditional hourly arrangement with a fixed fee which is contingent upon success.  In an article on Alternative Fees for Litigation, James Shomper and Gardner Courson list a variety of ways of defining success, including:

“...time of disposition (for example, dismissal or settlement by a specified date), type of disposition (summary judgment, voluntary dismissal), favorable judicial rulings (for example, denial of class certification, forum non conveniens, statute of limitations, preemption, or other dispositive rulings), disposition before fees and costs reach a specified level, and the like...

“[A] performance award can be defined in any number of ways, such as a percentage of the fees saved below budget, a multiple of the discounted fees, or a specified dollar amount. The performance award might also be paid in stages rather than on the happening of a single event.”

If you are looking for approaches that work especially well in a down economy, see the Law.com article “New Clients and Enhanced Fee Opportunities in Today's Market” by Gavin Lantz for several options, including blended contingency fee agreements:

“I begin by telling the clients if they want me to be committed financially to the case, I need a financial commitment from them. I believe the best way to do a blended, contingent-fee agreement is that the client pay an initial flat-earned fee that will cover evaluating the claims and defenses and drafting the lawsuit. Thereafter, the client only pays litigation costs and the firm gets a contingent bonus of 25 percent to 35 percent of the gross recovery at the conclusion of the case. In my experience, if you select your cases correctly, these agreements will result in much better fees than a standard hourly fee agreement.”

Another hybrid approach is to cap hourly fees.   Here, hourly rates are charged up to a maximum cap.  Beyond that, the law firm agrees to work at its own expense.  These arrangements are generally more advantageous to clients than to outside counsel, since the maximum serves as a kind of fixed fee, but the hourly billing also enables clients to pay less. 

In Part 7, I wrote about the value of safety valves in fixed fee work.  The same applies to a capped fee:  a safety valve should be defined in advance, with both parties agreeing to renegotiate if the fees exceed the cap by a certain number of dollars or hours.  When safety valves are used, it will be helpful to send formal monthly reports comparing progress to the cap and the safety valve, and offering suggestions for keeping each matter within budget.

I could go on about all the different approaches to alternative fees, but I’d have to write a book.  And luckily for me, several people already have.  In my opinion, the best by far was published by the ABA Press last year – the third edition of “Winning Alternatives to the Billable Hour - Strategies That Work”  (edited by Mark Robertson and James Calloway).  

The predecessor of this book came out in 1989 (under a different title) based on work by the ABA Law Practice Management Section Task Force an Alternative Billing Methods.  They’ve been improving it for twenty years, and the 2008 edition includes “tools you can use in your practice to implement and evaluate alternative billing methods, including real case studies of lawyers and firms successfully using alternative billing to deliver value to both the client and the lawyer.”  So if you want to dig deeper into the details of many different ways to structure alternative fees, do what I did:  Buy the ABA book. 

For a summary of this entire series, see the LegalBizDev Guide to Alternative Fees, in the free resources section of our web page.

The down economy (Part 9): What to do when demand disappears

My series on alternative fees will resume next week.  But first, a word about the economy.

When I opened the Boston Globe at breakfast a few days ago, I was planning to read about the Celtics first and then the Red Sox.  But I was distracted by an article on the front page with the headline “Boom times turn bleak for Boston lawyers.” 

It included a photo of a lawyer who had practiced for 25 years, lost his job a year ago, and now “has been forced to find a different way to earn a paycheck - by selling sofas and mattresses at a local furniture chain.”

I don’t think things will get quite this bad for too many lawyers, but the story certainly got my attention. 

That same afternoon, I had a Train the Trainer telecon with an internal business development coach at an 1,800 lawyer firm.  She is being certified to use our LegalBizDev Success Kit and other proprietary materials in her coaching, and she asked for my advice on how to help a lawyer from her office whose practice has been hurt by the economy.  For many years, he had a very successful practice doing big real estate deals.  These days, there are not enough deals to go around.  What should he do?

He should start by asking other lawyers in the office whether there is anything he could do to help them.  I’ve explained the basics of cross-selling in another series of posts, but the most important point is to start by asking people, “How can I help you?” not “How can you help me?” 

Mind you, it probably won’t work miracles in this economy.  But it’s the logical first step to take in a big firm, and it will prevent you from missing a project that is just a few doors away. 

Then I’d do a little thinking about the bigger questions of how to provide more value to the clients you have today, and the new ones you would like to get.  To do this, you must get out the door and start meeting with people.  For background, see these posts: 

o The down economy, Part 5: Defensive marketing
o The top ten ways for lawyers to increase client satisfaction
o The down economy, Part 8: What to do if your revenue goes down
o The most important trends in legal business development
o Alternative fees (Part 2): An idea whose time has come?

If you want more information after that, consider buying The LegalBizDev Success Kit.

Then I’d schedule a lot of lunches with clients and with colleagues in your area of specialization, asking their opinions on where things are headed.  Before each meeting, make a list of questions, and aim to listen 50-80% of the time.

These conversations will require some delicate decisions about what you say, and how you say it.  They should be frank exchanges of ideas between two people who find themselves in the same leaky boat.  But if you talk too much about your own need for work, you may sound desperate and the conversation could become awkward and counter-productive. 

I’d recommend that you schedule the first few lunches with your B and C contacts to get some practice with people who are not absolutely critical to your future.  Don’t make lunch reservations with your A contacts until you have some experience seeing how those discussions develop.

If you’re lucky, new ideas and opportunities for work will come out of these meetings.  If they don’t, it may be time to take a cold hard look at the future of your legal specialty.  See my post on “How to define your niche” and ask yourself such questions as:
• What type of legal work do I like to do?
• How much of a market is there for that kind of work?
• Is the market for those services stable, growing, or shrinking?
• What type of client do I want to work with?
• What experience do I have?
• Who do I know?
• How important are lifestyle issues vs. revenue?
• What types of risks and sacrifices are acceptable, and what types are not?

But avoid sudden moves, and keep meeting with everyone you know, even if they are all facing their own economic challenges.  Marketing works best with people who already know you and trust you.  So even if you need to move in a new direction, it is your old friends who can get you there the quickest.

You don’t need me to tell you that we are living in challenging and confusing times.  But there is no question that the world is changing, and we are all going to have to figure out how to change along with it. 

Alternative fees (Part 8): Succeeding with fixed fees, step by step

In an article entitled “Alternative Fees for Litigation: Improved Control and Higher Value,” James D. Shomper and Gardner G. Courson argue that “If properly structured, an alternative fee arrangement should result in a win-win scenario for client and law firm.”

That is an excellent goal, and it is certainly possible in some cases, especially for litigators.  But I must say that in my personal experience with hundreds of fixed fee contracts for consulting projects over more than 23 years, the vast majority were a zero-sum game.  In the short run, when the project was over, one party did better than they would have on an hourly basis, and the other party did worse. 

Fixed price projects generally begin with planning a budget upfront, and then managing the work to keep within that budget as the project proceeds.  When my company was billing by the hour, I found it relatively easy to manage employees to maximize profitability.  But during periods with lots of fixed price work, it became extremely difficult to juggle dozens of projects with ever changing deadlines in such a way that everyone remained productive, while projects stayed within budget.  And during mixed periods, when some of our projects were fixed price and some were billed hourly, it was an absolute nightmare, because employees had to turn their efficiency on or off, depending on the project.

So I believe that as law firms transition to do more fixed fee work, they will find it difficult and expensive.  Meanwhile, clients want to pay less.  Put all this together, and it makes it hard to imagine that alternative fees will consistently lead to “win-wins.”

On the positive side, as you get more experience, you will be more and more likely to do well.  And that will allow you to get more business as you serve the growing number of clients who are demanding lower costs and predictable legal budgets.

If you find yourself in a situation where a fixed fee is the best way to get a particular bit of business, here is a step by step process to maximize success, based on best practices from other law firms and other professions.

Step 1 - Identify the matters that are most suitable for a fixed fee

Some legal matters are much easier to handle on a fixed price basis than others.  In the Shomper and Courson article, the authors note:

“It makes sense to start with fairly predictable, repetitive cases; for example, slip-and-fall cases for a retail store chain. Outside counsel should evaluate the cases it has handled in the past and gather pertinent data that will be needed to structure the alternative fee arrangement, such as average case cycle time, amount spent in the discovery phase, success in dismissing cases or obtaining summary judgment, frequency of trial, and cost of trial.”

Step 2 – If necessary, break down large matters into smaller ones

If it is too risky to quote a single price for a large matter, consider whether a fixed price could be charged for sub-stages, such as separate fixed fees for interrogatories, pretrial motions and/or summary judgment motions.

Step 3 –Select the best clients for this approach

From a marketing perspective, there is only one good reason to offer a fixed fee:  because the client wants it.

Business development is all about advancing relationships with the right people.  So it may be useful to ultimately raise the subject of fixed fees with each of your clients.  At an absolute minimum, a discussion of alternative fees is a great excuse to spend time with clients understanding what they truly want and need. 

However, there are also reasons for caution. Do not open the discussion if you are not willing to proceed.  You can’t put the genie back in the bottle, and once you get a client thinking about fixed fees, it may be difficult to continue on an hourly basis.

If you are just starting to experiment with this approach, you may want to start first with your B and C clients, to work the kinks out of the system.  Approach your A clients only when you have a proven track record of success.

Despite the benefits of predictability, some clients will not be interested in this approach.  They may be risk averse by nature, comfortable with hourly billing, and unwilling to take a chance on lawyers cutting corners to stay within budget.  But every client will appreciate an offer to discuss fixed fees, even if it’s only because it shows that you are looking for better ways to meet their needs.  

Step 4.  Identify factors that drive cost up, and consider how you might control them

Shomper and Courson note that in fixed fee work it is important for all parties to be aware of the factors that:

“...make one case more costly to litigate than another. It may be motions practice in a class of cases in which motions to dismiss or for summary judgment are frequently used. It may be depositions in a class of cases in which gathering the testimony of numerous witnesses is necessary. Whatever the cost driver, inside and outside counsel need to consider it carefully and think creatively about ways to achieve the desired result at a reduced cost.

If depositions are driving the cost of litigation, inside and outside counsel might consider whether fewer depositions can be taken. For example, some third-party witnesses could be interviewed, if willing, instead of deposed, with a resulting lower cost. The cost of depositions can be reduced by making an intelligent and informed analysis of the risk involved in not taking depositions of certain witnesses. Rather than turning over every stone in an effort to find every possible piece of relevant information, the client may be willing to take a small risk of an unpleasant surprise later in the litigation in exchange for cost savings now.”

If simple specification of key cost factors can be added to the definition of a fixed fee, it will dramatically increase the chances of a mutually satisfactory outcome.  In addition, a clause as simple as requiring in-house counsel to identify a single decision-maker can avoid an enormous amount of inefficiency and waste.

Step 5.  Define the price

Now the moment of truth:  What will you charge for this work? 

This can be very difficult, or not, depending on your attitude and experience.  Details were described in last week’s post.

It’s time to come up with your best guess, and move on.  Keep the agreement as simple as possible, because fixed price agreements work best in an atmosphere of trust.

Step 6. Protect yourself with a “safety valve” clause or change order

Sometimes, things happen, and costs go up.

The traditional approach to this in most fields is to issue a change order in which both parties agree that the work went beyond the original scope and the client agrees to pay additional costs.  Needless to say, this often requires some negotiation.

A better way to go, in my opinion, is to start by setting an upper boundary “safety valve” that defines the maximum amount of work that will be delivered within the price.

For example, suppose a small firm defines a fixed price of $30,000 for a matter that you predict will require 100 hours of work at an average rate of $300.  Add a clause that says both parties agree that no more than 150 hours will be delivered for the $30,000.  If the hours exceed 150, both parties agree to renegotiate the price.

That protects the firm from charging less than $200 per hour ($30,000 for 150 hours) in the absolute worst case, and also gives the client motivation to avoid unreasonable requests.  When a project is bid, it also has a powerful psychological effect, in that some clients will do the worst case math, and perceive the $200 per hour limit as the true cost.

As the project proceeds, it also takes most of the arguing out of change orders.  Both the client and the law firm can review actual hours spent in each phase of the project, compare them to budgeted hours, and discuss what might be changed BEFORE a project goes over budget.

Step 7. Manage the work to a successful conclusion

With hourly billing, there is little need for efficient management.  In fact, the less efficient you are, the more money you will make in the short run, as long as the client is willing to pay.  But in fixed price work, it is absolutely urgent that matters be completed within budget.  This is a totally different mindset, which has the potential to change everything about the way law firms operate, and how lawyers are compensated.

A discussion of the best ways to apply project management principles to legal matters could be the basis for another ten part series in this blog.  For now, the most important advice is to keep records of the hours worked on each matter, and where you stand in relation to the original budget.   

Step 8.  Review the results

The best way to learn how to do better in the future is to study the past.  When you close each file, conduct what Ron Baker calls an “after action review”.  Meet with all the lawyers who worked on the matter, and discuss how to do better the next time.

If you want a detailed “Checklist for closing a file” see page 93 of the book  Winning Alternatives to the Billable Hour.

When you do a financial review, you may find you’ve done better than you would have with hourly billing.  But even if the revenue is lower than it would have been with hourly billing, you still may be better off in the long term.  If alternative fees help you to keep clients loyal in a very tough economic environment, you are already winning.

Next week’s post will discuss hybrid approaches, which combine fixed fees with hourly billing.

Second edition of our free Guide to Alternative Fees is now available

The second edition of the LegalBizDev Guide to Alternative Fees can now be downloaded from the “free resources” section of our web page. This 35 page document summarizes the complete content from the first eleven posts in this series, including several that have not yet appeared in this blog.