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.