Alternative Fees (Part 18) – Risks

By their very nature, contingent and fixed price arrangements involve risk.  Lawyers hate risk. 

DuPont has led the movement to change the legal service model for nearly 20 years, and may have more experience with alternative fees than any other large corporate buyer.  When DuPont held a conference for its outside counsel a few weeks ago, an article describing the meeting was titled “GCs, Law Firms, and Flat Fee Arrangements: A Matter of Trust.”  Much of the discussion focused on risk:

"Law firms... must be willing to put some skin in the game," said Silvio DeCarli, DuPont's chief litigation counsel. Too often, DuPont gets alternative fee proposals in which a firm makes money if the company loses a case, and even more money if the company wins.

"Law firms too often get the idea that they've got to make money on everything, and a lot of it," DeCarli said. "And that's the tension."

As Pat Lamb explained in Part 7 of this series, when law firms bid on fixed fees, many start by calculating a predicted “cost” based on the number of hours they expect the matter will require, at their standard hourly rates.  But those rates already have a substantial profit margin built in.  Then the firms increase the bid, to protect against contingencies.  The result is a fixed price bid which is heavily weighted in the firm’s favor.

In the alternative fees webcasts I moderated for West Legal Edcenter last April, Fred Bartlit compared this risk-averse mentality to oil companies that invest millions in drilling new wells, knowing from the start that many of those investments will turn out to be worthless “dry holes.”  But as Fred noted in that session, “at Big Law, there’s no such thing as a dry hole.”

You would think that if anyone understood the need to take risks, it would be the law firms that have been working for DuPont for years.  But even at DuPont’s conference for outside counsel: 

Who covers costs when a case takes an unexpected turn was a subject of debate. At the conference, some outside counsel said companies have an obligation to ensure their firms don't lose money if a turn of events isn't due to the firm's negligence. Other outside counsel said it’s a risk law firms have to live with.

A few large law firms have started to act like entrepreneurs who understand that the client is always right.  During my April webcast, Rob Fields from Womble Carlyle said that “The client needs to win on every fee, every time, even though at larger law firms, it’s difficult to wrap our minds around this.”

Rob’s comment led to a spirited exchange on LegalOnramp, a private website for in-house counsel and others, about the wisdom of this approach.  Some lawyers asked EXACTLY how Womble Carlyle structured fees to assure clients “winning every time.”  Naturally, law firms do not want to publicize the details of their pricing tactics to competitors.  But Womble Carlyle’s Chief Client Development Officer, Steve Bell, did describe how Fields is approaching one ongoing engagement where the fee is calculated three different ways, and the client gets to choose the lowest of the three for each matter:

[The fee is calculated as] an hourly fee, a fixed fee and a productivity/results based fee. The lawyer does not know which will come out lowest until the end, so all three aspects of the representation (cost, efficiency, results) have to be managed. The client wins because it has certainty about the maximum cost, and also pays the lowest cost. The client can use the fixed fee component to shop the representation against the budgets/fixed fees of other competitors. The client can also budget with confidence. Some lawyers win and some lawyers lose.  Low cost efficient providers win. High cost inefficient providers lose. (This result is Economics 101.) The first two components (hourly and fixed fee) are easy. The third component (productivity/results) is what is hard and new for both law firms and clients. It is also the key to the success of this approach because it is the source of the lawyer's incentive to provide good results.

Will this work in the long run?  Of course no one knows.  But if I could buy stock in law firms, I’d invest my money in the ones that are focused on maximizing client satisfaction for the lowest possible cost.

For a summary of this series, see the free LegalBizDev Guide to Alternative Fees, in the Alternative Fees section of our web page.  A substantially revised edition of that Guide will be released on July 29 in connection with our West LegalEdcenter webcast on Alternative Billing: How to Implement Sustainable Programs for the Long Run.