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6 posts from July 2009

July 29, 2009

New edition of our free LegalBizDev Guide to Alternative Fees released today

Approaches to alternative fees are changing so rapidly that it has been necessary to publish three different editions of the LegalBizDev Guide to Alternative Fees within seven months.

The basic concepts and conclusions from the first edition (January 2009) and the second edition (March 2009) remain unchanged.  However, the level of detail and sophistication has increased substantially in each edition, based upon newly available information from leading experts about what works for alternative fees and what does not.

The third edition of our free guide can now be downloaded from our web page.  In case you don’t have time to read the full 56 pages and just want the big picture, here’s the executive summary:

In a recent survey, seventy-seven percent of general counsel and chief legal officers said that they would like to increase the percent of their budgets spent on alternative fees. 

The basic concepts of alternative billing have been around for several decades, and the American Bar Association published its first book on this topic in 1989.  But client pressures to use the approach have increased substantially within the last year, due to the economy and to the Association of Corporate Counsel’s Value Challenge “to reconnect value and costs for legal services.”

According to Altman Weil, twenty-seven percent of in-house departments spent at least ten percent of their budgets on non-hourly arrangements in 2008.  This figure increased to forty-three percent in 2009.  A 2008 BTI Consulting survey reported that alternative fees are most commonly used in litigation, followed by mergers and acquisitions work, corporate finance, and labor and employment. 

Some experts focus on two fundamental types of alternative fees: fixed and contingent.  Others also include a third type: discounted hourly rates.  The number of ways that these fundamental dimensions can be combined to create hybrids is virtually unlimited.  This guide provides numerous examples of specific fee structures used, including transparent blended rates, hourly rates plus a contingency, retainers, fee caps, safety valves, and risk collars.  It also describes how some boutiques are using value-adjusted billing, in which legal matters are billed in the traditional hourly way, then at the end of each matter the client is invited to subtract or to add any amount, in order to reflect the value received. 

This guide then discusses the relative merits of several different approaches to structuring contingency agreements and value pricing vs. cost-plus pricing.  It also lists eight steps to succeed with fixed fees including identifying the clients and matters that best fit the approach, breaking down large matters into smaller steps, and, most importantly, managing the work after you win.  Ultimately, succeeding with fixed fees is an art which requires a great deal of trial and error, and improves with practice. 

While many writers have stressed the win-win possibilities of alternative fees, in a 2009 Altman Weil survey only fifteen percent of firms reported that non-hourly projects were more profitable.  It is getting harder to protect profits as prices go down and margins get squeezed, but many firms believe that alternative fee arrangements are an absolutely essential tactic to generate cash flow and to survive in an ever more competitive world.

For many years, law firm work practices, recruiting, and compensation models have all been built around billing more hours.  As law firms react to a business model that stresses fixed fees and rewards efficiency, many of these practices will have to change.  Just how quickly this will occur, and how far it will go, depends on many factors, including the conservatism of inside counsel who are accustomed to hourly billing. 

But there is no question that the profession has entered a period of growing experimentation, in which many law firms are relying on alternative fees for a larger proportion of their revenue.  If the growth of alternative fees hits a tipping point, it has the potential to totally transform the legal profession, from the way legal matters are handled to the way lawyers are compensated.

The guide ends with ten recommendations for firms that increase the use of alternative fees, including: identify internal champions to lead the effort; increase efficiency by adapting tools from other professions; measure success; and act like an entrepreneur, not like a lawyer.

July 22, 2009

Alternative fees (Part 20): How many kinds are there?

When lawyers are just starting to consider alternative fees, one of the first questions they ask is: how many kinds are there?

That’s a logical question, and indeed was one of the first things I asked when I started studying the topic.  My researcher and I spent more hours than I would care to admit listing all the types of alternative fee arrangements that have been reported in the past, and studying the taxonomies experts have proposed to classify them. 

In terms of the underlying dimensions, depending on who you ask, there are either two types of alternative fees (fixed and contingent) or three (if you also count discounted hourly rates).

Part 5 of this series provides an overview of discounts.  The disagreement about whether blended and discounted arrangements should or should not be considered “alternative” can add considerable confusion to an area that is already confusing enough. 

For example, when BTI Consulting Group reported a survey of the frequency of alternative billing at the 2008 annual conference of the Legal Marketing Association, the percentage they reported included blended rates.  But when Altman Weil published a survey of the same topic in November 2008, they specifically “excluded not only hourly work but also discounted or blended hourly rates.”  And, when a third survey was conducted last May (also by Altman Weil), the press release did not mention whether discounts were included or not.  Which makes it awfully hard to interpret their conclusion that “the use of alternative billing is nearly universal in law firms.”  Does this mean that almost every firm uses fixed and/or contingent fees?  Or simply that everyone is offering discounts?

In the AmLaw alternative fees survey we are currently conducting, we went with the strict definition and excluded blended rates and other approaches that are strictly hourly.  We focus instead on arrangements that are fixed or contingent, in whole or in part.  We explain that definition when we recruit participants, and I mention it again as I begin each interview.  Nevertheless, as the conversations continue, a few participants inevitably go back and talk about blended rates, because that’s the way they think about alternative billing. 

Unfortunately, some firms have a vested interest in maintaining this confusion.  Saying that your firm is offering “alternative billing” sounds much more thoughtful and less desperate than saying: we are slashing our rates because we need the business.

These two underlying dimensions – fixed and contingent – are often combined with each other and/or with hourly rates to form many different types of hybrids.  One increasingly common arrangement is the type of cap law.com reported when:

[Pfizer awarded] almost all of its U.S. labor and employment work to Jackson Lewis for [2008 and 2009]. In return, Jackson Lewis had agreed to an annual cap on its fees-no billable hours or even flat per-matter fees...

Under its agreement with Pfizer, Jackson Lewis gets any employment-related legal work that comes in the door for...two years, including single-plaintiff discrimination cases, equal employment opportunity matters, class actions, and general advice and counsel. All existing employment cases were transferred to the firm except for [three ongoing matters].  In return, Jackson Lewis is paid one-twelfth of the annual capped fee each month.

But there’s a catch. 

The firm sends Pfizer a monthly accounting of the time that it's spent on Pfizer matters. An end-of-the-year reconciliation will allow Pfizer to recoup any money left on the table.

Some lawyers see this sort of hard cap as the worst of both worlds: you can do worse than hourly, but you can’t do better.  Others accept hard caps as an inevitable element of the changing legal landscape.  As Womble Carlyle’s Rob Fields put it in Part 13 of this series, “[fees] must be transparent so the client can see that they won and they can defend the cost to their business people.”

If you wanted to list all the different types of hybrids which combine fixed, contingent and hourly arrangements, how many types would there be?  As Pat Lamb explained in my March webcast on alternative fees, when you consider all the combinations and permutations there are “a limitless variety of ways to structure fees.”  And even if you were able to somehow create a list of all the fees that had been used in the past, the next day some lawyer somewhere would invent a new one.

To cut through this confusion, some firms are compiling proprietary short lists of the exact details of alternative billing arrangements that best fit their business, and the risks and benefits of each.  These living documents will be revised frequently, to summarize what firms learn as their experience grows.  We are currently talking to several firms about the best ways to structure these internal guides, including one 700-lawyer firm that has reproduced the entire LegalBizDev Guide to Alternative Fees in their proprietary document.  

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.

July 15, 2009

Alternative Fees (Part 19): Structuring contingent fees

In contingency arrangements, fees depend on success.  Of course, this approach has long been used by plaintiffs’ lawyers, but it is now becoming more common for the defense.

For example, Duane Morris billed on a contingency basis when it defended Eli Lilly in a $1.4 billion whistle blower suit over allegations of improper marketing of an anti-psychotic drug.  An online account of that suit noted that:

For at least the last decade, [Duane Morris] has focused about 4 to 5 percent of its billable time on contingency fee or other matters with alternative billing structures. And throughout that time it has cultivated a process for assessing risk and potential rewards.  The firm will only take large commercial cases with a minimum fee of $1 million. There must be a 75 percent probability of success as determined by the firm's attorneys and contingent fee committee, and an opportunity to get three times the firm's recorded time.

When structuring contingent fees, some prefer very simple approaches, as described in Part 11 of this series.

For example, Bartlit Beck bills a substantial portion of its fee at the end of each litigation.  Depending on how satisfied they were with the result, clients may choose to pay this remainder, or a larger amount, or a smaller one,  or nothing at all.  Similarly, the Valorem Law Group includes a “Value Adjustment Line” on every monthly invoice.  Clients can add or subtract whatever they think is fair to reflect the value they have received.  Each client bases the fee on results and satisfaction, and is the one and only decision maker.

At the other extreme, some clients have developed complex models to mathematically tie rewards to success and results, notably FMC Technologies’ Alliance Counsel Engagement System (ACES).  As described in an article in the May 2008 issue of ACC Docket, alternative fees guru Jeffrey Carr “has increasingly applied the ACES model to all outside legal matters [at FMC Technologies] since... 2001.”  In one example:

The company withholds a portion of the fees incurred by the law firm and at the end of a predetermined period or the conclusion of the matter, the company conducts a performance appraisal of the work done by the law firm....The law firm is rated from one to five with five being the highest score on a number of predetermined criteria. If the law firm scores ‘average,’ or a three, then the company pays the withheld amounts. If the law firm performs better than average, then the law firm receives a corresponding premium on the amount withheld. If the law firm scores lower than a three on the performance evaluation, then it receives a reduced amount on the amount withheld.

The article even includes tables showing how the math worked for a number of matters handled by Littler Mendelson.  One table shows their ratings on six scales from an actual matter: understood goals, expertise, efficiency, responsiveness, predictive accuracy, effectiveness.  It also shows how those numbers were used to calculate a 1.67% premium on the final fee for that matter.  The article goes on to explain that:

Littler Mendelson and FMC Technologies have used this basic ACES concept in three working relationships. These include general employment and benefits advice under a retainer arrangement; project work such as union campaigns, OFCCP audits, or purchase and sale matters; and employment law litigation. The general ACES concept differs in each relationship but is based on the same general model.

Which is better for contingent arrangements, the simplicity of the value line adjustment or ACES’ detailed mathematical precision?  Personally, I prefer the simplicity of “less is more.”  But it doesn’t matter what I think, it matters what clients think.  Large firms must be prepared to offer both simple solutions and complex ones to meet a variety of needs.  The client is always right.

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.

July 29 webcast on alternative billing

I am pleased to announce the final panelists for our July 29 West LegalEdcenter webcast on “Alternative Billing: How to Implement Sustainable Programs for the Long Run”.

All four are in the forefront of the movement toward alternative fees.

I first wrote about Lisa Damon’s Six Sigma work at Seyfarth in Part 3 of this series.  Kerry Notestine of Littler Mendelson is the co-author of an article on the ACES program from FMC Technologies, which is discussed in today’s post on structuring contingent fees.  And I learned about the innovative programs conducted by Steve Jenkins of Haynes and Boone and Bryan Ives of Alston & Bird through my survey on alternative fees.  

If you’d like to hear our discussion on July 29, 12:30-2 PM EDT, just sign up at West LegalEdcenter.

And if you’d like to listen to the discussions of the first two panels in this series, you can still access those recordings on the web:

How Boutique Firms are Delivering Greater Value with Alternative Billing
(Panelists: Jim Hassett, LegalBizDev; Fred Bartlit, Bartlit Beck; Patrick Lamb, Valorem Law Group; Bruce Raymond, Raymond & Bennett; Jay Shepherd, Shepherd Law Group)

How Large Firms are Delivering Greater Value with Alternative Billing
(Panelists:  Jim Hassett, LegalBizDev; Fred Bartlit, Bartlit Beck; Robert Fields, Womble Carlyle; Richard Rosenblatt, Morgan Lewis; Harry Trueheart, Nixon Peabody)

July 08, 2009

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.

July 01, 2009

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.