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.