Alternative Fees (Part 22): More recommendations

Last week’s post listed the first five recommendations from the new third edition of our free LegalBizDev Guide to Alternative Fees.  Here are the rest of them:

6. Define and measure success

Some alternative fee projects will be much more successful than others.  You need to be able to quickly identify the winners and losers, so that you can refine your tactics and increase your success rate.

This starts by defining clear measures of success for financial results and for quality, to facilitate comparisons across projects and lawyers.

Measuring the profitability of each matter would be ideal, but may be much harder than it sounds, depending on your accounting system, and especially your treatment of partner compensation.  (For example, what percent of partner compensation should be considered a fixed cost of doing business, and what percent should be considered shared profits which are at risk?)

For many firms, the simplest financial measure will be the actual revenue received from each alternative fee matter, divided by the income that would have been received for the same work if it had been billed at standard hourly rates.  Some firms may prefer to measure the realization rate or another metric.  The important thing is to choose a single measure that everyone will use, and get on with it.

Quality should be measured first and foremost from the client’s perspective, not from partners’ perspective.  The client is always right.  This report describes both simple and complex ways to measure quality, including FMC Technologies’ ACES approach.  This is another topic I will be writing about in my blog, and another area that is likely to evolve as law firms get more sophisticated in their approach.

7. Evaluate results regularly, and learn from mistakes

Once standards have been set, key people within the firm can evaluate results quarterly or on another schedule, to see what works and what doesn’t.  In this new more challenging world it is not possible to avoid occasional failures.  But it is possible to learn from mistakes and to improve results. 

Exactly how this review should be conducted will again vary depending on each firm’s culture.  While many firms have a tradition of extreme confidentiality, the rest of the world is moving in the opposite direction.  Transparency is on the way.  The only question is, how fast will you get there?

8. Tie results to compensation

The hardest part of working with alternative fees will be making money.  The second-hardest part will be splitting it up.

After several decades of working with different systems for compensating my own employees and studying compensation systems at other firms, I believe that there is only one sure fire way to make someone happy with any compensation system: pay them more than everyone else. 

This is especially troubling in partnerships where relative contributions are controversial and where it is very easy for unhappy rainmakers to take their clients to other firms.

So it is easy to predict that compensation will remain a source of controversy, especially for firms whose total revenues are shrinking.  But as the world becomes more competitive, it will become increasingly important to assure that the greatest rewards are given to the people who are most responsible for the firm’s success, and that people understand how such decisions are made.

9. Don’t be penny wise and pound foolish

As the owner of a firm that provides consulting to law firms regarding alternative fees, I can hardly claim to be an unbiased observer on the matter of law firm spending.  But we started offering consulting in this area for a reason: we believe that the decisions law firms make on bidding, managing profitability, and managing quality area will have implications in six figures, seven figures, eight figures, and more.  Some decisions may affect the very survival of your firm.  Therefore, prudent firms will recognize the need to invest in this area, whether in terms of outside consultants or internal staff.

10. Act like an entrepreneur, not like a lawyer

It is a mistake to approach alternative billing like a lawyer, trying to craft perfect agreements 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.

Fixed price agreements should always define the scope of what will be delivered.  But I have been working on fixed fee contracts for nearly 25 years, and cannot remember a single case where something did not change somewhere along the way.  If you hired a contractor to build a new kitchen, and he raised the price every time some minor factor changed, would you use him again?  Most successful businesses ignore minor changes in scope, and  provide plenty of warning if there is any hint of major changes.

Alternative billing works best in a true partnership, where the parties are willing to work together for their mutual benefit.  Lawyers who try to get paid more every time the situation changes will have a hard time keeping their clients.

No one knows how alternative billing will affect law firms in the next few years.  The only way to find what works for your firm is to try it.  When you win some, do more of that.  When you lose some, accept it as the price of doing business.  Learn and adapt. 

The sooner you start, the more likely you are to beat the competition.