In my recent webcast panel on “Alternative fees: How to implement sustainable programs for the long run,” one of the topics that came up over and over was the importance of effective project management.
Bryan Ives of Alston & Bird noted that at the most fundamental level law firms sell time. “Our inventory is kind of like fruit, but our fruit rots every hour if we don’t sell it.” Therefore, to make alternative billing work, you must manage the way lawyers spend their time.
At Haynes & Boone, Steve Jenkins said that the simple fact that the firm is doing more alternative fee work has led to substantial changes in how they staff and manage each new matter. There is much more emphasis on assuring efficiency and avoiding the type of research and redrafting that can drive costs up with questionable benefits to the client.
Similarly, Lisa Damon explained that Seyfarth has instituted formal project management training to develop lawyers’ skills in completing high quality projects on time and within budget.
In the midst of this discussion, one webcast listener typed in a pointed question: “How often do you find the bids are much too low, and do you learn from these mistakes?”
Damon answered frankly: “We’ve done pretty well, but it took us a while and we had to learn a lot.” She gave the example of an early flat fee bid for a trial which had not budgeted extra time to re-prepare witnesses if the trials was postponed. Murphy’s law being what it is, of course this trial was postponed, and the cost went up.
Seyfarth learned that lesson the hard way. When they plan bids now, they have several ways of protecting themselves against unexpected costs. Much of the solution lies in talking openly with clients when situations change, and sharing the risk. “It really changes the relationship with your client,” Damon said, “in a way that is much more positive for everyone in the long term.”
Kerry Notestine of Littler told a cautionary tale that he had heard from a lateral about another firm’s problems with an alternative fee arrangement. That firm had a large retail client who paid a flat fee up front for the law firm to handle a large number of cases. But the way that deal was structured, once the client paid the fee they no longer had any incentive to settle cases. The result was that almost all went to trial, and the costs were much higher than anticipated. This arrangement was a failure, and the retail client ultimately went back to a more traditional hourly approach to fees. If both parties had put more thought into structuring the alternative arrangement at the outset, perhaps they could have aligned their interests.
Ives then stressed the importance of communication. In their merger and acquisitions practice, Alston & Bird walks new clients through the M&A process, explaining the costs at each step and establishing a range of possible costs for a particular matter. As long as the communication is accurate and complete, problems are minimal. They’ve found that if they are over budget, it’s usually because the client wanted something extra. And clients are generally willing to pay the difference as long as they understood at the beginning that if they wanted more, it would cost more.
Steve Jenkins then explained how Haynes & Boone has developed software to allow clients to
to get up-to-date cost information in real time instead of waiting for the end of each monthly billing cycle. When costs start to rise in a way that was not anticipated in the budget, the system can issue “surprise avoidance alerts” so both clients and their lawyers can see what is coming, and, when appropriate, change the approach before it is too late.
Kerry Notestine noted that Littler has had fewer problems with costs, since so much of its practice specializes in employment law, which is more predictable than many other practice areas. However, he did describe one situation in which they bid on a series of desk audits of affirmative action plans. This particular review turned over some unexpected rocks, and went way over budget. Fortunately, it was with a large client that they had a good relationship with, and since they kept the client in the loop every step of the way, the client was willing to share the costs of the overrun.
Then another webcast listener typed in a related question: if law firms take on additional risk, can they get a premium over hourly rates when they do well?
The answer came quickly and from several participants: not in this economy. Maybe premiums will be possible when the economy improves, but at this point breaking even looks pretty good.
For a summary of this series, download our free LegalBizDev Guide to Alternative Fees.
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