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5 posts from September 2009

September 30, 2009

Progress report: The LegalBizDev survey of alternative fees

Last week, I completed the final interview in our survey of how AmLaw 100 firms are using alternative fees, and what they expect in the future.  I talked to 9 chairmen and managing partners, 16 executives including CEOs, CFOs, and CMOs, and 22 senior partners, many of whom headed their firm’s alternative fee committee.  Thirty seven firms participated:

Akin Gump
Alston & Bird
Baker Hostetler
Blank Rome
Bryan Cave
Chadbourne & Parke
Dickstein Shapiro
DLA Piper
Drinker Biddle
Duane Morris
Foley & Lardner
Goodwin Procter
Greenberg Traurig
Haynes and Boone
Jones Day
Mayer Brown
McDermott Will & Emery
Morgan Lewis
Nixon Peabody
O'Melveny & Meyers
Patton Boggs
Pepper Hamilton
Perkins Coie
Proskauer Rose
Reed Smith
Sheppard Mullin
Shook, Hardy & Bacon
Steptoe & Johnson
Womble Carlyle

To me, the most amazing thing about the survey is the simple fact that so many high-level decision-makers from multi-million and multi-billion dollar firms participated in this research.  All will receive a free copy of our report, but it wasn’t because they wanted to save $395 that they took the time.  They took the time because they feel strongly about these issues and saw the survey as a way to advance their firm’s initiatives in this area.

I recently discussed some of my initial findings with an AmLaw 100 CMO who had not participated in the survey.  He skeptically asked whether a self-selected group of volunteers could provide good data about general trends.  As a recovering Ph.D., I said the sample may or may not be “good” in the eyes of the National Science Foundation, but there can be absolutely no question that this is the best data that is currently available, based on the richness of the interviews, the number of firms that participated, and the seniority of the respondents.

As mentioned in my August progress report, participants had complete editorial control over what was released.  All quotes will be anonymous, and no statement will be linked to any particular firm. 

Lawyers are accustomed to protecting clients’ confidentiality and sharing little information.  This discretion and even secretiveness is at the heart of law firm culture, and often carries over when firms are asked about how they conduct business. 

Our survey provided a platform that made it easy for firm leaders to communicate openly with clients and with colleagues about this important topic, without being quoted by name.  And it worked.  You can see that not just in the seniority of the people that we were able to interview, but also in the frankness of what they said.  A sample interview from one chairman will appear in this blog next week.

We are just starting to analyze the responses, but this survey has already proved something that I have suspected for a long time: there is an enormous amount of alternative fee progress and innovation going on at AmLaw 100 firms, beneath the radar. 

If I were to rank firms on their alternative fee innovation based on their replies to this survey, the list would look very, very different from the lists I’ve seen based on published articles.

But I won’t be publishing any lists comparing firms, because that wasn’t the purpose of the research, and all interviews were confidential.  The report I publish in December will describe a wide range of opinions about how alternative fees are being used now, and how they will be used in the future.  The table of contents is likely to evolve as the data is analyzed.  Here is our working draft:

Executive summary
About the survey
    Background and goals
    Defining alternative fees
    How participants were selected and interviewed
    Who participated?
    Alternative fee use
An idea whose time has come?
    Historical perspective
    Differences between practice groups
    Estimating the percent of AmLaw 100 revenue from alternative fees
    Measuring the percent of each firm’s revenue from alternative fees
Bidding strategies
    Sharing risk
    The aggressive approach
    The conservative approach
    How firms manage the bidding process
The most common types of alternative fees
    When to use alternative fees
    Differences of opinion about shadow billing
    Risk collars
    Portfolio fixed fees
    Fixed fee menus
    Fixed fees for a single engagement
    Holdbacks and success fees
    Full contingency arrangements
    Fee caps
What do clients want?
    Do most GCs want true alternatives or hourly discounts?
    Lower cost
    Reduced time
    Other goals
Advice to in-house counsel
    How to improve RFPs
    The need for information
    The need for partnership
    The need for trust
    What else can General Counsel do?
Advice to law firms
    Benefits of alternative fees
    Lowering cost
    Defining scope
    Increasing efficiency
    Maintaining quality
    Maximizing profitability
    The need for matter management
The future
    Differences of opinion about the coming change
    Increasing differentiation between firms
    For in-house counsel
    For law firms

If you would like to pre-order a copy of the final report today, we will send you the survey directly from the printer, the day it is released in December.  We will also send you a PDF preview of key conclusions in October.  The total cost for the final report and the PDF preview is $395.  For more details and an order form, see the alternative fees section of our web page or Download LegalBizDevSurveySummaryZ.

September 23, 2009

Should law firms spend more on business development?

If you’ve been reading this blog for a while, you know my answer: Law firms that want to survive in an increasingly competitive environment must indeed invest more time and money in business development.

But don’t just take my word for it.  Consider what these experts are saying:

In the last few months, law firms have become increasingly aware that training lawyers in marketing and business development is a key way to drive business....Business development is one of the few marketing areas where law firm executives are most willing to increase spending. Nearly 70% said they planned to provide more marketing coaching to lawyers.

71 percent of law firms responding to a major survey plan to expand their business development efforts this year, despite a recession that has driven them to significant cost cutting measures, including layoffs.

While general branding campaigns may be less of a focus right now, marketing initiatives such as business development training still remain popular, law firm marketing executives say....The value of a new web site or brochure can't be measured in dollars, but business coaching and training for attorneys can be more clearly converted into money.

Of course, it’s not at all surprising that law firms would ramp up their business development efforts. After more than a decade of consistent growth, profits plunged in 2008 and layoffs and pay cuts followed close behind. Once the work stopped falling into their laps, a realization set in: attorneys don’t know how to market. They need to be taught business development skills -- and fast -- in order to hold on to existing clients and meet prospects.
…one of the characteristics of most of the law firms that are now in deep trouble is that they badly under-invested in the development of business, marketing, and practice management skills in associates.

Executive coaches report steady demand for their services despite the recession....In a down economy, it’s particularly important to have someone on your side. Instead of 10 client opportunities this year, there might be five. You have to make each one count.
Lawyers have time on their hands, so put it to good use with increased focus on client development, client teams, and appropriate business development training.

My thanks to Craig Brown for calling my attention to several of these quotes.  To be honest, Craig is a competitor.  But he’s one of the best.

September 16, 2009

Alternative Fees (Part 25): Experts predict the future

Near the end of my recent webcast on “Alternative fees: How to implement sustainable programs for the long run,” I asked four senior partners at AmLaw 100 firms to speculate about the future. 

Some said that alternative billing will grow substantially, and that their firms are investing heavily to prepare for this transition.  Others stressed that no one knows what the future will hold, and that different firms have different views and strategies.  But all four agreed that it is prudent to be prepared for change, even if it does not come quickly.

Several panelists noted that the transition to non-hourly billing still seems radical not just to lawyers but also to clients, and even to some of the general counsel who write RFPs asking law firms for creative billing solutions.  As explained in Part 13 of this series, many general counsel want to talk about alternative fee arrangements, but at the end of the day what they really want is a deeper discount on hourly rates.   

Bryan Ives of Alston & Bird noted that there’s been “a lot of rhetoric.”  While he’s had many discussions about alternative fees, to date only a relatively small percentage have actually led to implementing alternative billing arrangements.  Similarly, Lisa Damon of Seyfarth said that her “pet peeve” is that she often has discussions in which GCs are enthusiastic about alternative arrangements, but a few days later gets a spreadsheet back from them asking for lower hourly rates

According to Steve Jenkins at Haynes & Boone, whenever he meets with in-house counsel these days, they want to talk about predictability, efficiency, and alternative fees.  True, the topic also came up in prior recessions, and at that time it did not lead to major changes in the way law firms operate.  However, this particular recession seems broader, deeper, and more global than in the past, and the dialogue over alternative fees seems much more serious, in part because of the ACC Value Challenge.

In Jenkins’ view, the current economy and marketplace are likely to lead to a paradigm shift, which “probably will happen.” If there is a paradigm shift, law firms will be forced to change in many ways to lower costs and increase efficiency.  Haynes & Boone is preparing for that future.  If the paradigm does not change, they believe the firm will still benefit by being able to offer clients lower cost service and improved efficiency.

Kerry Notestine of Littler said that it takes a lot of effort from both clients and firms to see if alternative fees work, but it’s worth the effort.  He believes that the clients and firms that are on the leading edge of this movement will succeed in the legal marketplace, and many of their competitors will not.

According to Lisa Damon, Seyfarth strongly believes that the world is changing.  “Firms are learning to work and think differently, and that’s good for clients.  There is less rework, more efficiency, and better training, which will benefit everyone regardless of how it is priced.”  In short, “It’s a better way to do business, and I don’t think we’ll go back.”

Several panelists noted that you “can’t put the genie back in the bottle,” which is a sentiment I’ve also repeatedly heard in my ongoing survey of alternative fees at the AmLaw 100.  There is nothing easy about switching from hourly billing to fixed or contingent arrangements.  But once clients see how it works, they will never go back.

For a summary of this series, download our free LegalBizDev Guide to Alternative Fees.

September 09, 2009

Alternative Fees (Part 24): Management and risk

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.

September 02, 2009

Alternative Fees (Part 23): Examples from the AmLaw 100

According to Bryan Ives, a partner at AmLaw 100 firm Alston & Bird, "Law firms our size have no choice but to aggressively talk to clients about alternative fees.  These days, almost every new engagement begins with an active discussion of the topic.”

He made the comment near the beginning of a recent discussion of “Alternative fees: How to implement sustainable programs for the long run” which I moderated for West LegalEdcenterThe panel consisted of four senior partners from AmLaw 100 firms that are among the leaders in this area.  While these experts did not always agree on what the future holds, they did provide numerous examples of how their firms are building new business and strengthening client relationships with alternative fees.

Ives described one situation where Alston & Bird agreed to handle all routine litigation (through summary judgment) for a large national client for a fixed fee per case.  An enormous amount of research and discussion was required before the two sides were able to agree on what that fixed fee should be.  Alston & Bird spent months studying the client’s history of past cases, including how many cases went to trial vs. how many were settled, and where they were located.

That arrangement is now underway.  When Alston & Bird compares the results to what they would have earned on an hourly basis, “sometimes we win, sometimes we lose.”  But they believe that when they get to the end of the project they will “come close to the standard hourly rate.”  And in this economy, that’s a very good thing.  In the future, after the economy improves, they expect to use the same approach to make more profitable deals.

According to Steve Jenkins, at Haynes & Boone so far the transition from hourly billing to alternative fees has been “episodic, not transformational.”  However, there is “potential for a paradigm shift,” and the firm is “operating under the assumption that change is likely to occur.”

They are therefore encouraging lawyers to experiment with alternative fees in most practice areas, to prepare for the future.  In particular, they are experimenting with risk sharing and risk collars “in areas that are not usually thought of as fixed fee.”  Typically, they establish a budget at the beginning of each matter, and bill on an hourly basis.  If they go a little over budget, the firm takes all the risk and does not bill for the excess hours.  If it goes beyond that, the responsibility and the risk must be shared.  The details vary from case to case.  In one instance, the firm agreed to bill nothing for hours that were up to 20% over budget, but after that the costs were split 50/50.  If the matter came in under budget, savings would be shared 50/50.

Next, Kerry Notestine described Littler Mendelson’s work for FMC Technologies under their widely publicized ACES risk-reward system.  Since I outlined this approach in Part 19 of this series, I won’t go into the details here.  But I was interested to hear Notestine say that while there was initially “some hesitation” on the firm’s part to accept this type of arrangement, it’s been going on for seven years now, and Littler is very happy with the results. 

When they compared the cost recovery with FMC to what they would have recovered with hourly rates, they are almost even on their retainer work (they recover 97% of what they would have billed hourly) and are a bit ahead of hourly costs on projects and litigation.  Littler recently started a large class action suit on an alternative fee basis.  It has much greater potential for profit or loss, and the firm is watching closely to see how that one turns out.

The final speaker was Lisa Damon of Seyfarth Shaw, whose approach has also been described previously in this series.  (See Part 3 and Part 10.)  About three years ago, Seyfarth was hearing a lot of clients talk about their interest in alternative fees.  They decided to make a significant investment in getting ahead of the curve, so they could “do it right, deliver high value, and maintain margins.”  The firm made a significant investment in Six Sigma training to help lawyers deliver services much more efficiently, by eliminating re-work, using knowledge management, and creating process maps.  This helps them craft flat fees that lower costs for the client while still maintaining profitability for the firm.

Although “it’s been a learning curve,” Seyfarth now offers alternative fees in every practice area.  “We like flat fees the best,” Damon said, “because the risk sharing does so many things to help the client/firm relationship.  They produce a very interesting mind shift.  Suddenly you change from being a vendor to being a business partner.  It’s wonderful.”

For a summary of this series, download our free LegalBizDev Guide to Alternative Fees.