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November 04, 2009

Alternative Fees Demand Improved Project Management

SDBThis is a guest post by Steve Barrett, former CMO at Drinker Biddle, who recently joined LegalBizDev to help us meet the demand for alternative fees webinars, workshops, and consulting.

Alternative fees have been discussed with great frequency over the past 12 months, as the economic downslide has shifted buying power into clients’ hands in the legal industry.  Obviously, to implement alternative fees on a wide scale, a law firm must be willing to consider serious shifts away from the hourly rate culture of the past 50 years.  But, more importantly, law firms must commit to better understanding their own economics, to self-discipline and to a willingness to change to meet the marketplace’s new dimensions.

Over the course of developing its Survey of Alternative Fees of AmLaw 100 law firms, LegalBizDev surfaced many necessary prerequisites to success in implementing alternative fees, including:

1.  Systems – At billing and collection time, large firms all too often discover that their partners have made “rogue” or unapproved deals with clients.  Aside from surprise, these deals, whether explicit or tacit, can result in either costly write-offs or needless tensions with key clients.  One survey respondent cited a case in which a client was quoted a range of $120-$150K to handle a deal.  The client “hears $120K,” the project has run up $200K in hours when it’s ended, yet no one has communicated updates to scope with the client along the way, creating an embarrassing ex post facto “Oops” moment.

Law firms have always had many committees, yet in the important area of fiscal discipline, many firms only recently set up a method to screen and approve all off-hourly deals and monitor them as they progress.  The “Oops” write-offs happen all too frequently for organizations with nine-figure revenues.

2.  Tools – A surprising percentage of respondents admitted that they have never rigorously analyzed the financial outcomes of their past alternative fee client matters, either separately or taken as a whole.  More said that they were not able to “push several buttons” and receive a report on them.  A handful of progressive law firms have the tools and procedures to do so.  Law firms today have analytical tools (such as DataFusion’s IntelliStat or Redwood Analytics), with which they can slice and dice profitability, realization rates, efficiencies, etc., six ways from Sunday, but few are fully using their sophisticated capabilities.  Contemporary law firm accounting systems (e.g. Elite, Aderant, and Juris) all permit coding to be added at the client or matter number level to quickly provide reports on the financials of any or all alternative fee matters.  At the barest minimum, one designee can always keep an alternative fees matter inventory on a spreadsheet, to facilitate ready analysis.

3.  Cost Histories – Many firms mentioned that a good understanding of cost patterns has never been developed in their firms.  One said (paraphrasing) “We should know how much an ‘XYZ financing transaction’ typically costs, since we do hundreds of them every year.”  Another (again, paraphrasing) said “I can’t believe we don’t know the cost of a typical deposition, since we must do thousands a year.” 

The ABA-developed UTBMS (Uniform Task-Based Management System) and LEDES (Legal Electronic Data Exchange Standard) matter coding systems have been in effect now for nearly a decade and a half, and many Fortune 500 companies have long required their law firms to code all their fee invoices using these systems, at least for litigation and bankruptcy matters.  Depositions (code: L330) can readily be coded and periodically aggregated and analyzed to better understand the average cost of, say, a “home-town defense deposition,” or an “out-of-town opponent deposition”  with but a modest effort by a capable analyst.

Originally created in 1995, LEDES is now more than just an e-billing format and standard.  Along the way it has added XML to its original ASCII format, and in 2006 a budgeting standard was approved by the LEDES Oversight Committee.  But the point is that the tools have been there, in the sensitive litigation area, for some time now, to cost out at least the ranges of certain types of litigation sub-units.  That’s the good news.  The bad news is that those same F500 companies that run convergence RFPs have been doing the analysis themselves for a decade.  One may soon expect law firms to be told what clients will pay per type of deposition, for example, just as health insurers dictate to providers what they’ll pay per x-ray or hip replacement.

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