Legal Business Development

Happy Thanksgiving

My next post will appear on Wednesday Dec 2.  In the meantime, don’t miss the free resources on our web page at www.legalbizdev.com/free.

Price wars

Around the time I started my recent survey on alternative fees, I had heard many accounts that a price war had broken out among large law firms, with some racing to the bottom to offer ever better deals.  So I decided to include this question in the first few surveys:

There is a lot of price pressure these days, and some say it is leading firms to bid on projects as loss leaders in a way that is not sustainable.  Have you seen any examples of this?

I asked the question of 15 large firms, and all 15 said yes.  I have never heard 15 lawyers agree on anything else before this.  Here are a few examples of what people said:

Some of our competitors across the country are doing work on an hourly rate that is drastically less than what they would ordinarily charge. Some firms will do all of the discovery in a case for free, and then take the case on a fee basis from there, or will charge half of their hourly rate for the first phase of the case. We’ve also heard about some firms that have actually said that they will do these motions that will probably occur during the course of the case for free, or they will do the motion work at 30%, or some other drastically discounted rate like that, because they’re really hungry to get work.

We have heard stories about well-established New York firms who have [told] clients that they will not be underbid. They will do [a case] for nothing [just so that they can] get in the door and show [the client] what they can do.

Some brand-name firms [are making] low-cost proposals that are very surprising.

In the last 18 months, there has been a fall off in patent filings, [so] some firms have a lot of excess capacity in this area.  With all those people sitting around, some [firms] are bidding in ways that are totally insane.

There were differences of opinion about why firms were bidding so aggressively.  The most common explanation was too much capacity:

Many firms are willing to discount their fees in order to keep people busy.  People do what they have to do; it’s a jungle out there.

[Some] firms have been doing private equity [but] there isn’t any [of that work] right now, so it’s either fire people or work for any money they can bring in at all.

There is something to be said about recovering 50 cents on the dollar when the alternative is to have idle people.

Some participants thought that other factors were behind the low bids, including lack of experience:

I have seen some dramatic underbidding, but I think it’s by people who do not know what they’re getting into.

Some firms are bidding alternative fee projects at very low costs.  These are loss leaders which cannot survive in the long term, but it’s not certain whether the firms are doing it on purpose or not.

Some firms may simply be treating the bid as a loss leader in the sense that they realize they may lose money.  Others are simply on a learning curve, trying to be responsive to the client's request.  Since many firms have not established the database that they need for truly rational alternative fees, people are taking risks that are not going to be sustainable.

[In one recent competition] another law firm bid a price which quite frankly we thought was not sustainable. And there are really only two or three answers as to why they did that. One is a loss leader. The second is sheer stupidity. And the third is a willingness to take an extraordinary risk.

There were mixed opinions about “loss leader” bids as a strategy for getting started with new clients:

They’re getting in with the client [and] the strategy may be effective.

I have never seen loss leader work lead to higher end work, and I have been at this a long time. Loss leaders just cause people to expect lower rates, rather than focusing on fair pricing for the value provided.

On a similar note, one participant said that low bidding firms may be creating some long-term problems for themselves:

There are some law firms that are pricing in a way that will make it difficult for them to sustain their [past] market position.  It is difficult to explain to an existing client who’s been very loyal to you why you would offer dramatically different pricing to new clients.

For more about The LegalBizDev Survey of Alternative Fees, see www.legalbizdev.com/survey.

New research on alternative billing: What it means to you

Are you trying to decide what to do about alternative billing, or whether you should be doing anything at all?  You have a lot of company, because important changes are taking place.

That’s why I recently conducted in-depth interviews with senior decision makers from 37 AmLaw 100 firms about what works best for alternative fees, and what does not work at all.  Participants included nine chairmen and managing partners, 16 executives (primarily CEOs, CFOs, and CMOs), and 22 senior partners, many of whom head alternative fee committees.

They provided an enormous amount of information on what law firms and inside counsel are doing to structure fixed and contingent fee arrangements in a sustainable way that makes business sense for both sides.  They also expressed a wide range of opinions about the future.  Every single participant believes that the use of alternative fees will go up, but there were dramatic disagreements about how much, and how – or even whether – alternative fees will change the way law firms operate.  

Some firms are aggressively bidding alternative fees to get new business, even when it means risking profits, to establish leadership positions in this growing market.  Other firms are taking a more conservative approach, and trying to assure that every deal is profitable on its own merits. 

This week I will be finishing the final analysis, and my complete report on the results will be published next month.  If you are still trying to determine what you should do about alternative fees, you will be particularly interested in the conclusion section summarizing “Tactics to Prepare for an Uncertain Future.”

If you pre-order your copy now for $395, we will immediately send you a .pdf of a 27-page Preview Edition.  Then when the complete report is published in December, we will ship your copy directly from the printer, the day it is released.

On Thursday December 10 at 1 PM EST, I will offer the first public presentation of the complete results in a webcast for West LegalEdcenter, “the nation's leading online continuing legal education (CLE) service” and a division of Thomson Reuters.  I will focus on our research findings regarding:

•    Differences between practice groups
•    Alternative fee revenue, now and in the future
•    What clients want
•    Aggressive vs. conservative bidding strategies
•    Nine common types of alternative fees, and how they are used
•    Expert predictions for the future
•    Recommendations for large law firms, for small ones, and for inside counsel

The webcast costs $135, and can be ordered through West LegalEdcenter.  After the webcast, if you decide to purchase the complete survey report by December 31, 2009, you will be given a $50 discount.

We also offer customized in-house presentations, workshops, and webinars to help lawyers decide:

•    When and how to discuss alternative fees with clients
•    How to bid and win the most profitable deals
•    How to manage projects to maximize profitability

For more information about a custom presentation designed to meet your firm’s needs, email us today.

Alternative Fees Demand Improved Project Management

This 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.