The most critical issues for alternative fees

In The LegalBizDev Survey of Alternative Fees, I interviewed chairmen, senior partners, and C-level executives at 37 of the largest law firms in the world about what works for alternative fees, and what doesn’t.  Here are some of their most quotable quotes.

There is a paradigm shift. There are a lot of law firms that are sitting back and waiting for the world to return to the way it was in 2006, 2007, and our view is that the world has fundamentally changed.  The concept of clients being willing to pay for inefficiency is unlikely to come back.

Alternative fees will grow.  Once the cat is out of the bag, you can’t put it back in.

We’re going to see a very wide spectrum [and] a much greater differentiation among law firms as to how we do business than we’ve ever seen before.

Our firm has an 11-page chart summarizing what types of fees have worked in the past, and why.  [It also summarized] the structure we used, [and] how it worked out.

The survey report lists the nine most common types of fees, and gives stories behind each.  For example, here’s what one participant said about a situation in which they offered a holdback:

We estimated the cost of a regulatory due diligence at $100-$125K, but the client balked at spending more than $75K.  [We] then explained how the scope could be narrowed to keep within the $75K budget, but the client did not want to do this.  Then [we] offered to do an experiment: they guaranteed a fixed price of $75K, with the understanding that they would do whatever work they felt was necessary.  At the end of the project, we sent [the client] a statement showing exactly what we did, and asked them to decide whether they wanted to pay any of the amount over the original $75,000.  The difference came to $55,000, and the client chose to pay every penny.

Here’s how another participant described their portfolio fixed fee arrangements:

It’s similar to the program offered by my utility company. Every year, they send me a flier in the mail that says that they will take care of all my HVAC repairs. They’ll condition it, charge it, [and] service it; they’ll do anything that comes up for a fixed fee.  If the thing is horribly broken, they lose, [but] if it requires no repairs, it’s the other way around. And so our fee arrangement is almost like insurance, and [we could] get really stung. We have several of those arrangements for a certain type of litigation, so if a particular year is really heavy, we could lose. You’ve got to start somewhere, but I much prefer doing this with a client that we know well, as opposed to a client who’s trying to play gotcha.

Some participants stressed that there is still a lot of learning going on, and that aggressive bidders may come to regret their actions:

Some law firms are going to large companies and offering to do all their legal work for one fixed price, but the firms don’t know how it will work out in the long run.  I suspect in some cases it will come out really ugly.  It is similar to the way information technology outsourcing started between IBM and Kodak back in 1988, when IBM offered to do ten years of work for Kodak on a fixed fee, at a rate less than what Kodak’s IT [department] was charging [at the time].  IBM didn’t really know how they were going to make it profitable, and [at first] it turned out to be a loss leader for them.  Eventually they figured out how to make it profitable, but it took a long time.  Back in those days, IBM could afford to lose some money, but it’s a much bigger risk for law firms to take.  Law firms are cash businesses and are much more sensitive to risk.  It’s a lot more challenging to make [fixed fees] work for a law firm than it was to make it work for IBM, because lawyers operate differently [from IT departments].

There is uncertainty on both sides of the table:

When it comes to alternative billing arrangements, a number of clients are just not sure yet what it is they are looking for. They are feeling their way through this paradigm shift, just as we are.

In the Foreword to the survey, Bruce MacEwen of Adam Smith Esq. wrote that when he first read through all these interviews “nothing struck me more powerfully than the dramatic differences of opinion. Nevertheless, there seems to be at least one core concept on which there was no material disagreement: alternative fees are here to stay, and the assault on the citadel of the billable hour will only get more, not less, fierce.”