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4 posts from February 2010

February 24, 2010

The Revenue Impact of Alternative Fees (Part 2 of 2)

Last month, Of Counsel, the Legal Practice and Management Report, published an article based on The LegalBizDev Survey of Alternative Fees, which they described as “the most lucid and comprehensive study that we have seen on this topic.” This week’s post reproduces the second part of the article.  Click here to view the entire article.

Several participants in the first few interviews for our study were reluctant to talk about the percent of revenue that their own firms derived from alternative fees. As noted already, I assumed that it was confidential information, but as I probed deeper, I began to think that some of them might not know the percent in their own firms.

So I added a direct question to the remaining firms about how easy it was to determine alternative fee revenue in their own firms. There were 30 respondents and 67% said it was not easy to determine, 27% said it was, and 7% didn't know whether it was or not.

People who answered no — that their accounting system does not code alternative fees separately — talked about how difficult this figure was to track, as in these comments:

We don’t have it. I don’t know if we will be able to add that in the future. There are so many different varieties [that] you would probably have ten different ways to code them and an eleventh coming next month.

I think the most complicated part of that process is [defining] what an alternative fee is. Once everybody is in agreement about what that definition is, we have wonderful people in our finance department who are able to do some real gymnastics and come up with numbers.

It’s not as simple as one would think to capture all of this accurately, [because] arrangements change over time, definitions can be fuzzy and many arrangements are actually hybrids.

As an example of arrangements changing over time, one firm described what can happen to hourly estimates when clients perceive them as fee caps:

[Lawyers] are supposed to clear their side agreements, so in theory [the firm] knows them all. But what happens in real life is [that] a client says, “What’s it going to cost?” and the lawyer replies, “Oh, I can’t tell you [because] we don’t have enough facts yet, but normally a deal of this size would run $120-150K.” The client hears, “You’ve promised me $120K.” And then that’s it; that’s the fixed fee. And [the firm] doesn’t know that because [the lawyer] thought what he said was, “This is what it costs on average.”

Today [our firm] has learned that [lesson], but two years ago we’d happily keep saying, “This is what you should be planning on,” thinking it was a planning tool. At the end the client would say, “Gee, this cost $200K, how is that possible?” And we tell them, “Well, you know, your CEO got fired in the middle of the deal. The deal dragged on for three years. It turned out you got sued, so, yeah, it cost $200K.” But the client only pays $120K and the lawyer comes back and says. “Oops, gotta take a big write-off.”

When I do the write-off, I might or might not classify this as an alternative fee. First of all, I would be writing this off as a submitted bill, because I wouldn’t even hear until the client balked. And then I might or might not think to attribute it to the client thinking my estimate was a cap. We put a little sentence in [the bill] that explains why we’re taking a writeoff, but there wouldn’t even be a way to capture that as an alternative fee.

Several firms reported that they were currently working on tracking alternative fees better:

We cannot just run a report, but we certainly can look at our top 200 to 300 clients and figure out really fast which ones are alternative fee arrangements. There are codes, but I’m not sure how reliable they are. People on a straight contingency will usually put the contingency code in. But you typically don’t see that as much for these alternative fee arrangements where you’re doing a fixed fee for all of the client‘s litigation.

We’re trying to assemble that sort of stuff in a more reliable fashion, but it’s not something that falls directly out of the system.

Another firm reported that:

The system is being modified to track that information. When I started the alternative billing committee and asked that question, no one had a clue. But since we’re moving more in this direction, we’re beginning to configure our accounting system to do that.

A few also talked about how important it is to improve measurement within their firm:

This is really going to be an issue, not just for the law firms but also for the systems providers to law firms, those who sell accounting systems. Many of these accounting systems presume that the only source of revenue is hourly fees.

A project we are working on right now with various lawyers and our technology people is to track which of our matters are within our definition of alternative fee, and how we and the clients did on those. In the past we would take the occasional contingent case or fixed fee, but we did not worry about separately. As the percentage of alternative arrangements is growing, we want to track it more and learn from our experience.

This two-part series is based on The LegalBizDev Survey of Alternative Fees, which may be purchased online for $395 per copy (with volume discounts available) or by calling (617) 217-2578.

February 17, 2010

The Revenue Impact of Alternative Fees (Part 1 of 2)

Last month, Of Counsel, the Legal Practice and Management Report, published an article based on The LegalBizDev Survey of Alternative Fees, which they described as “the most lucid and comprehensive study that we have seen on this topic.”  This week’s post reproduces the first part of the article.  Click here to view the entire article.

In the first few interviews conducted for our study, The LegalBizDev Survey of Alternative Fees, I asked participants to tell me the percent of revenue that their firms derived from alternative fees last year. Several declined to answer, and I concluded that many participants would be unwilling to disclose this number.

Later, I came to believe that there was a second reason for their reticence: Many simply did not know the percent of revenue in their own firms, a point that we will further discuss below.

So I switched to a less threatening approach and asked, “Last year, approximately what percent of revenue at AmLaw 100 firms do you think came from alternative billing; that is, fixed or contingent, excluding blended and other approaches that are strictly hourly?”

It can be hard to pin down lawyers, and when they were asked to provide an estimate for all AmLaw 100 firms, many initially said that no one could possibly know this number.  When they were prompted to provide their best estimate anyway, many said things like, “I’ve seen lots of different numbers that are kind of speculative,” and, “It is a complete guess.”

When they finally did offer a number, it was often hedged with statements like:

It depends on the experience people have with managing alternative fee arrangements once they strike the deal. If that does not go well, then firms and clients will somehow figure out how to get back to hourly fees. If it does go well, the percentage will increase.

If the economy comes back to full steam and the supply and demand change so that supply is short or at least more in line with demand, it will not change much. If, however, the downturn continues for some time and clients and firms are forced to learn new ways of working, that percentage could go up.

When we got past the hedging, people often offered a range rather than a single number, such as when one interviewee said, “My sense would be it might be around 20 percent to 30 percent, something like that.”

In order to be able to compute an average, I pushed each respondent to come up with a single number. For example, for those who responded with “20 percent to 30 percent,” I suggested that I use 25 percent as their number, and the individual agreed. When two or three people participated in the same interview, I averaged their responses to come up with a single estimate.

Once I had an estimate for last year, I asked the same question for five years in the future. Ultimately, 30 of the 37 firms in this survey provided estimates for both last year and five years from now. Participants' average estimate was that 11% of AmLaw 100 revenue came from alternative fees last year, and they predicted an average of 26% in five years, nearly double what it is now.  (To view a chart of all 30 answers, see the full article.)

For the seven firms that refused to estimate one or both of these numbers, I asked the direct question: “Do you think alternative fees will become more common in the next five years?” All seven said yes. Thus, every single participant said that the use of alternative fees would increase over the next five years, either by answering the direct question or by providing percentages.

In his book The Wisdom of Crowds, James Surowiecki argues that the best way to gather reliable information in complex and uncertain situations is to ask many knowledgeable people, and then average their estimates. If that is correct, the averages in the chart — 11 percent of revenue for last year and 26 percent for five years in the future — are clearly the best available information about how widely these billing arrangements are used and will be used at large US firms.

The total revenue for AmLaw 100 firms last year was $67 billion, according to American Lawyer. If one simply multiplies this number by 11 percent, it gives a rough estimate of $7 billion for last year’s alternative fee revenue in this group.

Similarly, multiplying $67 billion by 26 percent would put the figure at $17 billion five years from now. Of course, both figures exclude the alternative fee revenue from many thousands of smaller US firms. (Some would argue that the $67 billion base should also be adjusted for future changes in five years, but we decided to stick with the simplest possible projection.)

However, it is important to remember how wide the range of estimates was:

• From one percent to 25 percent for last year’s AmLaw 100 revenue;
• From 5 percent to 50 percent for revenue five years from now; and
• From 20 percent to 900 percent for the growth rate.

Given these differences of opinion about revenue, it is not surprising that AmLaw 100 firms have radically different strategies and tactics for the types of alternative fees that they offer clients. Several participants noted that these differences may become increasingly important in future marketing. As one put it:

Eventually there will be some sort of an equilibrium reached where, for many firms, 25 percent or 30 percent of the work will be alternative fee or fixed fee work, [but] other firms will become much more radical. They will change their business model completely, and 50, 60, or 70 percent of the work that they do will be based on alternative-fee arrangements.

Different firms will handle it different ways. And I actually think that there will be room for this differentiation; that clients will want to use different firms that approach this differently for different work.
This two-part series is based on The LegalBizDev Survey of Alternative Fees, which may be purchased online for $395 per copy (with volume discounts available) or by calling (617) 217-2578.

February 10, 2010

The keys to new business in a changing economy (Part 2 of 2)

Whether you choose to focus on current clients and referral sources or to spend your time looking for new ones, the marketing tactic that is most critical in this changing economy is increasing the value you provide.  This need is hardly limited to the legal world.  In his book, What the Customer Wants You to Know, consultant Ram Charan described how the internet and the global economy are changing the way customers think and what it means to people who sell: “[Businesses] are under enormous pressure to deliver value to their clients and their shareholders.  They are compelled to use the newfound power of transparency and overcapacity to drive down prices.”  One result is that the traditional tools of business development – “long-term relationships, golf games, skybox seats and theater outings” – are losing their power (p. 4).

The same trends have now come to the legal world, with a vengeance.  In a June 2009 survey, Altman Weil reported:
[There has been] a dramatic vote of no confidence from Chief Legal Officers.  Either many law firms just don’t understand that clients today expect greater value and predictability in staffing and pricing legal work, or firms are failing to adequately communicate their understanding and willingness to make real change.  In either case, it’s a big problem.
In interpreting this result and others from the survey, they noted that:
CLOs rated the importance of “relationships” with outside law firms at exactly the same low level, whether for critical work, important work or commodity work.  The personal element apparently doesn’t carry as much weight in the hiring decision in 2009. 
How do you deliver more value?  Value lies in the eye of the beholder, so it all starts with asking clients questions like this:
•    How well do we listen to your concerns?
•    How well do we understand your goals?
•    How well do we understand your industry?
•    Do we do a good job keeping you informed?
•    Do we explain legal issues in terms that are easy to understand?
•    Do you perceive us as genuinely committed to your business success?
•    Do you perceive our lawyers as prompt, responsive, and accessible on short notice?
•    Are our billing statements accurate and complete?
•    Do our invoices include an appropriate level of detail?
•    Do you think our fees are fair and reasonable?
When you ask these questions, plan to listen, not talk.  Experts say that when you are building business relationships, you should spend 50% to 80% of your time listening. But when lawyers meet potential clients, many think that they need to talk quickly so they can list all the wonderful things their firm can do.  This is a mistake.  The customer is a lot more interested in her own problems than in your capabilities. If she did not think you were good, you wouldn’t be meeting. So you need to devote most of your time learning what she wants and needs, and then act on what you hear.

To win new business in today’s tougher environment, law firms must ultimately change the very way they do business.  At a panel discussion sponsored by the Legal Marketing Association (LMA), consultant Leigh Dance suggested that firms should:
•    Prepare to be one step ahead by measuring and proving your value proactively.
•    Improve transparency in budgets and estimates and allocation of resources.
•    Demonstrate and promote efficiencies.
•    Offer value added services free.
Norm Rubenstein, another panelist at that same event, expanded on the value of offering free services, and recommended offering “a host of unbilled products and services dedicated to relationship development, including CLEs, intellectual property, and loaned staff.”

Marketing research in every profession has consistently shown that the vast majority of business comes from existing clients and referral sources, so if you focus on providing more value and defensive marketing, it will not only help protect the business you already have, it will also lead to new business.  The way the profession is headed, the best way to protect your future is to increase your personal book of business.

Marketing is the hardest work you can do in a suit, so you will be disappointed if you look for instant results.  But if you stay with it, prioritize relentlessly, and follow professional advice, you will get new business.

Who knows?  Maybe the changing economy will prove to be a blessing in disguise.  Maybe you’ll find that you’re not only good at marketing, you actually enjoy it. 

February 03, 2010

The keys to new business in a changing economy (Part 1 of 2)

This two-part series is based on a presentation I gave on January 27 at the Annual Meeting of the Commercial and Federal Litigation Section of the New York State Bar Association.

When the economy changes, lawyers must change too.  New client demands and new levels of competition are requiring lawyers to rethink the way they develop business.

When I wrote the book Legal Business Development: A Step by Step Guide a few years ago, I outlined the steps each lawyer should take to find their unique individual answer to the question, “What should I do today to increase new business?”

The fundamentals of marketing have not changed since then, but the world has.  In the current economy, every lawyer must focus first on defensive marketing – protecting the clients and referral sources they already have – and on providing clients with more value.

If your practice is based in part on repeat business from large clients, you know how strongly law departments are being pressured to cut costs.  When I interviewed AmLaw 100 chairmen, senior partners and C-Level executives recently for The LegalBizDev Survey of Alternative Fees, one question I asked was, “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?”

Every single participant said they had.  As one put it, “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.”

If you are one of the lucky few who have not yet felt these competitive pressures, maybe you’re not worried.  Your top clients have worked with you for years.  You’ve sat through many a ballgame together, and they know in their hearts that you are not just the best lawyer on the planet, but also a heck of a human being. But do you think they might be just a little tempted to give another firm a try, if they could save a lot of money?  How about if their management was pressuring them to cut costs?

And your client’s opinion of your work may not be as high as you think it is.  In a series of surveys, Inside Counsel magazine has compared ratings of satisfaction from clients and the law firms who serve them.  In their most recent survey, 43% of lawyers thought they were earning an A for their work, but only 17% of their clients agreed.   So if you think you’re getting an A, you could be wrong.

If you agree that defensive marketing would be a good idea, where should you start?  Review tactics that have worked at other firms, quickly pick out an item or two that fits your practice and personality, and give it a try.  Here are five of the best tactics to increase client satisfaction:

•    Schedule a free visit to a client’s office to discuss the client’s business needs, or free monthly meetings, or telecons “off the clock.”
•    Conduct a formal or informal client satisfaction interview.
•    Ask the client what needs to be improved – responsiveness, timeliness, and/or value – and brainstorm together about how to accomplish this.
•    Improve communication about the business implications of legal matters.
•    Promote efficiencies to reduce cost, and tell clients about them.
For many litigators, referral sources are the most important source of new work, and they should be treated as if they were paying clients.  Here are some tactics for increasing the satisfaction of referral sources:
•    Update people promptly and regularly on your results with each and every client they’ve sent to you.
•    Ask yourself, “What has helped build this relationship in the past?” and do more of the same.
•    Take them to lunch and ask, “How could I help you?”
•    Schedule a visit to the referrer’s office to discuss trends in their business.
•    Ask them to describe their ideal clients, then try to help them find some.