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.