Legal Project Management (Part 6): Budget problems and solutions
Many lawyers believe that it is simply not possible to predict the costs of complex legal matters. As the managing partner of a firm with more than 1,000 lawyers put it in The LegalBizDev Survey of Alternative Fees:
[Some] litigators say [a fixed fee] just doesn’t work at all, because who knows what’s going to happen. You hear all those stories about how you can get a fixed fee to build the Taj Mahal, and a litigator will say, well that’s true, but when you’re building the Taj Mahal, there isn’t somebody who’s paid to fend you off. In a contentious engagement, that’s what’s going on.
It’s certainly true that the cost of defending a suit can vary widely depending on whether the other side is interested in settling, or determined to engage in scorched earth tactics. However, it is interesting to note that the lawyer quoted above manages a firm that has signed a number of multimillion dollar fixed price litigation deals. He believes that if you work with the right clients in the right ways, handle enough cases, and accept a “win some, lose some” mentality, fixed price work can be a very profitable strategy.
Some firms have been acting this way for years, and have done very well for themselves. Consider, for example, Bartlit Beck, which The American Lawyer named “Litigation Boutique of the Year” in 2009. As their web page explains:
Our approach to fees is unique, but simple. We believe our interests should be aligned with our clients’. To that end, we think we should get paid more if we win and less if we lose. We do not bill by the hour. Our fees depend on our success. We employ a variety of fee arrangements, including flat monthly fees, partial contingency fees, and similar alternatives. In virtually every matter, some portion of our fee is based on the outcome of the case. This approach works for us because we leverage our experience and efficiency to get a positive result, rather than leveraging an army of associates to run up the hours.
In my series on alternative fees, I quoted the firm’s founder, Fred Bartlit, about estimating costs:
Almost NO ONE knows what tasks should cost done right. I usually ask at meetings of General Counsel and other inside lawyers, “What should it cost to prepare for and take the deposition of an economic expert in a $100 million antitrust case?” I get answers ranging from $30,000 to $500,000 in the same room. So, to me, we have a dramatically atypical situation facing us: a huge market that is not competitive, that does not foster innovation in business processes, and has NO useful metrics for comparing efficiencies of different competitors or calculating roughly what various aspects of litigation SHOULD cost.
Do I think every litigator should follow Bartlit Beck’s lead and switch to 100% alternative billing? Absolutely not.
Some clients are willing to accept financial risk in return for reassurance that their interests will be defended. Others are sure to disagree, but I would never recommend switching those clients from hourly rates to fixed price. Just the opposite: I would recommend that you should do everything possible to turn those clients into raving fans,and keep billing on an hourly basis for as long as they are willing to pay.
There will always be some clients who are willing to pay hourly rates in “bet the company” cases. If I were accused of a white collar crime, I would not shop around for the lowest price or for a fixed fee. I would look for the lawyer who was most likely to win my case, and pay whatever it cost.
But the world is changing, and the number of clients who are willing to “pay whatever it costs” is shrinking quickly, according to all the available evidence.
If you find that your clients demand fixed budgets, what exactly should you do? There are many guides to budgeting, including the template “Six steps to better budgets” in our Legal Project Management Quick Reference Guide.
If you use these templates, can you eliminate the risk of underbidding? Of course not. As Nobel Prize winning physicist Niels Bohr famously said, “It is very hard to predict, especially the future.”
In my home town, the cost of Boston’s Big Dig was estimated in 1985 at $6 billion (adjusted for inflation). By the time this project was finished in 2007, the actual cost was closer to $15 billion. It’s not exactly a poster child for the accuracy of professional budget estimates.
No matter how good you get at budgeting, sometimes your predictions will be wrong. But you can be right enough, often enough, to run a very profitable business, maybe even more profitable than it would be on hourly billing. And these same project management skills can help you increase revenue with hourly matters as well. Especially now, when so many clients want predictable legal costs and so few firms know how to offer them.