Alternative fee strategies (Part 1 of 3): Aggressive risk-taking

This three-part series is reproduced from the LegalBizDev Survey of Alternative Fees, a research report based on in-depth interviews with chairmen, senior partners and C-level executives at 37 of the largest law firms in the US.

Over the course of these interviews, it became clear that different law firms are taking very different approaches to [alternative fee arrangements].  While some are aggressively cutting prices and assuming more risk, others are sticking to a more conservative approach.

Many aggressive firms believe in the long-term benefits of building alternative fee business, and are willing to reduce profits and take some risks to get there.  In the LegalBizDev Guide to Alternative Fees, I quoted lawyers from a number of boutiques and large firms in this category, including Womble Carlyle partner Rob Fields, who believes that “the client needs to win on every fee, every time, even though at larger law firms it’s difficult to wrap our minds around this” (Third Edition, p. 20).

Many survey participants echo this aggressive philosophy:

Some special fee arrangements are loss leaders, used to build relationships.  In that case, firms are really looking down the road at the next project, not the current one.

I used to work in a venture capital firm, and I enjoy taking an entrepreneurial approach to betting on alternative fees.  It’s a portfolio; I don’t need to win every one.  If I make 20 bets and five are disastrous but three are home runs, I will do very well.  If I try to engineer these arrangements so I can’t lose, I’ll never win the big ones.

Aggressive firms stress the value of building long-term relationships with key clients:

It’s okay if we lose a little bit of money compared to our normal hourly rate as long as we are communicating well with the client.

We’ve had situations in corporate deals where we’ve really gotten burned on something, but if it’s a good client, they don’t say “gotcha” and laugh about the fact that you made a bad deal. They say that we’ll do more deals [in the future] and life goes on, and we assume that we’ll make it up in volume by being engaged in better situations.

Aggressive firms are also actively jumping in to do more alternative fee deals, even when it means they must pay a price to learn by doing:

One way [to deal with the current uncertainty] is to wait until all of the questions are answered and then act when and if the sea change occurs.  The other way, which is what our firm is doing, is to “just do it,” proactively seeking engagements from clients with value-based alternative fee arrangements even when it’s hard to quantify costs.  We plan to step out there and take the risk so that the process of working in a different way (managing costs against a hard budget with implications) will actually facilitate our creating an information database. [This database] will ultimately be necessary, the tools and processes will be necessary, and the training will be necessary [so that] our attorneys [can] really work in a different, more cost-effective way.