Legal Business Development

How to track legal work that is out of scope

A few months ago, during a routine review call in our LPM coaching program at Bilzin Sumberg,  Executive Director Michelle Weber mentioned that her firm was beginning to require lawyers to systematically track work that fell outside the scope defined by each engagement letter. 

Steve Barrett was on the call with me, and we both had the same reaction:  Why didn’t we think of that?  It is such a simple idea, and such a valuable one, that neither one of us could believe we’d never suggested it, nor heard of anyone else doing it.

When I later learned that Baker & McKenzie was also tracking work this way, I began asking around looking for more examples.  So far I have heard of only one other that does this: Faegre Baker Daniels.  According to Steve Petrie, the firm’s Chief Strategy Officer, Faegre Baker Daniels uses separate matter numbers to track out of scope work for certain fixed-fee arrangements.  This is done in collaboration with the client and is subject to a clear and mutually-understood, change-order process.  (If your firm requires lawyers to track work that is out of scope, please email me the details, and I’ll write about them in a future post.)

At the beginning of every matter, lawyers should be asking clients about their goals and expectations, so that the legal team delivers what the client needs, and is willing to pay for. A failure to get a clear understanding at the beginning of a matter can lead to unnecessary work, strained client relations, and ultimately to reduced realization and profitability if clients refuse to pay their bills.

Anyone who has ever worked at a law firm knows that a clear definition of scope at the beginning of a matter often simply does not happen.  Many lawyers are impatient problem solvers, and they like to just jump in and start working. In the third edition of my Legal Project Management Quick Reference Guide (page 15), I quoted the executive director of an AmLaw 100 firm (who preferred to remain anonymous) about the ambiguities in a typical engagement letter: 

The scope of work often contained in our engagement letters is generally no more than one or two lines.  Lawyers are missing an opportunity to clearly specify the scope of what is included in each matter, and what is not.

And even if an engagement letter is well defined, there is the question of who sees it.  A senior executive at different AmLaw 100 firm (who also preferred to remain anonymous) recently did an informal survey of senior associates during a talk he gave on LPM.  He asked very simply:  How many of you have seen the engagement letter on the matters you’ve worked on lately?  Only 1 in 4 raised their hands.  To put it another way, 3 out of 4 of these lawyers had no way of knowing what was in scope, and what was not.  When this executive later shared those results with a group of partners, “they were horrified.”

Any system that requires lawyers to classify some hours as out of scope starts with a huge benefit, simply by requiring lawyers to be clear about the distinction. 

At Bilzin, at the beginning of key matters they now post the statement of scope on their intranet, where every team member can review it.  Then lawyers are required to record each hour worked under two different codes in their accounting system for each matter: one for work within scope, and the other for work that falls outside scope. 

As Bilzin partner Al Dotson summed it up:

Keeping the scope of work top of mind has many benefits.  The tactic of tracking out of scope work requires:

• An understanding by all billers to the file as to what the scope of work is
• An ongoing recognition of the status of the matter and when a task is out of scope, and
• An understanding of the protocols to be followed when out of scope work is requested or done.

This benefits both the client and the law firm and often is the basis for clearer communication before there is a problem.

At Baker & McKenzie the procedures are a bit more complex, as you might expect at a firm with more than 4,000 lawyers in 73 offices around the world.  According to Stuart Dodds, the firm’s  Director of Global Pricing and Legal Project Management, some groups use the same approach as Bilzin, while others have developed task codes that provide additional detail.  For example, in an M&A deal, a particular type of due diligence could be in scope or out of scope, depending on exactly what is involved and what was expected and agreed to.  Some lawyers therefore have two task codes for due diligence, one for in scope, one for out of scope.

Whatever system is used, Dodds said, tracking improves awareness, internal management and external communication.  If the responsible attorney sees the number of hours beyond scope growing, it is a warning sign to report back to the client and ask “how do you want us to proceed?” before the number gets still higher.

“There are many ways to accomplish this coding,” Dodds said in a recent interview.  “We don’t want to be too prescriptive in defining the details.  The battle right now is getting lawyers using a tracking system they are comfortable with. The key to success is to keep it simple.”

 

Sample assumptions for defining scope (Part 2 of 2)

This post was adapted from the new Third Edition of the Legal Project Management Quick Reference Guide. It was written by Steve Barrett, Mike Egnatchik, and Jim Hassett.

 

Scope assumptions

• Based on the attached breakdown of work, we will analyze the legal and factual issues presented by the complaint (including preliminary witness interviews), prepare a memorandum of law in support of a motion to dismiss, analyze ABC’s opposition brief, and prepare for and argue the motion for a budgeted cost not to exceed $XX in legal fees


• Alternate Dispute Resolution (ADR): If we determine to pursue ADR, the budget includes preparation and participation in mediation. The budgeted number assumes a one- to three-day mediation session, the negotiation of a settlement agreement, and limited discovery.


• Fact investigation and development: The budget includes preparing for a case management conference, making initial disclosures, propounding and responding to discovery requests, preparing documents for production and reviewing produced documents, negotiating a confidentiality agreement, and preparing for and attending fact depositions

 

Discovery budget assumptions

• To the extent mediation is unsuccessful, the case will move into the discovery phase. For budget planning purposes, we have further divided this phase into the following three parts: (i) pre-trial planning, (ii) offensive discovery, and (iii) defensive discovery. Our estimated cost for the entire discovery phase is $XX. 


• A breakdown of this estimate is set forth on the attached spreadsheet. There are several key assumptions in this cost estimate, including: (i) each side will depose no more than five witnesses; (ii) all discovery disputes (if any) will be resolved without court intervention; and (iii) we will not seek third party discovery. These assumptions are reasonable in light of the circumstances of this case; however a change in circumstances may impact the estimated costs.


• Expert Discovery: The budget includes preparation of expert reports and rebuttal reports (we currently estimate a total of three reports to cover the issues of infringement, patent validity, and damages) and preparing for and attending expert depositions. This budget does not include any fees for experts.


• Document Review: All required documents are readily accessible and in a machine readable and searchable electronic format. If a significant fraction of the documents are available ONLY in hard copy format, client agrees to reimburse firm for converting the material into readable/searchable electronic form. If such conversion is not possible, or if documents are damaged beyond acceptable scanning standards, the firm and client will negotiate a formula for their manual review.


• Case preparation includes:
  •  Analysis of complaint and motion to dismiss
  
  
  • Factual investigation
  
  
  • Preparation of discovery requests and review of discovery responses by opponents
  
  
  • Motion to compel discovery (assumes one such motion)
  
  
  • Review of documents produced by the other side (assumes opponent’s production is XX pages)
  
  
  • Responding to opponent discovery requests
  
  
  • Review and production of our documents (assumes production is XX pages)
  
  
  • Responding to the opponent’s motion to compel (assumes one such motion)
  
  
  • Preparing our witnesses to be deposed (assumes XX witnesses)
  
  
  • Preparing for and taking opposition depositions (assumes XX depositions)
  
  

Transaction budget assumption

For purposes of the fee proposed, we have made the following assumptions:

• The target does not have any material or significant legal/regulatory issues that necessitate material or significant changes to the transaction structure or require extensive additional due diligence


• Opposing counsel is sophisticated and knowledgeable in these matters


• Negotiations will take place in [insert city]


• Transaction documents will be executed within XX weeks and the transaction will close within XX weeks from the time of engagement of our firm for the transaction


• Each transaction document will be “turned” in three passes or less


• Diligence documents will be provided electronically or delivered to our firm’s XX office 


• A tax diligence and opinion letter will be delivered by ___ or another leading accounting firm to be mutually agreed upon

Sample assumptions for defining scope (Part 1 of 2)

This post was adapted from the new Third Edition of the Legal Project Management Quick Reference Guide. It was written by Steve Barrett, Mike Egnatchik, and Jim Hassett.

 

These posts provide sample wording for various assumptions and exclusions that may be used as a reference to define, qualify, or limit the scope of work in an engagement letter or to plan for any legal matter.

Law firms need to protect themselves by being careful about phrasing assumptions. But if the list of carve-outs gets too long or too specific, it can annoy the client and lead to lost business.

Unfortunately, there is no simple general way to create assumptions that balance client needs and firm needs. The details must be worked out case by case. This can be especially difficult in a highly competitive environment, if clients take advantage of the awkwardness of this negotiation to pressure firms to agree to budgets and fixed prices without adequate protections.

These samples may be especially appropriate when providing budget estimates to clients where key details are not known, such as:

• Number of deponents, expert witnesses, consultants, etc.
• Number of document turnarounds
• Volume of document production requests from investigative agencies
• Quantity and physical condition of discovery materials (electronic, hard-copy, or poorly preserved documents)

For these and similar situations, law firms should develop general standards for use of the sample wording. Firms must constantly balance the level of written detail needed for self-protection vs. the business demands of good client relations.

Lawyers sometimes tend to err on the side of including assumptions and exclusions that protect themselves too well, and could wind up losing the business as a consequence. Excessively protective language in a highly competitive marketplace might result in the client saying, “Never mind. I’ll hire a different lawyer.”

The samples below are designed to give you some ideas about how to word assumptions, exclusions, and carve-outs for your clients.

 

Catch-all statement for material changes

This statement of work, together with the assumptions and tasks provided, is the basis for our budget estimate.  If there are material changes, it may be necessary to negotiate appropriate budget adjustments.

 

General assumptions/carve-outs

• Matters not covered above in the “Activities” column of the attached spreadsheet are excluded from the budget 
• Reimbursed costs and expenses are excluded from the fixed fee
• Local and foreign counsel fees and expenses are excluded from the fixed fee
• Any material change to the transaction structure will be handled at the firm’s prevailing hourly rates
• If the closing date of the transaction occurs after [insert date], work conducted past that date will be handled at the firm’s prevailing hourly rates
• An electronic “deal room/litigation room” will be created for the use of all client personnel and relevant counsel and related entities, in which electronic datasets will house all documents produced, including segregation of privileged materials
• Documents sought for discovery and/or due diligence purposes will be readily available in electronic format
• All critical deal/litigation documents will be reviewed and revised in no more than three “turns” of drafts
• The agreed budget does not include risk factors such as extended negotiations on the bank commitment or requirements to increase the level of due diligence as a result of issues uncovered during the due diligence process
• The agreed budget does not include due diligence beyond one week, due diligence in specialized areas (such as employment, IP, IT, environmental, insurance, litigation, competition, real estate), a formal written due diligence memorandum or exceptions summary
• We anticipate that three experts will be needed for researching, vetting and selection, and deposition preparation and/or report analysis

 

Additional examples will appear next week in Part Two of this post.

Are blended rates alternative fee arrangements?

Blended rates are 100% hourly arrangements, in which a single middle rate is charged for senior lawyers who normally charge more and junior lawyers who normally charge less. Whether the client or the firm benefits from this arrangement depends on the actual numbers in a particular situation.

For example, consider a case that is expected to require 100 hours of senior time at an average of $500 per hour ($50,000) and 100 hours of junior time at $300 per hour ($30,000), for a total of $80,000. A firm might offer a blended rate of $350 per hour, which reduces the predicted cost of the matter to $70,000 ($350 times 200 hours).

But now suppose that once the matter is underway, the firm discovers that almost all the work could actually be performed by more junior lawyers. If the senior lawyers only need to spend 20 hours supervising the matter (which would have cost $10,000 at the original rate of $500 times 20 hours), and junior lawyers put in the other 180 hours (which would have cost $54,000 at $300 times 180 hours), the client who pays the blended rate will actually pay more ($70,000) at the blended rate than they would have at the non-discounted rate ($64,000).

Now you could argue that it’s still a win-win, because if the firm had not offered blended rates, senior lawyers would have delivered 100 hours out of the 200. The client won by paying $70,000 instead of $80,000, and the firm won by charging $70,000 instead of $64,000.

From a marketing perspective, that is a terrible argument. In essence, it implies that senior people never should have been doing the work in the first place and the client must agree to be overcharged a little in order to avoid being overcharged a lot.

Blended rates invite gamesmanship, as individual lawyers may be tempted to manipulate predictions to maximize profit. And they encourage the use of more junior level lawyers, even when it may not be to the client’s benefit. Here’s how the general counsel at Marriott International described his unhappiness with his blended rate experience:

The law firm only assigned to the matter those lawyers whose regular hourly rate was at or below the blended rate, and more senior lawyers were unwilling to engage in significant supervision.

We will leave it to others to argue about whether blended rates are a good thing or a bad thing. In this context, what is important is that there is a philosophical difference between two types of alternative fee arrangement (AFA) definitions: narrow and broad. Our LegalBizDev Survey of Alternative Fee Arrangements used the narrow definition which reserves the term AFAs for fees that are fully or partly non-hourly. In contrast, when ALM published its AFA survey last year (Speaking Different Languages: Alternative Fee Arrangements for Law Firms and Legal Departments) they used the broad definition which includes blended rates.

People feel very strongly about which definition should be used. When members of our Advisory Board reviewed a draft of my book Legal Project Management, Pricing, and Alternative Fee Arrangements, some said that we made a mistake and that blended rates should be considered AFAs. Others said we made the opposite mistake and needed to be much more forceful in explaining that “blended rates are not alternative fee arrangements and are no different than discounting.”

The fact that two conflicting definitions of AFAs are in wide use adds considerable confusion to an area that was already confusing enough. If a firm claims that 50% of its work is performed on an alternative fee basis, that could mean that they are moving away from the billable hour (under the narrow definition), or it could mean that they are engaging in some creative hourly rate discounting (under the broad definition).

Some have a vested interest in maintaining this confusion. Announcing that a firm offers 50% of its work on an alternative fee basis sounds much more thoughtful and less desperate than saying, “Half the time, we have to slash our hourly rates because we need the business.” 

 

This post was adapted from my book Legal Project Management, Pricing, and Alternative Fee Arrangements.

 

Legal project management workshop in Chicago

On May 17, the Ark Group and Managing Partner magazine will present a “Legal Project Management Showcase and Workshop: Changing Behavior within the Firm” in Chicago.  When I chaired a similar event in New York two weeks ago, participants said:

“All of the speakers were excellent… with very different perspectives”

“I learned a great deal from their frank discussion about what had worked well at their firms and what had not worked well.  Also their frankness in the morning sessions set the tone for the small table discussions where people spoke very openly about challenges and things that had to be done to move forward at their respective firms.”

“This was a good panel – good diversity of viewpoints, and each of the panel members was willing to be candid about their experiences.”

There will be four panelists in Chicago, three of whom also spoke in New York:

Stuart Dodds, Director, Global Pricing and Legal Project Management, Baker & McKenzie

Albert Dotson, Partner, Bilzin Sumberg

Scott Kane, Partner, Squire Sanders

Mark Williamson, Principal, Gray Plant Mooty

All four firms are leaders in the LPM movement to increase efficiency and value to clients.  The panelists will compare notes about what has worked best, what hasn’t worked, and what they plan for the future. Near the end of the workshop, the audience will break into small groups to discuss unique challenges at their firms and to brainstorm the best way for each firm to make progress.

I will moderate the panel discussions, and some of the small group discussions will be led by LegalBizDev principals Mike Egnatchik and Steve Barrett.

One thing will be different from the March session.  Several audience members in New York asked for samples of tools and templates developed by the firms on the panel and by LegalBizDev, so that is what we will do in Chicago.  Sample tools and templates will not only be included in the workbook, but will also be discussed by panelists.

When I gave a speech at the beginning of the New York workshop, I said that if I were not already on this panel, I would have paid to attend the event.  It would have been worth every penny.  The workshop presented a rare opportunity to listen to partners in firms that are successfully implementing LPM brainstorm with each other about the nitty gritty details of exactly what is working and what isn’t.

If you plan to come to Chicago and are interested in alternative fees, you should also consider attending Ark’s Fourth Annual Alternative Fee Arrangements Forum which is in the same location the day before.  The speaker list is a who’s who of experts on the topic, including Fred Bartlit of Bartlit Beck, Mike Roster of the ACC Value Challenge Committee, Lisa Damon of Seyfarth Shaw, Paul Williams of Shook Hardy & Bacon, Richard Rosenblatt of Morgan Lewis and Pat Lamb of Valorem Law Group.  If you decide to attend both events, be sure to check the bottom of Ark’s registration form for a significant discount.

Five ways to improve pricing

There is so much talk these days about value pricing and alternative fees that many people think of pricing simply as setting a fixed or alternative fee. However, you are pricing whenever you decide what to ask someone to pay for your services. When you set an hourly billing rate you are pricing, and when you discount that hourly rate, you are making a pricing decision.

Proven techniques from other businesses can help any law firm to improve the way it sets prices.  Here are five basic ideas that may be particularly helpful, based on Nagle Hogan & Zale’s classic text The Strategy and Tactics of Pricing, now in its fifth edition:

1. Differentiate. You may have heard legal marketers use this word quite a bit, and it is just as important to pricing experts. According to The Strategy and Tactics of Pricing, “A product’s total economic value is calculated as the price of the customer’s best alternative (the reference value) plus the worth of whatever differentiates the offering from the alternative” (p. 19).  This differentiation value can be either monetary or psychological. Whatever features of a law firm add differentiating value, it is crucial that these features be communicated to the client. Are you different because your legal project management expertise makes you more efficient than others, or because you communicate progress better? Let the client know.
2. Communicate value. Value is perceived differently in different businesses. Legal services are difficult for clients to evaluate when compared to products like light bulbs or computers for which buyers can more easily get price and performance information. “In our research, we have found that business managers rated ‘communicating value and price’ as the most important capability necessary to enable their pricing strategies” (p. 72).  They make special note of the value of an endorsement from a client known to be especially discriminating. For example, Kaiser Permanente has an excellent reputation for being an informed buyer in the health field. Thus “when other hospitals and health maintenance organizations (HMOs) learn that Kaiser Permanente has adopted a more expensive product or service, they assume that its price premium is cost-justified” (p. 75).
3. Have a clear and consistent pricing policy. It is important to have a clear and consistent pricing policy and to avoid commonly granting price exceptions. In Chapter 6 of my new book, I advised being cautious about discounting to win business because that creates client expectations of future discounts. The Strategy and Tactics of Pricing says that “Good policies lead customers to think about the purchase of your product as a price-value trade-off rather than as a game to win at your expense” (p. 117).  In setting up your policies it is important to keep in mind that people are more affected by perceived losses than perceived gains and you should frame your pricing with this in mind. If the client is offered a service package, it is better to have a policy that allows a reduction in cost if a service is dropped (a perceived gain) than a policy that requires an extra fee to get that service (a perceived loss).
4. Know your market segments. Clients are not all the same; they fall into different market segments. The Strategy and Tactics of Pricing gives an example of a company selling a scientific device to be used in DNA analysis. The device is a great improvement over existing competitor products, and the company estimated the differentiation value in order to set a price. However the company sold to two different market segments—the industrial market and the academic/government market. The differentiation value was not the same in industry and universities, so the ultimate pricing strategy involved different pricing policies in the two segments. As long as this policy is clearly stated it does not violate consistency requirements. Airlines do this all the time when they distinguish between business travelers and nonrefundable touring seniors. What are your market segments?
5. Know your client types. Within a given market segment there may be different classes of clients, and knowing their classification may help you to deal more intelligently with each group. The Strategy and Tactics of Pricing divides clients into four categories:
   1. Value-driven clients have sophisticated analysis strategies for studying value added, and you will need to work to establish your value added for them.
   2. Brand buyers are also known as relationship buyers. For them, the cost of analyzing value added is perceived as too high. This “buyer will buy a brand that is well-known for delivering a good product with good service without considering cheaper but riskier alternatives” (p. 105).  This is an easier client so long as you do not disappoint her.
   3. Price buyers are looking for a specified service at the lowest possible price. Here you will need to “strip out any and every cost that is not required to meet the minimum specification” (p. 107).  It is also important to fence off this job, so that more lucrative clients who receive a higher level of service understand that this lower priced work is at a different level.
   4. Convenience buyers “don’t compare prices; they just buy from the easiest source of supply”(p. 108).  They know that they are paying a premium for immediate convenience and will not complain. 

Whether your pricing is based on value or cost-plus, and whether your typical agreements are hourly or AFAs, these general principles can help you set prices

 

This post was adapted from my new book Legal project management, pricing and alternative fee arrangements.

How profitable are alternative fee arrangements? (Part 2 of 2)

One of the biggest pressures on AFA profitability is the fact that in many firms, lawyers are paid more if they bill more hours. Several participants in the LegalBizDev Survey of Alternative Fees noted that without proper management, AFAs can be seen as a giant loophole, a place where lawyers who have too little to do can bill as many hours as they like, without risking client complaints:

It takes a lot of discipline to manage a contingent matter. When lawyers track hours on a traditional hourly project, they know that clients will review the results, and that creates a certain discipline. On contingent matters, lawyers may think no one will look at the hourly record for years.

One of the lessons [we’ve] learned is that somebody has to be the point for cost control. It often happens that alternative fee matters, particularly large ones, [end up being] a dumping ground for individuals who may not be fully employed because you are reportable to the client for the result, not the cost. [When lawyers work unnecessarily on a project] your profitability looks bad, so in order to really determine the profitability, we need to deal with that issue.

Some relationship partners we’ve worked with encourage associates to put in extra hours on AFA matters. Associate salaries are a sunk cost, the partners reason, so they might as well put in extra time to assure quality and client satisfaction on fixed fee matters. It’s more productive than googling or staring out the window.

In the short term, they have a point. But in the long term, this type of thinking is highly counter-productive. It reinforces the bad habits created by decades of hourly billing, and substantially increases the chances that AFAs will be unprofitable.

It is not surprising that systematic data on AFA profitability is hard to come by. Law firms are notoriously secretive about their finances, sometimes even with their own partners. And nobody likes to publicize their losses.

The best data currently available comes from the 2012 Law Firms in Transition Survey, in which Altman Weil asked managing partners and chairs, “Compared to projects billed at an hourly rate, are your firm’s non-hourly projects more profitable or less profitable?”  Twenty-nine percent said non-hourly matters were less profitable.

Of these 29%, there is no data on how many turned out “really ugly.” But based on many stories I have heard off the record, I would guess quite a few. I also suspect that the true number of less profitable deals is much higher than 29%.

In college, I had a friend who spent a lot of time at the racetrack. He seemed to remember the times he won much better than the times he lost. I suspect many lawyers have a similar talent for forgetting deals that turned out badly. Especially when they answer questions in a survey.

Of the other respondents in the Altman Weil survey, 14% said non-hourly arrangements were more profitable, and 40% said they were about the same as hourly. The remaining 17% were “not sure.”

Even more interesting were Altman Weil’s findings about which firms profited.

Some law firms have for years proactively used AFAs as a way to increase new business, and invested in training and systems to make them more profitable. For example, at Morgan Lewis, says Richard Rosenblatt, the operations partner for the Labor and Employment Practice, “AFAs invite the client to engage with us and increase the ties that bind. We’re now on the same team, and more likely to get the next engagement. This is an opportunity to get a bigger share of a shrinking pie.”

When Altman Weil asked, “Is your firm’s use of alternative fee arrangements primarily reactive (in response to client requests) or primarily proactive (arising from your belief in the competitive advantage of alternative fees)?” about one-third said they were proactive (33.2%) and two-thirds classified themselves as reactive.

When Altman Weil compared AFA profitability for the two groups, they found that it pays to be proactive: “Firms that are proactive rather than reactive in their use of AFAs are more than three times as likely to enjoy higher profitability on their non-hourly work.”  For more about this proactive approach, see Chapter 11 in my new book.

 

This post was adapted from Legal project management, pricing and alternative fee arrangements.

Announcing the publication of my new book

Press release

Boston, February 14, 2013: Today, LegalBizDev published the new book, Legal Project Management, Pricing, and Alternative Fee Arrangements: What Firms Are Doing, by Jim Hassett, Ph.D., the founder of LegalBizDev. 

Unlike any other book about legal project management (LPM), this 258-page volume relies heavily on interviews with partners at several dozen law firms across North America who have recently adopted LPM techniques. Much more than an introduction to the subject, this book contains reports from lawyers in the trenches who have used these techniques to plan their projects efficiently, develop budgets, price their legal work appropriately, and gain advantages over their competitors.

“This new book will help lawyers understand the theory and the practice of legal project management,” says Hassett. “Law firm partners will see how LPM can assist them on a day-to-day basis by building on the lessons that have been learned at large firms and at small ones.”

As Hassett points out early in the book, “The reason LPM is growing so rapidly is that it helps law firms meet client needs and their own needs.”

The key portions of the book are Chapters 3, 4, and 5. Chapter 3, “Eight key issues in LPM,” describes the fundamental concepts that lawyers must learn if they are to adapt successfully to the “new normal” relationship between large-firm lawyers and their corporate clients.

Chapter 4, “A variety of approaches to LPM,” gives brief accounts of the different ways nine law firms have begun to adopt the principles of legal project management. Chapter 5, “Case studies in behavior change,” describes how four additional firms have offered targeted training in LPM and changed their approaches to planning, budgeting, and managing their matters.

“I appreciated the casual conversational nature of the writing, along with the formality and detail of the citations to other sources. It is a nice mix that makes the text a quick read, but also a resource guide for more detailed research and study of the topics,” says Paul A. Williams, a partner at Shook Hardy & Bacon.

Says Kim Craig, director of the legal project management office at Seyfarth Shaw LLP, “Jim’s book is a true testament to the changing legal landscape supported by numerous case studies and facts representative of firms in various states of their LPM maturity. For an industry historically known for asking, ‘What is everyone else doing?’ this book answers that question and ignites a sense of urgency for lawyers and law firms to pay attention to the drum beat of the cultural transformation taking place within the legal industry.”

What is unique about this book, in addition to the case studies, is the way that Hassett integrates the latest thinking and research on the relationships between project management, pricing, and alternative fees.

Several hundred copies have already been pre-ordered by dozens of law firms before today’s publication date. 

The book is available now from LegalBizDev (info@legalbizdev.com, 800-49-TRAIN). An excerpt and an order form can be downloaded from: www.legalbizdev.com/projectmanagement/lpm-pricing-afas.html. 

A Kindle edition is available now on Amazon, and the printed book will also be available soon through Amazon and Barnes & Noble.

How profitable are alternative fee arrangements? (Part 1 of 2)

The ABA Commission on Billable Hours Report predicted that the non-hourly approach would be a financial boon to law firms: “Alternatives that encourage efficiency and improve processes… increase profits” (p. ix).

Some consultants love to spread this good news message, and when law firms and law departments talk publicly about the topic, they too often focus on the upbeat side. For example, in an article entitled “Alternative Fees for Litigation: Improved Control and Higher Value,” James D. Shomper and Gardner G. Courson argue that “if properly structured, an alternative fee arrangement should result in a win-win scenario for client and law firm.”

To cite just one more example, a New York Times article about alternative fees quoted Carl A. Leonard, a former chairman of Morrison & Foerster, about AFA profit potential:

In one case... Morrison & Foerster negotiated a fixed fee for defending a company in court, covering work up to the point of a motion for summary judgment.

On top of the fee, if the case settled for less than what the company feared having to pay if it lost in court, the law firm got a percentage of the amount saved. The arrangement made sense when the goal was to resolve the dispute quickly....

Lawyers on the case negotiated a settlement for much less than the client’s worst-case number, Mr. Leonard said. “The effective hourly rate was something like 150 percent of our hourly rates,” he added. “We made money, the client was happy."

I think such examples are the exception to the rule and believe it can be very hard to turn fixed prices into win-wins, especially in a highly competitive market. My view has been shaped by my personal experience running fixed price and hourly projects in my own business. For more than 25 years, I have found that consistently profiting from fixed fee work is an enormous challenge, and a struggle that never ends.

In the hundreds of fixed fee projects we’ve performed, the vast majority were a zero-sum game. In the short run, when the project was over, one party did better than they would have on an hourly basis, and the other party did worse. Usually the client had power over the deal terms, and we were the one that did worse.

Fixed price projects begin with planning a budget upfront and then managing the work to keep within that budget as the project proceeds. When my company was billing by the hour, I found it relatively easy to maximize billing and profitability. If an employee had nothing to do on one project, I could usually find something for them to do on another, and keep them billing.

But during periods with a significant amount of fixed price work, it became extremely difficult to juggle dozens of projects with ever-changing deadlines in such a way that everyone remained billable and projects stayed within budget. And during mixed periods, when some of our projects were fixed price and some were billed hourly, it was an absolute nightmare. Employees quickly understood the never-spoken message that while they needed to be efficient on fixed price projects, inefficiency was winked at or even encouraged in hourly projects. For some employees, this inconsistent message created a conflict that threatened to make their heads explode.

Lawyers have been rewarded for their entire careers for putting in extra hours to analyze every risk from every possible angle. Many will have a hard time learning to deliver the quality they are comfortable with when they must work within strict funding limits. And law firm managers will have an even greater challenge when they try to juggle staff on dozens or hundreds of projects with constantly shifting deadlines. Traditionally, most firms expect lawyers to bill 1,800 hours per year or more. If firms shift a significant portion of their work to a fixed price basis, many will find that goal unreachable.

When both inside and outside counsel talk about alternative fee arrangements, I predict they will continue to accentuate the positive, and focus on win-wins. People will speak most freely about the matters that make them feel good and look good. But in my experience as a business owner, in fixed price deals one side usually wins a revenue concession and the other side does less well.

When I wrote about this a few years ago in my blog, Jordan Furlong, now a consultant at Edge International, made this incisive comment:

It may come down to how we define “winning.” I think a win-win alternative-billing scenario right now might look like this: the client wins because it reduces its outside legal spend, or at least improves its legal cost certainty, and the law firm wins because it gets to keep the client for one more day. That’s not the kind of victory lawyers are accustomed to settling for, but I think they ought to get used to it.

Next week, in Part 2, we will review the data on who is making more with AFAs, and who is making less.

This post was adapted from my new book Legal project management, pricing and alternative fee arrangements.

What percent of legal revenue is derived from alternative fee arrangements?

Over the last few years, surveys have consistently found that the use of non-hourly alternative fee arrangements (AFAs) is slowly growing. In Altman Weil’s 2012 Law Firms in Transition Survey, 47% of firms reported that their AFA revenue had increased in the past year. In the 2012 ALM Legal Intelligence Survey, 50% of law departments and 62% of law firms reported that there was an increase in the volume of AFAs in the preceding year. And in the American Lawyer’s 2012 Law Firm Leaders Survey, 68% said more clients are requesting AFAs.

While it is crystal clear that the use of AFAs is growing, it is difficult to be sure exactly what percent of law firm revenue they currently represent. There are many reasons this question is hard to answer, including disagreements over the definition of the term “alternative fee arrangements,” law firm secrecy about finances, and the fact that many firms simply do not know.

When I conducted the LegalBizDev Survey of Alternative Fees in 2009, one of the questions I asked AmLaw 100 decision makers was, “Does your accounting system code alternative fee projects separately, so that you can easily look up the exact percent of last year’s revenue from alternative fees at your firm?” At that time, only about one in four could look up AFA revenue. (66% answered no, and another 7% did not know.) When I asked decision makers in that same survey to estimate the average revenue percentage for the AmLaw 100 as a whole, answers were all over the map, ranging from 1% of revenue to 25%.

While the answers would be more precise if that survey were repeated today, there is still no definitive  revenue data in many firms.  Last week, I talked to one lawyer who had recently helped conduct a confidential study to determine the AFA percent at her own AmLaw 100 firm.  They had come up with a number, but she did not trust it.  She felt that some lawyers were including blended rates and discounts in AFAs while others were not, and many true AFAs had been completely missed.

The best data to date was published two weeks ago in the 2013 Client Advisory from the Hildebrandt Institute and Citi Private Bank.  It was based on a series of surveys of 176 large law firms (79 from the AmLaw 100, 47 from the second hundred, and 50 additional firms), and shows a slow but steady increase.  In 2011, 16% of law firm revenue came from non-hourly AFAs.  In 2012 it was 17%, and for 2013 they are predicting 19%.

While in some ways 19% may not sound like much, it is important to emphasize that this implies that the AmLaw 100 alone will perform over $13 billion worth of legal work this year on a non-hourly basis (assuming their total gross revenue stays around $70 billion).  And while we may never know whether this percentage is exactly correct, there can be no doubt that it is going up.

This post was adapted from my new book Legal project management, pricing and alternative fee arrangements.