2 posts categorized "Alternative Fee Arrangements"

August 08, 2018

AFA pricing best practices

By Jonathan Groner

At the recent conference of the Corporate Legal Operations Consortium (CLOC), Matthew Beekhuizen, chief pricing officer of Greenberg Traurig, was a member of a panel titled “How to Build an AFA Program: Best Practices in Design, Implementation, and Management.”  Beekhuizen recently discussed the panel and various aspects of pricing and alternative fee arrangements with us in the following interview.

LegalBizDev: Based on your personal experience, what approach do you take in dealing with pricing issues?

Beekhuizen: Earlier in my career, I worked in commercial banking, and I became accustomed to analyzing financial statements and profit and loss statements, particularly for the purpose of assessing the amount of risk for commercial loans. That work was highly data-based, and I still use a data perspective in developing prices in my present position.

I use data as a starting point. For example, in developing a budget for a piece of litigation, we look first at the costs of various tasks, such as depositions, motions to dismiss, etc., in similar matters. We also ask: What is the possible range of costs? This historical data paints a picture, and then I sit down with the attorneys on the matter and I ask them how the present case is different, if at all, from previous cases that were similar. We can go from there.

LegalBizDev: Are firms like yours becoming more data-driven?

Beekhuizen: Yes, firms are much savvier now, for example, about why and how they should use task codes to capture data in a meaningful way. In addition to the well-known ABA litigation codes that have existed since the 1990s, many firms are developing their own coding systems for all types of matters, not just litigation. And Hilarie Bass (current ABA president and a co-president of Greenberg Traurig) has initiated an ABA working group with the goal of creating broader code sets for a variety of practice types, as well as revisions of the litigation code set, aimed at capturing better data and being more useful in AFAs.

LegalBizDev: What is the relationship between task codes and AFAs?

Beekhuizen: The array of data that can be gathered from completed matters by the use of task codes helps a firm develop detailed projections of the cost of an upcoming matter. These projections can then be used to develop a fee proposal that the firm, with a greater degree of confidence, expects will be a valuable arrangement for the client and the firm.  The use of task codes also enhances legal project management efforts once the matter is under way, so firms can monitor what work has been done, by whom and when in comparison to the fee agreement.

One type of AFA that firms are using more frequently when they are truly data-driven, is task-based pricing. An example of this type of pricing would be that the firm and the client agree on a certain price per deposition, regardless of the number of depositions, or on a certain price for the review of, say, each set of 5,000 documents.

LegalBizDev: What is the relationship between legal project management and AFAs?

Beekhuizen: AFAs can really set the stage for legal project management. Say the work is being done for a fixed fee, which is a common type of AFA. That means that when the firm agreed on the fee with the client, the firm had based the arrangement upon specific staffing (how many people would be used for each aspect of the matter, where they are based, experience level) and expected scope (activity such as number of depositions, number of documents to review, etc.).  The firm needs to staff the matter in the way it had planned and monitor that the work is within scope. So the fee agreement becomes, or should become, a work plan to which the firm must manage. That requires regular reporting and assessing of where things stand, which of course involves project management. Project management becomes indispensable in making AFAs work well.

LegalBizDev: What is the relationship between the growth of legal operations within client corporations and AFAs?

Beekhuizen: Because of the growth of legal ops, more sophisticated clients have set benchmarks for what they want to pay for certain specific legal services, just the same way as firms’ use of data has helped firms come up with benchmarks for the prices that offer the most value to all involved. This is actually very good because it makes the relationship and the negotiation between the law firm and the client more transparent in many ways. Now, if the client and the firm have different expectations about the potential costs for a matter, both can review the data behind the expected cost. This helps firms have a more substantial and fact-based discussion with clients about price. When our clients are trying to implement AFAs for the first time, I always tell them to start with data. Having a legal operations professional on the client side helps with this process.

As legal operations continues to grow by leaps and bounds, as it has, we will be seeing a lot more data-driven requests from clients, and I think that’s a great development.

LegalBizDev: Do you deal with aspects of pricing that are not necessarily reducible to data?

Beekhuizen: Yes. Pricing is both a science and an art, and it ultimately is all about understanding your clients’ needs. Sometimes you may come up with an initial cost estimate that you know is beyond what the client is expecting. For example, a price estimate may represent what the firm believes will be required to win a certain litigation, but that cost is greater than the client’s monetary exposure. At that point, you can explore other alternatives that reduce the cost and create value for the client.

In another situation, the client may want to develop a fee arrangement that has the law firm sharing risk with the client, so that the law firm incentives and client objectives are aligned.

In yet another situation, the value for the client is not so much in cost reduction as in predictability of its legal expenses over a period of time.

In all these instances, our job is to develop an understanding of what the client is really trying to achieve. AFAs and data-driven analysis set the stage for the most important part – talking to the client about what they expect and what they consider value.

May 18, 2011

Announcing the first Certified Legal Project Managers™

Last December, we announced that Squire Sanders, Stewart McKelvey, and Harris Cost Lawyers were the first three firms to sign up for our new Certified Legal Project ManagerTM program.  

Lawyers from all three firms have now completed their final case studies and been awarded certification.  We have also begun certifying additional lawyers in the United States, Canada, Brazil, China, and Germany.  The smallest firm to sign up has eight lawyers, the largest has over 3,000. 

The first certification group has provided an important proof of concept that busy senior partners can indeed complete this program within a few months, build a solid foundation of project management knowledge, and apply this knowledge to develop and implement new procedures that improve client service and increase profitability.

Over the course of the program, each participant studied over 300 pages of assigned readings from six textbooks and answered 17 essay questions about how the concepts applied to their practice.  Then, in three phone conversations and numerous emails, we discussed their “low hanging fruit”: which of the concepts could be most efficiently applied to achieve immediate and practical results?

The first to finish was Fraser MacFadyen, a partner at Stewart McKelvey, a 220-lawyer firm in Atlantic Canada.  Fraser decided to focus on improving practice-wide procedures for handling certain types of secured financings, starting with representing borrowers on a loan secured by real property and related personal property. 

For his final project, Fraser developed several templates to increase efficiency:

  • Standardized spreadsheets for estimating the cost of easy, moderate, and difficult transactions
  • A standardized cost estimate letter to clients that explains what is included in the price and what is not
  • A working agenda summarizing key tasks, who is responsible for each, and deadlines
  • A closing agenda and checklist

We also discussed sustainable tactics to use these templates to maximize benefits to clients, and then to implement them throughout the firm.  We agreed on minimum success criteria for the next 90 days, including using the forms in at least two of Fraser’s matters, getting in-depth feedback from at least two partners on how to improve the forms for their practices, and holding at least one client meeting to discuss how to work together to increase efficiency.  Again, these are the minimum goals.  We both hope he can achieve much more in 90 days, including having other partners actually use the templates. 

Although the program has technically ended, I will be calling Fraser after 30 days and after 90 days to check on his progress.  I want to know what works and what doesn’t.

The second to complete the program was Liz Harris, the founder of Harris Cost Lawyers, an eight-lawyer firm in Melbourne, Australia.  Timing is everything in life, and Liz read about our program on the internet at exactly the right moment.  She had just completed the first module in a program to become certified through the Project Management Institute (PMI) and concluded that while “the PMI program was extremely interesting, much of the content was not relevant to my practice.” So when she saw an announcement that explained how our certification program was specifically designed for lawyers, she signed up right away. 

For Liz’s final project, she created over 25 pages of checklists and templates to enable her firm to better define scope for four types of fixed price matters, and to complete them within budget.  For example, one of Liz’s templates will help her firm to complete particular stages of litigation under Australian law.  One of her checklists lists 12 issues to take into account when estimating the extent of work a matter will require, built around practical details and hard-won wisdom, including “Who is instructing us…a client with little litigation experience will need a more detailed explanation of concepts like instructions for experience offers of compromise" and, “Which court are we in – federal court objections need to be much more detailed and reference case law.” 

Harris Cost Lawyers has been using the templates for the last month, and has already started seeing results.  The templates have “resulted in a clear change in focus on the part of the lawyers in planning matters upfront.”  The firm is planning to increase its percentage of fixed price work, measure the results, and continue to improve their processes.  According to Liz, “the materials developed in this program give us a clear competitive advantage.”

The third to finish was Stacy Ballin, a partner at Squire Sanders, which has over 1,200 lawyers.  Stacy is co-chair of Squire Sanders’ Project Management Committee, so she came to the program with a very strong interest and background in this area.  She is also one of the people who convinced me to start the program, along with her partners Mitch Thompson and Howard Nicols.  We met last fall after I gave a speech at the Squire Sanders Partners meeting, and we talked about the lack of standards in this rapidly growing field.  After they convinced me that the profession needed to establish standards as quickly as possible, I went back to the office and started designing our Certified Legal Project ManagerTM program.

Stacy’s final project is likely to produce immediate results that go straight to the bottom line.  As the Litigation Group Business Partner, she is responsible for approving discretionary write-downs, where a relationship partner decides not to bill a client for some of the time charged to a case and writes down a portion of the bill before it is sent to the client.  According to data reported in the 2011 Hildebrandt Client Advisory, the average large law firm write-down rate – also called billing realization - has been increasing for the last few years, and currently exceeds 11% (p. 13).  (Firms also write off an additional 13% of the bills they send as uncollectible, but that is another story.)

Squire Sanders has not revealed its billing realization rate, but with annual revenues over $500 million, a reduction of 1% would mean an immediate increase in profits of $5 million.

When Stacy reviewed all 2010 litigation write-downs over $10K as part of this program, she saw that a few young partners had unusually high write-down rates, which they explained as simply costs beyond budget or caused by a pattern of inefficiency.  Inefficiency reduces the value clients receive and discretionary write-downs have an immediate negative impact on the bottom line.   So Stacy decided to interview six of these young partners and explore with them how the firm could help them reduce inefficiency and write-downs in the future. 

For her certification case study, Stacy developed a phone interview survey questionnaire based in part on the 17 questions she answered in the first part of our certification program.  In the next few weeks she will conduct these interviews and “develop a plan as to how to use the results to reduce write-downs in the future, and to measure the financial impact of my recommendations.”  Depending on what Stacy finds, her initiative may include future project management training to help key partners manage their teams more efficiently.

All three of these lawyers have been awarded certification and their programs are now officially over.  However, I have planned additional follow-up with all three over the next few months.  I want to hear exactly what happens next.  And when I do, I will let you know.

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