Alternative Fee Arrangements #2

I am old enough to remember when consulting firms came to us lawyers in the 1970’s and said “...we want to show you an Alternative Fee Arrangement from the US that will revolutionise the way business is done in law firms. It is easy and efficient to apply, involves no risk, will make you much more money, allows you to manage your staff properly, and is totally transparent. Best of all you will no longer have to have awkward conversations up front with your clients about price, as price is totally flexible and can move up( and up )solely at your will. You can make as much-or as less- money as you like. Sounds too good to be true? Well try it - it is taking the professional services world by storm. It’s called Time Costing.”

Fast forward 30 years and consulting firms - including yours truly - are peddling Alternative Fee Arrangements #2 (“AFA’s #2) and in 2009 nearly every law firm in Australia has in their kit of client service offerings some AFA’s #2.  These AFA’s #2 include anything from blended rates, capped fees, fixed prices, staged costing, event costing, success fees, etc. Whilst all firms market their AFA’s #2 offerings as “innovative” and in their clients best interest (which they may well be), most of the firms are merely responding to their clients demands for more certainty of their legal spend. In reality if given a choice most firms would still prefer their clients accepted time based billing. Only a small minority of firms at this stage genuinely offer AFA’s #2 as a real point of differentiation and an even smaller number only offer AFA’s #2 and no time based billing options at all.

So what is really happening out there with AFA’s #2? Whilst very few lawyers and commentators willpublicly support time based billing they will tell you that even though AFA’s #2 are on the increase overwhelmingly the majority of legal work is still being billed out by time and that this is likely to continue for some time yet - if not forever. Notwithstanding the widespread criticism of time based billing from nearly every quarter the story goes that as no one has come up with a better billing model as yet until they do law firms will continue to use time based billing and the leverage model as the cornerstone of their practices. So much for our profession’s “innovation”.

This is not to say there is not innovation happening in law firms pricing and business models in Australia. There are-just look at new age start up firms like Optim LegalAdvent Lawyers andMarque Lawyers - but regrettably these examples are to date far and few between. Compared to other industries that search far and wide outside their own industries to look for new markets and to come up with genuine innovative offerings, consistent with a risk averse profession primarily built around precedents, we tend to only look and see what our competitors are doing, and simply try to do it a little better or more efficiently.

Lawyers who genuinely have their clients and their team members interests at heart should not be so much interested in what other law firms are doing with their pricing and business models - but what law firms should be doing!  There is a big difference.

Just as we looked at the US for the introduction of AFA’s #1 it is in the US where many still look for  examples of not only what is happening now, but more especially what may happen in the future, in respect of alternative fee arrangements.

In November I attended an Alternative Fee Arrangement Forum (sub titled: strengthening the firm/client relationship by softening the shortcomings of the billable hour in an economically challenged environment) put on by the Ark Group in San Francisco CA. The line up of speakers were all lawyers and corporate counsel that in various ways or another have moved away- either fully or in part- from time based billing.

Given the nature of the topic the audience were either already practising in part non time based pricing and wanted to increase their % of non time based billing, and those that were still mired in time based billing but wanted to learn more about alternative fee arrangements. This mix together with the quality of the speakers made for very open, full and at times vigorous discussion about law firms pricing and business models, what corporate clients increasingly expect and want, plus some crystal ball gazing about the long-term future of legal practises - especially BigLaw.

Given that, in Australia at least, most of the more vehement opposition to moving away from time based billing comes from litigators, it was interesting that most of the private practice lawyers speaking at the Forum were in fact litigators.

Fred Bartlit Jr senior partner at Bartlit Beck Herman Palenchar & Scott LLP www.bartlit-beck.comis one of the doyens of big scale commercial litigation in the US, acting mainly for multinational corporations and he has NEVER charged by time since he left BigLaw and started Bartlit Beck in 1993. American Lawyer described this firm as having a Unique Model, Unmatched Results. No hourly fees, no leverage, no laterals. The firm’s model is unique-and its results are too”. They have a totally inverted pyramid structure because the majority of their lawyers are senior experienced litigators (48 of them), they only take on cases they can “win” for their clients, and reject more cases than they accept leaving, in Fred’s words, the time based billing firms to take on the “losing cases”.

Patrick Lamb and Nicole Auerbach founding partners from Valorem Law Group of Chicago are also escapees from BigLaw and use a value adjustment line amongst other tools as part of their value based pricing model for their clients.

Polly McNeill visionary CEO of Seattle based law firm Summit Law Group also has a unique and innovative client service practice model that has made this 12 year old Law Firm a leading light for many other “new age” law firms in the US.

Also speaking was the American Lawyer’s newly crowned “legal rebel” Christopher Marston founder of probably America’s most innovative law firm Exemplar Law

Chris’s model is entirely different to even the other firms practising AFA’s #2 not the least because he is mainly corporate not litigation based and exclusively and uncompromisingly practices value pricing.

Make no mistake these are successful and profitable law firms not in spite of, but because they offer something totally different to mainstream law firms.

The various corporate counsel in attendance were a mixture of corporates who now accept nothing else other than fixed priced fees to those that still use a variety of alternative pricing models with their panel firms. Most spoke of the difficulties they initially experienced with their law firms and in both parties feeling “confident” in alternative pricing models. Several acknowledged they were still in a “transition” and learning phase in weaning themselves away from accepting non time based billing as the norm.

Certainty of knowing what the legal costs are rather than merely how the fees are calculated were high on counsel’s list as the reason for moving away from hourly rates.

True to their philosophy as innovators the speakers were not so much interested in “dumbing themselves down” by looking at what the traditional law firms were doing (although there was much hypothesising as to whether, based on the Cisco and other multinational corporate decisions to only instruct law firms who will fix their prices in advance, BigLaw will ever come to accept non time based billing as “the norm”) but how they themselves could continue to improve to provide exceptional service offerings to their clients.

In respect of traditional law firms it was generally felt that whilst the majority of Amlaw 100 firms practice alternative fee arrangements in parts of their business, most are still a long way from moving away from hourly rates and indeed from measuring and rewarding their “fee earners” onresults rather than time and input. Indeed the whole leverage based model that the majority of Amlaw firms are built on- same as most Australian law firms - could crumble under alternative fee arrangements and as such there were too many “vested interests” in retaining hourly rates as the core method of pricing their services.

That is not to say in time (excuse the pun) many of those firms will move-or be forced to move - to using alternative fees much more readily and confidently but for many that will be a painful and drawn out process as they fight a rear guard action to retain hourly rates and prop up an old and tired business model that was better suited to the 19th century industrial age than the 21st century knowledge age.

It would seem that the challenges and opportunities facing US law firms and their clients are pretty much the same as we face here in Australia. The impact of the GFC in the US has probably enabled clients to wield more weight in their pricing negotiations with their law firms and in some cases the more innovative corporates have insisted on alternative fee arrangements such as fixed pricing and their law firms “having some skin in the game”, whereas others are simply screwing their firms on rates (“the clients revenge” as termed by one speaker).

Granted some of the law firms like those at this US Forum are more further advanced than most firms here in Australia but these firms are still the exception rather than the rule even in the US. Having said that, the tide is certainly turning and alternative fee initiatives are definitely on the increase everywhere. The smarter corporates and their law firms are definitely working more closely together for mutual long term benefits(seeking better value) rather than simply short term gain ( just cheaper legal fees).

As with any declining and mature business model it will be those that have traditionally got the most out of it that will be the last to change and will cling onto making as many “efficiency improvements” to the current model as they can before jumping into any new model. Those that do jump however will reap the justified rewards-as will their clients.