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Alternative Fee Arrangements and Value Billing — The Continuing Public Dialogue

Alternative Fee Arrangements and Value Billing – the Beat Goes On

 

 

                                                                             Jerome Kowalski

                                                                             Kowalski & Associates

                                                                             April,, 2010

 

 

            A series of different articles and blog postings that appeared today (April 11, 2010) in various trade media continues to emphasize the critical necessity for law firms to focus on alternative fee arrangements and value billing in order to remain competitive and relevant.

            Today’s Law 360 posted an interview with UPS general counsel Norman Brothers, Jr. Mr. Brothers notes that while UPS undertook a radical convergence program in 1999, drastically reducing the number of its outside counsel from the previous 200 law firms that previously served as outside counsel to UPS. Despite this convergence, Mr. Brothers notes that currently, despite its radical convergence a decade ago, UPS now solicits bids from within its network and from other firms outside its limited network to ensure competitive pricing and maximize value for legal services delivered. This process, says Mr. Brothers assures “competitive pricing” and value pricing. Favorable rates are negotiated and outside counsel are encouraged to propose “creative alternative fee pricing” in which outside counsel assume risk coupled with incentives when matter are efficiently brought to a successful conclusion. 

            This, of course, is the trend we previously discussed in our previous primer on Alternative Fee Arrangements.

            Law.com also today reported about on a competitive process in which a variety of law firms presented proposals to the Creditors’ Committee of Heller Ehrmann to pursue a $58,000,000 hotly contested claim by the estate against bank lenders of Heller Ehrmann.  The winner – an 11 lawyer boutique which was prepared to assume substantial risk by accepting a $1,000,000 flat fee, in a case which will likely consume a multiple of that amount if traditional hourly fees were charged, against a 5% premium of any benefit received.

            Today’s Legal OnRamp.com, reports on an article originally published on January 10, 2010 by Microsoft Associate General Counsel Brad Smith in Inside Counsel in which Mr. Smythe advises:

At Microsoft we expect that 45 percent of this year’s and more than half of next year’s U.S. spending likely will be based on alternative billing arrangements. The reason we’re interested in alternative billing arrangements is simple—efficiency. We want to align economic incentives so both client and firm are motivated to make legal services more productive. In the medium and long term, that should lead to lower costs.

But this isn’t a zero sum game between clients and firms. More efficient legal processes can also help law firms become more profitable. For example, a well-structured fixed fee arrangement incents a law firm to increase profitability by becoming more efficient and reducing its costs.

            OnRamp.com also featured a piece by Paul Lippe in which he made a number of salient points, including:

In law, prices have only gone up; for clients, prices of lots of goods and services (including the ones they sell) have gone down. In the new normal, the theme will be predictable pricing, where clients and firms share a reasonable expectation of price and value, and work together to meet it.

 In law, the attitude has been “what we do is so complex it can’t be measured.” Meanwhile, clients have grown accustomed to measuring everything. In the new normal, the theme will be defined quality, where work product will be assessed according to explicit, outcome-based criteria.

 

            And finally, Hannah Halsi-Kelschner, associate general counsel at Lorillard posted today:

 

If more firms viewed case matters (both litigation and transactional work) from a project management perspective, with more input from the client as to what the true goal is (even if that goal evolves over the course of the project), a large number of the project segments could be priced with some certainty. That’s where the attorney’s level of experience and expertise comes in. Furthermore, the level of communication and the working relationship that develops from this high level of interaction would also engender the kind of trust and understanding that could accommodate the need for revised pricing when the unforeseen arises.

There is a big difference between asking for a blank check at the beginning of a matter versus providing a level of certainty up front with the assumptions and limitations on which you basis that pricing certainty laid out clearly. You can then jointly working through hiccups as they arise.

Firms that get on board with this will thrive and prosper because they are helping the client gain “control” of what is perceived to be a runaway cost. Those who remain closed to anything but the billable hour will be at a competitive disadvantage

           

 

                The take aways from the ongoing dialogue: (1) the hourly fee may be a mastodon.  (2) Alternative Fee Arrangements provide unique opportunities for middle market and boutique law firms to represent companies previously outside of its weight class. (3)  Clients’ demands that counsel assume part of the risk in legal engagements must be met. (4) Legal services are now being acquired through a purchasing agent mentality. Just like a corporation would not purchase office supplies based on price and quality, not because a vendor was a fraternity brother of a senior corporate executive.  (5)  Clients of any degree of sophistication generally reject the old bromide that hourly billing is the only fair way to compensate counsel because legal engagements necessarily involve so many uncertainties and unknowns. After all, so does air travel.

© Jerome Kowalski, April, 2010, All Rights Reserved.

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6 Responses

  1. […] and second year associates. “They’re worthless” said Mr. Beach. Clients, he said and as we previously noted  clients “are not going to pay for people who can’t add value.” To be sure, this is not a […]

  2. […] Alternative Fee Arrangements are not a passing fad.  Our colleagues at Altman Weil reported just last week that a whopping 94.5% of law firms utilize varying forms of AFA’s.  Firms which have more thoroughly embraced these billing arrangements are experiencing real increases (often double digit increases) in revenues and profitability and substantially enhancing client relationships.  Now is the time to make sure your partners understand that clients are no longer buying in to the palaver that legal matters, particularly litigation, are so unpredictable that the only way for lawyers to be fairly compensated is through an hourly billing model. It is now the time for everybody to slake their thirsts and enjoy the Kool-Aid.  […]

  3. […] an AFA to a client.  You have read the basis premises of AFA’s, and you have been following the public discussions.  Based on all of the propaganda you have been reading, you know that clients seem to love them […]

  4. […] We used to record time on slips of paper. Today they are recorded real time on a mobile app. And in some instances, we no longer even record time. […]

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