Advertisements

Alternative Fee Arrangements, Value Billing and Metrics in a Dwindling Marketplace for Legal Services: Are We All Marching to the Beat of the Same Drummer?


Bass drummer at New Orleans "Tumble"...

Image via Wikipedia

 

Value Billing and Alternative Fee Arrangements:  What are we Really Talking About?

 

A Client and a Lawyer Walk in to a Bar. 

The client says “we want you to provide us with value billing.”  The lawyer says “we’re big believers in alternative fee arrangements and have very sophisticated AFA programs.”  The client says, “Okay, how much are you going to reduce your rates?”

 

                                                                                      Jerome Kowalski

                                                                                      Kowalski & Associates

                                                                                      December, 2010

When it comes to value billing, are clients and lawyers speaking the same language?

  

In 1985, while still actively practicing law, I defended a claim brought by a diversified Fortune 500 Company against my client, a relatively small manufacturer of fluidized bed heat treating furnaces. These furnaces are, among other things, designed to harden certain ferrous metals for greater endurance. For example, many of the metals in automobiles require enhanced hardening beyond their natural state. This enhanced hardening is achieved by heating the metals above 1,200 degrees Fahrenheit for fixed periods of time. The breach of warranty claim was straightforward:  The plaintiff purchased such a machine for $103,000 and it claimed it did not function as warranted. It wanted its money back. An AmLaw 100 firm prosecuted the case.  The lawyer handling the case has since become a federal judge, while I sit from my perch here and jot my musings.

Early discovery in the case and my client’s own engineers’ inspection of the device at the plaintiff’s facility led us to quickly conclude that the problem was that the plaintiff’s personnel were simply not properly operating the equipment. Our conclusion was not surprising: In 50 years of business, no customer had ever successfully prosecuted a breach of warranty case against my client.  To be sure, this 1,000% batting average was not the result of outstanding lawyering; rather, my client had an excellent product and high quality control standards.

In a very early settlement conference, my client offered to provide the plaintiff’s personnel with additional training at no added charge and further offered to refund the full purchase price plus some portion of the legal fees if an independent academic expert mutually acceptable to the parties reported that the device was in fact not operating as warranted. The plaintiff’s division head summarily rejected the offer and in an expression of refreshing candor conceded that his division was not meeting net revenue expectations and he needed to get rid of both the machine and the personnel needed to operate the unit if he were to get close to meeting his division’s net revenue projections.

Against this backdrop, my client’s CEO called me and told me that he could resolve the case quickly. His company had received an order from a different customer that required the purchase of $10,000,000 worth of refractory brick (that is brick that can sustain consistent high heat, such as you will find in your own fireplace) and that our plaintiff, through a different division,  was one of the nation’s three largest manufacturers of such refractory. My client was prepared to issue a PO for this refractory to the plaintiff, while still providing the promised additional training.

Sounds easy, doesn’t it? The plaintiff would get the full benefit of its bargain and profit from the new order.  Yet the plaintiff’s division manger refused, since his division would not be credited with the sale and he still needed to trim costs to meet revenue projections. Try as we might, opposing counsel and I, who agreed privately that the proposed resolution was sound and an outstanding commercial resolution, just could not get the plaintiff, even at its highest corporate offices, to buy in on the deal.

We nonetheless settled the case quickly thereafter. My client simply repurchased the machine and resold it within days to the United States Department of Energy for $135,000. The PO for the refractory was issued to a competitor of the plaintiff.

The litigation costs were far less than anticipated for both sides, and in today’s parlance we provided “value billing:”   We provided efficient professional services and concluded a potentially complex litigation, at a fraction of the budgeted cost.  But, did we really provide “value billing?”

This quarter century old case came to mind as I sat through the National Law Journal’s Managing Partners Conference in Washington on December 2.

The conference included much talismanic recitations of “value billing.”  Actually, the repeated catch phrase that captured my ear was the too oft cited “legal spend.”  The repeated juxtapositions of the two phrases by each presenter, extremely capable law firm leaders, to be sure, was rather straightforward:  Corporate clients were slashing expenses for outside counsel and law firms were scrambling to maintain significant slices of the shrinking pie by discounting prices.

It’s now been two years since the Association of Corporate Counsel issued its “Value Challenge” and perhaps it’s now time to reconsider the concept and perhaps re-define re-think what legal “value billing” really should mean. I readily admit to be a value billing junkie.

A principal problem in the ACC Corporate Challenge is its rather wholesale reliance on defined metrics. Professor Steve Harper, a former Kirkland partner, recently reported that reliance on metrics is frequently misplaced.  I long ago joined a chorus of others in raising the issue of the “mother” of all metrics; the much touted annual AmLaw 200 report on law firm profitability is slightly less than gospel.

The National Association for Legal Placement, which has a key part of its mandate issuing reports on the metrics of recent law school graduates issues reports on that are nothing more or less than picture perfect portraits of opacity. NALP and its constituents are unwilling or unable to answer a simple question:  “If I decide to go to law school, work my butt off for three years and incur $200,000 in debt, what is the likelihood that I will get a well paying job?  If the law schools let me know how their recent graduates managed, I could make an informed decision.”  An Indiana Jones inspired group, The Law School Transparency Project, embarked on a good faith search for this holy grail of metrics and short of an extremely unlikely national labor strike there is very little likelihood that actual metrics will ever be found.

The point here is that metrics are ephemeral, misleading, quixotic, enigmatic and too often of little assistance in getting the full measure of quality.

All of which brings me back to my original questions:  exactly what is value billing, how is it measured (or even recognized) and how should it be rewarded?

Indeed, even with the ever rising crescendo demand by corporations for Alternative Fee Arrangements over the past 30 months, corporate general counsel are still expressing confusion and uncertainty regarding the concept while law firms, eager to satisfy a dwindling client base believe they have risen to and met the Alternative Fee Arrangement challenge, remain perplexed about why they are having so much difficulty marketing AFA’s.

Metrics are simply just but one, and only one, variable in a far more complex algorithm by which value is measured.

I think we all need to get back to basics and view the issue in the context of law school:  Classroom participation counts.

Let’s posit the query in a Socratic hypothetical:  Assume a sophisticated client believes it has perfected the alchemy to turn dross in to gold.  All that it needs is the capital to finance the R&D and the assistance of regulatory specialists to gain required governmental approvals. At a networking event at law firm or through some blog postings by a law firm, the client makes the connection to obtain financing and is introduced to scientists who can serve as Scherpas through the regulatory gauntlet. Clearly, the client has already obtained value (of the most prized, sort, since it came at no cost) but now it needs to engage counsel to handle the lawyering. Corporate counsel, guided by his or her own Sherpa, the purchasing agent, issues an RFP and circulates it among the usual suspects, including the networking event host and blog poster. Five acceptable proposals are submitted, with network hoster and blogger proposing a fee schedule placing it as the second most expensive bidder in a tight race.  As John Belushi asked, “who are you going to call?”

General Counsel:  How do you answer Belushi’s question?   Hit the comment section below and share your thoughts.

The Law Firm and the Lawyer as a Marketplace for Value

            Lawyers who have achieved marketing successes have done so because they intuitively comprehend that they add value because they have developed a network of contacts and that this network is a constant work in progress. Whenever such a lawyer is in contact with a member of his or her network, his or her first instinct is to calculate in nanoseconds which of his or her other network contacts can add value to that contact. The primary skills for achieving this result is listening to the speaker and then instantaneously calculate how value can be added to the speaker by hooking him or her up with another network member and for each to develop synergies, business alliances, business solutions and more spokes attached to the hub of the marketplace for value.  No direct metric can be attached to this activity nor will immediate revenue derive from having a lawyer or a law firm function as a marketplace for value.  But the simple fact is that clients will flock to lawyers who regularly add value, even if no invoice can be rendered for the value received by the client in having commercially enjoyed the benefit of this marketplace for value.

As for law firms, it is your job to demonstrate the entitlement to a higher grade by touting your own classroom participation and the real value (not the metrics) you added to the client:

  • During your own marketing calls to your clients, show how you added real value, not just a lower bill.
  •  In responding to the RFP, don’t be shy as to expressing a willingness to meet the competition (But only meet the competition after you have first assured yourself that you can manage the engagement at a reduced fee which still yields profitability;  as more than ever, risk assessment and project management are the elixirs for survival in the AFA world).
  •  Just as the swallows head south for Capistrano at this time of year, so too does the annual debate concerning the value of client surveys fill the air.  Does your client survey ask the simple question “other than lowering our fee structure, how else can we add value?”  In your client survey submission, cite instances in which your firm added real value to a client’s business (other than simply by reducing fees); solicit suggestions from clients regarding how your firm can add value,  not just reduced metrics.

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

Advertisements

Blog, blog, blog: Take advantage of the fact that 27% of in-house lawyers use blogs as their most important tool in researching and identifying outside lawyers to hire.


Image representing Google Reader as depicted i...

Image via CrunchBase

Recently, a  deputy general counsel for the Association of Corporate Counsel, reported at a conference about a corporation that chose to conduct a “beauty contest” for a particular engagement by independently identifying the top five lawyers in the country who had the expertise to handle the matter.  Of the group invited to make presentations, most were New York based.  The client selected a Kentucky firm, since its rates were 25% lower than its East Coast competitors. James  Merklinger of the ACC, who conveyed the anecdote, explained  “In this day and age of technology, it doesn’t really matter where you are, so there’s no reason to pay top dollar if you can find someone who’s considered just as capable.”

Neat story with obvious lessons.

But the astute reader should be thinking about a different question:  How in the hell did the client find a lawyer in Kentucky, of all places, with the precise expertise it needed?  A better question you should be asking is: Instead of your chasing around looking for new clients and business opportunities, attending de rigueur lunches, golf outings, industry specific conferences (where you are competing with a score or more of lawyers looking for the same work) is there some efficient way, other than late night TV ads,  for you to have clients look for you, instead of your looking for them?

The fellow from Kentucky figured out how to do this.

ALM Legal Intelligence Group, in association with the Zeugheiser Group released early this week the result of a survey it recently conducted which will lead you to obvious conclusions:  27% of in-house lawyers used blogs posted by lawyers on relevant topics as the “most important” tool in researching for outside counsel for a particular engagement.  Another interesting statistic: only 96 of the AmLaw 200 firms used blogs.

So I assume that each lawyer takes pride in his or her specialized expertise in a subset of his or her broader generic practice area.  So for example, you are a litigator with relatively unique expertise in nuclear reactor construction disputes involving concrete.  Likely, your firm’s web site will have you listed as part of its litigation group or part of its construction group.  A Google search made by a prospective client for lawyers with that unique expertise (expertise in nuclear reactor construction disputes) will never find you doing a web search.

Don’t believe me? Try it yourself.  Identify a specific area in your practice for which you have specialized and conduct a search a lawyer with that expertise. The heavy odds are you will be shocked not to find your name popping up. So, how are the 27% of in-house lawyers who rely on blogs as their most “important tool” in searching for outside counsel going to find you?

Lesson 1: create and maintain a blog (don’t know how? Skip the call to your IT department and just go to Google or a similar search engine and type in this question: How do I create a blog? Or ask your kids or grandkids).  Lesson 2: put postings of interest  and of substance on your blog, and please, don’t  make them boring or make them look like they were written by a second year law student writing an analysis of a case.  Short, interesting, substantive, informative is part of the solution (Example this is a recent development that you should know about [please, please, no case citations and no procedural history, nobody cares]).  Lesson 3: Post regularly (I suggest once a week). Lesson 4:  use the key terms of your special expertise (such as nuclear reactor construction disputes involving concrete and use those terms in different combinations often.  Lesson 5: circulate a very short, sweet and enticing email among your clients and prospective clients very briefly advising the reader that you’ve just written a piece about the subject and include a link to your posting .  Keep adding to your email list new prospective clients. I previously addressed this issue, if you forgot, click this link.  Lesson 6: Sign up to www.jdsupra.com , a novel, robust, easy to use, and extremely effective web site signing up is free, the modest price of an upgrade is well worth it). JDsupra.com circulates your blog entry to tens of thousands of lawyers.  When posting on jdsupra, be sure to include your firm’s logo and a link to your web site and your firm’s web site.  (there is some chace you may need some small amount of assistance from either your marketing director or IT specialist, if you can’t figure out how to insert the web site or blog links,  but once a template is created, it can be used by you regularly.  Lesson 7:   Register with Lexology (www.lexology.com ), a portal for thousands of lawyers particularly in house corporate lawyers and which is co – sponsored by the ACC .  Lesson 8: Include a link to your posting on Linked In and the relevant groups to which you belong (there are 1,500,000 lawyers on Linked In, thousands of groups dealing with nuclear reactors and construction, which have too many millions of members for me to count), as we previously recommended. Chances are that if you are reading this, you just saw how this all works.

As you go through these exercises, consider the tools available and that are actually being used by clients to stay in touch with new developments and trends in their industries.  The most common and easiest to use is Google Reader.  Google Reader will provide you with real time access to new information posted on the Internet in areas specified by the user.  The user defines the terms of the areas in which he or she has an interest.  Your client and potential are using this tool regularly and you should as well.  Thus, you will not have to wait for any of this information to crawl to your attention through your reliance on traditional media, print or electronic.  You will not only be ahead of the curve, but when the client asks for your views on a cutting edge issue he or she may have read about on the web using these tools and with which you will likely not have acquired any information unless you are using the same tools, you will in fact be able to respond on an informed basis.  More significantly, you may actually place yourself ahead of the curve and be able to take the initiative in commencing a dialogue on such an issue with a client or potential client.  Google offers a simple training video on how to use this tool at http://www.google.com/reader/view/?utm_campaign=en&utm_source=en-ha-ww-ww-bk&utm_medium=ha&utm_term=google+reader#welcome-page

The net critical point:  The more often you use the terms associated with your area of expertise and the more times people link up to your web site, the more often your name and area of expertise will show up when one of those 27% of corporate counsel are looking for somebody who needs the very special skills you have.  Or, when an ACC member or other in house corporate lawyer calls a colleague and asks if he or she knows somebody with expertise in nuclear reactor construction disputes, hopefully he or she will say check out so and so. I’ve read his or her blog and he or she seems to know what they are talking about.

A useful guide in getting started can also be found at http://associatesmind.files.wordpress.com/2010/08/new-legal-blogger-guide.pdf

Succesful marketers are also familiar with a basic maxim, namely, most often to successfully get new business, you need to ask a client to retain you.  Thus, frequently conclude your blog with some version of  “”I (or our firm) am (or is) happy to discuss our availability and our experience in this area of the law.  Feel free to review our web site at ____  and contact me at _________.  I would also be happy to provide you with a representative list of transactions (or cases we have handled in this area.”

And then keep a pile of new matter intake forms piled on your desk as the phone rings off the hook.

In accordance with my own advice above, feel free to contact me at jkowalski@kowalkiassociates or at 212 832 9070, Extension 310, to discuss the assistance I may be able to provide you and your firm in connection with marketing your services.

%d bloggers like this: