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Is There a Crisis in Legal Education?


What if they built a law school and nobody came? Chapter II

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Alternative Fee Arrangements: Lesson II of the Primer


Alternative Fee Arrangements: The First Steps

                                                                             Jerome Kowalski

                                                                             Kowalski & Associates

                                                                             August, 2010

                                                                         

               So after all of the hype concerning Alternative Fee Arrangements, you are reluctantly getting ready to drink the Kool-Aid and are preparing to propose 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 and law firms can generate significant profits from an AFA.  Apparently, all you need to do is make an educated guess as to what the fees on a project will be, provide a discount and then slap on a sizeable success contingent fee and everybody walks away happy, assuming, of course, a successful result.  Not quite.

           We first must draw from decades of experience acquired in other professions which routinely do not perform services on an hourly fee basis, but rather routinely perform services on a project basis.  These include, among many others, building contractors, IT engineers and consulting firms.

             Before a firm can “slap on a contingency fee,” law firms must first undertake a far more detailed risk assessment. The need for this risk assessment cannot be overemphasized.  In scoping out an analogous consulting fixed fee construction project, IT project or indeed, any engineering project, the basic assumption is that the desired result is always capable of being accomplished, the principal question being the amount of engineering and design effort that will be required to achieve the result.

               In an adversary system with opposing sides pulling in opposite directions seeking opposing results, the most significant part of the process is on the intake side and the capability to undertake a careful risk analysis, with these added factors in mind. In the legal world, the question is not simply an informed assessment of how much professional effort must be expended to achieve the desired result, but given existing judicial precedents, often not completely settled, statutes and regulations, as well as an independent assessment of the adversary, it’s carefully analyzed business objectives and its prior conduct in similar situations. While some of this may require some degree of soothsaying in addition to ordinary prudent assessments of risk, as in any other definable project, the analysis is nonetheless crucial. Mitigating against the risk can only be achieved by acute risk assessment and more detailed project management than that which is required of other service providers.  An engineering firm is constrained only by the laws of physics; a building contractor may only be constrained by climate, labor or materials issues.  The lawyer and the legal project manager need to add to his or her own calculus not only natural elements, but also an adversary pulling in an opposite direction.

                  The legal professional also must be focused on undoing a century or more of “time and materials” billing culture, in which the carrot was given to those professionals who spent a great deal of time on a project and a stick whacked against the head (or some other appendage) of the professional who did not dedicate sufficient hours to a project, despite the quality of the result achieved.  In other callings, the natural orders of things were very much the opposite.  Given the dearth of native bred legal project managers, LPM’s must first learn to appreciate and cope with the Pavlovian behavior in which lawyers have long been trained. Professionals who will actually be involved in the project must provide written estimates as to their estimates of how much time they expect to devotee to designated tasks with a clear understanding that they will be accountable for material variances in these projections.  Some variances may indeed be caused by exogenous factors, not within a lawyer’s control.  However, for the efficiency and profitability of the engagement, it is incumbent on the lawyer to keep the LPM timely informed of these occurrences, while the LPM must be constantly vigilant in monitoring work flow, process and adherence to timelines.

                 Thus, in estimating the time necessary to complete a legal engagement, prior similar legal engagements by the law firm must be analyzed, but filtered through a new sieve. That sieve must filter out the lawyers who happily logged many hours and allow only those who have the greatest capacity to deliver a quality product with the highest degree of efficiency to pass through the sieve’s filter and base cost estimates on the history of such lawyers’ performance.

                       Regularly scheduled meetings among the client the client relations manager and the LPM regarding the progress of the matter, its compliance with the initial budget and foreseeable out of scope work, discussed below, must be held and the results of the meetings must be memorialized and circulated to all of the involved personnel.  As we pointed out in our initial primer on AFA’s the one area in which corporate counsel consistently found law firms lacking was in budgeting skills and keeping clients informed accurately on budgeting matters.

                         Rare, if not completely non-existent, is the law firm who upon the conclusion of a legal matter, conducted a post hoc review to determine how the project could have been completed more efficiently. As AFA’s gain greater dominance, such post hoc reviews will necessarily become quite essential and routine. Every de rigueur closing party must be followed by a thorough Monday morning quarterbacking session in which, among other things, initial estimates must be compared against actual performance and the efficiency of the professionals involved must be carefully analyzed. The results of these post-hoc reviews must be archived for future reference by those involved proposing future AFA’s, in risk assessment, LPM’s and firm management.  Failure to institutionalize such post-mortems and archive the results would simply be folly.

                        More to the point, in developing an AFA, containing components of hourly billing and success contingency rewards, as I mentioned earlier, the risk assessment and early intake process are critical. As with an analogous engineering project, following the intake analysis and risk analysis, the engagement arrangements must define, to the fullest extent possible, the “scope of the engagement.” Indeed, the organized resistance by litigators to undertaking any AFA will likely lessen once they understand that the inherent risks and uncertainties in litigation can be dealt with through a carefully negotiated and carefully crafted “scope of engagement” retention agreement.

                Items included in the scope of the engagement portion of the agreement, which should be a joint exercise of client and counsel, include those that are reasonably foreseeable. As the project continues, from time to time, additional work “out of scope” might emerge. Simple examples make the point: In a litigated context, it may develop that a parallel litigation might also be required to be commenced or defended. Early thought should be given as to whether a complex motion for summary judgment should fall within or outside the initial scope of the engagement.  An obvious alternative is to include such a possible motion as an option which the client may elect to pursue, with the costs generally predetermined.  The same might apply to a trial itself, since as we all know, fewer than 3% of all litigated matters result in trial.  And, naturally, whether appellate work would fall within the scope of engagement, available as an option or subject to “a change in scope” fee adjustment would similarly be addressed when the initial AFA engagement letter is prepared.  

                        In an acquisition engagement, an intervening litigation might be necessarily brought or defended; a secondary acquisition might also be considered. All of this work may very well be “out of scope,” but must be addressed. The engagement letter should, in addition to carefully defining the scope of the engagement, also define how the law firm and the client will collaboratively arrive at a decision as to how such out of scope should be addressed as they arrive and a mechanism by which fee arrangements for such out of scope are to be handled.

                     Careful attention to detail in jointly preparing the finer points of the scope of the engagement and then the deployment of a team that includes the LPM, the client relations partner and the client must communicate regularly to follow the course of the engagement and identify early on the emergence of potential “out of scope” matters so that the manner in which such out of scope work is to be handled, if at all or if necessary and the changes, if appropriate or necessary, in the fee schedule requires adjustment. 

         A provision frequently found in fixed fee service contracts and in AFA agrreements is a clause allowing for the service provider to make a request for an equitable adjustment (like so much in our worlds, this provision has risen to the level of having its own acronym — “RFA”), under which the law firm reserves the entitlement to ask the client during the engagement for an upward adjustment in the billing arrangement because of completely unforeseen intervening event, such as, for example, a request for a stay in a litigated matter arising from events not foreseeable, or in a transactional matter, a third party counter-offer.  While such clauses are far from rare in fixed fee service contracts or even in AFA’s, careful thought must be given by the law firm in requesting an RFA.   Some clients are sufficiently astute to suggest that they have a reciprocal entitlement to an RFA, in the event that the matter is brought to a successful conclusion well in advance of original anticipations, and a concomitant fee reduction.  Further, invoking an RFA request may invite an unnecessarily distasteful discussion as to why  counsel failed to apprehend the foreseeability of the event.  Rather, if the initial AFA agreement is sufficiently well crafted and the details of the “scope of the engagement” are detailed and well articulated, an RFA clause my well be redundant.

         I must emphasize again that lawyers must bear in mind the principal objectives of the client:  (a) the efficient delivery of a quality work product, delivered at a fair price; (b) predictability of costs; and (c) a willingness by outside counsel to assume some level of risk. 

                     Most service providers who routinely work on fixed fee billing, such as that nice contractor who added the beautiful den to your home, will tell you that they relish “out of scope” work (“you know, what would really make this den really smashing would be a nice deck outside with sliding doors leading to the den”) since that is almost always the most profitable work that they can do.  It is unlikely you will bring in another contractor to do the work, while he is on site and clients tend not to be as cost focused with add-ons.

                  But, by the same token, as you discuss “out of scope” work with a client, you will likely be sitting across the table from a corporate executive, sitting between the vise created by the adjacent purchasing agent and a corporate lawyer who are both under separate pressure to contain legal fees, the same dynamics will not apply.

                      In all events, at the end of the day, if the appropriate steps are taken and qualified professionals discharge their assignments, everybody will indeed walk away happy: The client will appreciate the fact that its lawyers are prepared to share some of the risk; partners at the law firm will be comforted by the fact that the risk is being carefully monitored and the law firm will be financially well rewarded.

© Jerome Kowalski, August, 2010; All Rights Reserved.

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