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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?


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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.

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Do We Really Have a Shortage of ABA Accredited Law Schools?


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Just What We Need: More ABA Accredited Law Schools

                                                                                                Jerome Kowalski

                                                                                                Kowalski & Associates

                                                                                                August, 2010

 

We recently reported on what we view as the unwarranted continued establishment of new law schools at a time when the profession cannot even absorb the current torrent of graduates from existing law schools. I doubt that any pragmatist, aware of all of the available facts could possibly come to any contrary conclusion.

Apparently, there are those who think that adding even more ABA accredited law schools is worthy of consideration. The current edition of The National Law Journal reports

The American Bar Association is already tasked by the U.S. Department of Education to accredit U.S. law schools. Now an ABA committee has recommended that it should seriously consider expanding that power to overseas law schools that follow the U.S. model.

In June, the ABA’s Council of Legal Education and Admissions to the Bar appointed the committee of law professors, attorneys, judges and law deans to examine whether foreign law schools should be allowed to seek ABA accreditation. The council is scheduled to consider the committee’s recommendations in December.

The committee cited an earlier ABA report’s conclusion that state supreme courts and bar associations are under more pressure than ever to make decisions about admitting foreign lawyers as the legal profession becomes more globalized.

“Such an expansion would provide additional guidance for state supreme courts when lawyers trained outside the United States seek to be allowed to sit for a U.S. bar examination,” the committee said in its report. “Since that is a key function of the accreditation process generally, the expansion would be consistent with the historic role of the section in aiding state supreme courts in the bar admissions area.”

Completely absent from this rationale is the ever growing amount of legal work that is outsourced offshore.  Hitherto, work outsourced offshore had inherent limitations precluding offshore outsource vendors from performing substantive legal work.  Work performed offshore was limited largely limited to document review, preparation of largely rudimentary documents, subject to review by lawyers admitted to practice in the United States and some basic legal research, again subject to review and analysis by U.S. lawyers.

Should the ABA grant such accreditation, the result will ineluctably be significantly greater offshore outsourcing, this time, work of a substantive nature.  In short, an increasing number of legal work will be handled by non-U.S. lawyers. Jingoism aside, with the legal profession now at its lowest level of employment since 1991 (think about what that means:  the profession as a whole literally lost hundreds of thousands of jobs in two decades) and there being no likelihood that the profession will be able to absorb at least 20%, if not more,  of new U.S. law school graduates in the near term, the wholesale shipment of legal jobs overseas, the inevitable result of accreditation of foreign law schools will be akin to the virtual abdication of United States preeminence in automobile production to other nations.  Only here, there assuredly will never be any federal bailout.

In the interest of additional disclosure,  in the Spring of this year, there were ten law schools in a queue awaiting ABA accreditation, which are apparently already up and running (presumably in states where bar admission is not predicated on attending an ABA accredited school)  and already adding to the mass of law school graduates.

Of perhaps more curious interest,  The National Law Journal reported on August 11, 2010 that Louisiana College announced plans for the creation of Louisiana’s fifth law school in Shreveport, Louisiana.  The announced raison d’etra of this new law school is, as reported by Joe Aguilard, president of the college, the establishment of a “curriculum that recognizes the moral and religious foundations of the American legal system.”  President Aguilard went on to say “Our extensive feasibility study confirms that Northwest Louisiana is the perfect location for this new institution, and we are grateful to the representatives and officials of the Shreveport area who have worked hard to ensure that we locate there.”  More details about this law school were reported in the September 2, 2010 edition of  the Shreveport Times: http://www.shreveporttimes.com/article/20100902/NEWS04/9020337/Law-school-to-open-in-Shreveport

For those who may not be familiar with Shreveport, a truly lovely city, unfortunately ravaged by hurricane Katrina,  it is populated by some 200,000 souls.  Some will recall that 30 years ago, Shreveport was a relatively major “oil town” and the home of “oil and gas deals,” with which you will not be familiar if you are less than 60 years old. The oil business is gone now as are “oil and gas” syndicated tax shelters which then made Shreveport a mecca for lawyers and deal promoters; all of whom are now gone.  Shreveport’s current economy is largely the gambling industry, apparently ideally suited for a law school whose curriculum is based on moral and religious foundations.

Let’s give the founders of Shreveport’s new law school the benefit of the doubt and perhaps consider that they are motivated by a set of high minded ideals. Let us even suggest (arguendo, only) that there may be some altruism at the University of North Texas which believes Dallas has a jingoistic right to open a new law school in this economy because, after all, Dallas hasn’t opened a new law school since 1967.  (Can Wasilla, Alaska be far behind?)  Let us, for a nanosecond, consider the lack of facial absurdity of accrediting foreign law schools.

Is there any rational or morally supportable reason for Kaplan Higher Education, a sprawling complex of undergraduate, graduate and professional school preparatory programs, trade schools, and, yes, even an on line law school to build a new law school in Washington, DC which already hosts six law schools?  The folks at Kaplan seem to think so.

Kaplan, owned by the Washington Post, believes it has a duty to offers “important opportunities for low-income students.”  Kaplan itself is already investigation following on the heels of the United States Department announcement concerning “wasteful spending on educational programs of little or no value that also lead to high indebtedness for students”   Is that the “opportunity” Kaplan believes should further be bestowed on low income students?

This madness continues unabated. On December 7, 2010, the University of Delaware announced plans for a new law school anticipating its first graduating class in 2015. Elie Mystal of Above the Law had some choice observations concerning this fool’s errand. Apparently, one needs not be either smart or concerned about the future of a university’s students to lead a university. [Update: In May, 2011, the University announced that it was shelving these plans.]

[Update: On May 17, 2010, Indiana Tech announced the opening of a new law school – the fifth in that state. The rationales, according to the school’s trustees, is that Indiana hasn’t opened a new law school in 119 years and that the State of Indiana ranks 44th in the nation in terms of the ratio of lawyers to the general population.  There is no indication of any kind that something has happened to suddenly increase the demand for lawyers in that state]

I wish I could conjure up a clever punch line for the planned Shreveport law school, Kaplan’s desire to create more debt and unemployment for low income students or the  [abandoned]hubris at the University of Delaware but I simply cannot top the simple reported and unadorned facts.  Indiana just sucks the breath out of the observer.

© Jerome Kowalski, August 2010.  All Rights Reserved.

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