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The End of Alternative Fee Arrangements?


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                                                                             Jerome Kowalski

                                                                             Kowalski & Associates

                                                                             November, 2011

In doing my nightly reading last evening in order to keep up with the latest trends in the legal profession, I came across a very recent brief video clip from Richard Susskind that made me bolt upright and reach for a very stiff drink.  The clip is a bit nerve rattling; accordingly, as they say, viewer discretion is advised.

The headline on the clip is certainly designed to grab your attention:  It has Sir Richard purportedly suggesting “The End of Alternative Fee Arrangements?” Quite obviously, this headline grabber is a clever play on Sir Richard’s seminal work “The End of Lawyers?”  My first thought was whether all of my work on AFA’s over the past few years was for naught. Or was it like the chimera of the tooth fairy, the Easter bunny or Santa?

In fact, on my second and third view, Sir Richard’s admonition became far more lucid and perhaps obvious:  2012 will be the last year in which the need to meet the demand for a reduction of the legal spend will be met almost exclusively by resorting to AFA’s.

Much more of Sir Richard’s observations are both chilling and enlightening:

  • Contrary to general opinion, the legal spend in the coming year will be reduced by 30 to 40%.
  • General counsel and law firms are going to need to meet these demands by creating yet new efficiencies.
  • Lawyers will need to meet demands for more legal services and receive less remuneration.
  • General counsel and law firms will need to learn work far more collaboratively.

Serendipitously, this morning my friends at Altman Weil, released their Annual Chief Legal Officer Survey.  Altman Weil’s take is consistent with much of Sir Richard’s admonitions in that in spending money for legal services, “Efficiency Trumps Costs.”

However, Altman Weil’s survey numbers are a bit less glum than Sir Richard’s prognostications:

  • “Fifty-six percent of CLOs said they had increased their internal budgets from 2010 to 2011, compared to 51 percent the previous year. The median increase also ticked up from 6 percent to 7. Forty-six percent of respondents increased outside counsel expenditures, up from 43 percent a year earlier.”
  • The median budget for outside counsel increased by 10%.
  • Controlling costs topped CLO’s list of priorities.
  • 13% of CLO’s outsourced work, previously performed by traditional law firms,  to non-traditional vendors of legal services.
  • 60% of CLO’s promoted collaboration rather than competition from their outside law firms.
  • For the third year in a row, top lawyers said they don’t think law firms are serious about changing their service delivery model. They gave firms a median rating of three, on a scale of zero to 10. But the companies aren’t doing much better. Respondents gave themselves a five in terms of how much pressure they were putting on firms to improve the value proposition.
  • 35 percent of respondents said they regularly and formally evaluated outside counsel, and only 17 percent said they communicated evaluation findings to the firm.

On this last and perhaps most significant point, Dan DiLucchio of Altman Weil had a most telling observation: “As long as the company is sending them work,” says DiLucchio, “the firms assume that that is their evaluation.”  Law departments miss out on the opportunity to change the firms’ behavior, says DiLucchio. He’s seen one of two things happen for firms: “Either you die a slow death, where the faucet is slowly turned off. Or you’re just called in one day and told that the company is moving the work elsewhere.”

These slow deaths and sudden terminations are completely preventable. But it is the obligation of outside counsel to be extremely pro-active in doing so. The steps we encourage our law firm clients to take are very straightforward:

  • Build an extranet.  Make all of your work for the client, not merely timekeeping, completely transparent. Clients should be able to click on their files and have full access to the work done and in progress.  Clients should be encouraged to actively engage the extranet and provide their input. Never respond to a client’s compliant about work done or budget overruns by blithely saying “gee, it was all on the extranet, you should have known.”  The extranet does not absolve the lawyer from communicating to the client.
  • Every monthly bill rendered should be accompanied by a letter that describes the objectives the firm had set out for the preceding month for the matter, the steps the firm had taken to meet those objectives, the results and the objectives for the next month. Even where the matter is undertaken on a fixed fee or an AFA, these monthly letters are essential.
  • In mid-month, send the client a time run of time spent on the matter. Let the client know it is for informational purposes only.
  • When an event occurs in a matter that materially affects either the fee or time budget, get on the phone and let the client know at once.  Explain the issue in detail. Let the client know how you propose to deal with this hiccup and solicit the client’s advice on the proposed course of action.
  • Take a page out of the book of Ed Koch,  New York’s long term mayor, who always greeted voters and visitors with “How am I doing?”  annual client surveys, annual visits by a managing or originating partner just don’t do the trick anymore.  You have to be on the telephone with regularity communicating with the client.  You must visit the client with greater regularity.  Your visit should be carefully planned out, as explained in detail here.

Yes, this is a lot of work.  But it is far less painful than seeing your revenues fall by 30%, watching the faucet slow to a drip or being told where to send all of the client’s files.

© Jerome Kowalski, November, 2011.  All Rights Reserved.

 

Jerry Kowalski, who provides consulting services to law firms, is also a dynamic (and often humorous) speaker on topics of interest to the profession and can be reached at jkowalski@kowalskiassociates.com .

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The Clock is Ticking: In Five Years, Traditional Law Firms May be Extinct. What Are You Doing to Avoid Being an Artifact?


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                                                                                                Jerome Kowalski

                                                                                                Kowalski & Associates

                                                                                                September, 2011

We recently warned that traditional law firms were in danger of being replaced by Internet based providers of legal services, unregulated entities not owned or even having lawyers perform the legal services. We also addressed the issue of unregulated LPO’s, similarly not owned by lawyers and often heavily populated by lawyers not even being educated at an American law school and certainly not being admitted to the bar in the United States.

On the heel of those reports, Paul Lippe, founder and CEO of www.legalonramp.com wrote a compelling piece in the ABA Journal entitled “The Rise of the Non-Firm Firms.”

Paul posits, quite correctly I would say, that entities that he calls “Non Firm Firms”  (“NFF’s”),  namely the group of vendors that compete with traditional law firms for providing legal  ervices, have five distinct advantages over law firms, with which traditional law firms (“TF”S”) cannot compete.

First, Paul notes that the “non firm firms” “do a few things and only those things: typically e-discovery, due diligence, contract review and management, research, and other high-volume  ctivities.”  They are pointedly not full service law firms.  They recognize, as Jeff Carr the voluble distinguished general counsel at FMC has long noted, that legal services can be into four buckets: counseling, advocacy, process and content. Paul goes on to note, “Counseling and advocacy work is the true province of lawyers and requires specialized expertise and judgment; process and content work is generally repetitive, information processing work. Because the process and content work has been “bundled” with the TF’s bread-and-butter advocacy and counseling work, it has been delivered and charged as if it were high-value work. But it’s not. So clients will start to unbundle some of the process and content work to the NFFs, and it is likely that large companies will pick one NFF to work with directly, and then tell all their TFs (or at least their TFs who haven’t figured out how to work with NFFs) to work with that designated NFF.”

Next, Paul notes that the NFF’s are designed from the ground up, engineered with a view towards providing efficient services, not hidebound by any pre-existing norms, giving them enormous pricing advantages. Their owners are investors who seek out a profit from their investment, not from their labors, as is the case in the TF. Paul goes on to note that since these NFF’s are the new kids on the block, they are far more receptive to feedback from their clients. Then, assuming that the market for legal services is a total of $50,000,000,000 annually, Paul estimates that the NFF’s will grab 10% of that market by 2016 (current reports suggest that NFF’s will gross $2.5 Billion by next year, up from $500 Million only two years ago).  Paul suggests that for every dollar the NFF’s grab, TF’s will lose between $1.50 and $2.00.

Paul’s solid advice to TF’s who want to survive is:

A. Do a rigorous inventory of your process and content Work. Don’t just sit around and persuade yourself that everything you do is advocacy and counseling: Do a force-ranking of your time from five largest recent matters and characterize at least 25 percent as process and 15 percent as content. Then look at that work and ask yourself the Jack Welch question: If you were starting a new business to do that better, faster and cheaper, how would you do it?

B. Study the methods of the NFFs. Go to websites for Integreon, Axiom and NovusLaw and others and really understand what they’re saying. Don’t dismiss it as “jargon” or “buzzwords.”  (What do you think nonlawyers think of words like indemnification or disclosure? All specialized language sounds jargony to the nonspecialist.)

C. Develop an alliance with an NFF. Pick one and do a project with that firm.

D. Ask your clients for systematic feedback, and discuss with them how to do process work more efficiently.

Adding to this discourse, the eminent Sir Richard Susskind just announced that there is a five year expiration stamp on traditional law firms.  Sir Richard said that by 2016, both law firms and corporate general counsel  “will embrace legal process outsourcing, off-shoring, de-lawyering and agency lawyers.”   Susskind observed, “the endgame will not be about labour [he is British, you know] arbitrage: ‘I predict that the third phase, from 2016 onwards, will involve great uptake of information technology across the profession, such as automated production of documents and intelligent e-discovery systems – these are applications that will be staggeringly less costly than even the lowest-paid lawyers.”

There is truly not much air that separates Lippe’s and Susskind’s prognostications, views and recommendations.

Professor Susskind highlighted four main strategies GCs could embrace – driving down law firms’ prices, reshaping the in-house department, combining the two, or starting with a blank sheet of paper and undertaking a comprehensive legal needs analysis for the business. “Once these requirements have been identified, the task then is, dispassionately, to identify how best to resource the full set of needs, drawing not just on conventional lawyers but on the new legal providers too.”

Describing this last option as the most ambitious, he said it will “deliver the most cost-effective and responsive legal services for large businesses in the future”. It ties in with his vision of “legal process analysis” and multi-sourcing, where the legal requirements of an individual matter or a whole business are analysed to determine the most efficient way of sourcing each element of it.”

And that, as Sir Richard previously observed will be the end of traditional  law firms.

Few have the ability to start with the blank piece of paper and focus on “faster, better, cheaper,”  a daunting challenge for traditional law firms. Some, such as www.Clearspire.com and www.rimonlaw.com   have started on that path and their models seem to be gaining impressive traction.

The point is that the clock is ticking. It took over a century for the traditional law firm to evolve. Susskind and Lippe are warning us that we are five years away from extinction.

What will you be doing to avoid being the T-Rex in the museum display case?

© Jerome Kowalski, September, 2011.  All rights reserved.

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