Law Q News (December 2010)

Alternative fee arrangements are "in" again. Some say they are a temporary trend and the billable hour will reign supreme once the economy improves. It is more likely alternative billing is here to stay for two reasons. First, alternative fee arrangements never disappeared after they last were in vogue in the 1990s, but they did stop getting press because the biggest law firms were grabbing headlines by commanding top dollar for hourly billing. Second, today's in-house counsel find a lot to like about alternative fee arrangements and will be reluctant to abandon them in the future.

GUIDING PRINCIPLES

Trust, fairness and transparency -- if a fee proposal has these three features, it is likely to succeed. The attorney-client relationship requires a foundation built on trust. This is as true in the billing arena as it is when it comes to devising strategy regarding the merits of a case. Moreover, in any complex and ongoing business relationship, both sides must feel the deal is fair, or the relationship will not last. The key to building a fair and trusting relationship is transparency. A transparent billing relationship allows you and your client to see how fees are generated and risks are shared. In this scenario, neither party is likely to regret making the deal.

When structuring a fee arrangement for a new matter, the first and most important thing to do is determine what matters most to your client with respect to the particular case or transaction. Then, tie a risk and a reward to the client's top priority. If the client cares most about prevailing on the merits, use some version of contingency billing to tie your reward to the result. On the other hand, if the client places the greatest value on getting an early settlement, tie your reward to that achievement by, for example, reducing a pre-set bonus every month the case remains unresolved. Or, if your client's top priority is the efficient processing of a series of cases, tie the reward to keeping the average fees-per-matter within the client's budget.

The point is to create a partnership in which the client's goals become your goals. As attorneys, we believe in our hearts that we always put clients' best interests first and certainly ahead of our own. This partnership will be strongest when your financial interests are aligned with those of the client.

Comcast Corp.'s General Counsel Arthur Block puts it this way: "The objective is to get a sense that the law firm is managing its own business more efficiently for our mutual benefit so they have some skin in the game. We are not looking to be punitive; we are looking to be more businesslike. We can be creative. We want them to be creative."

RETHINKING THE 'BILLABLE HOUR'

After decades of hourly billing, many attorneys can be forgiven for feeling like they are selling their time in hourly units. But clients are not buying our time. They are, rather, seeking our advice and specialized skills to solve problems. A creative alternative fee agreement can eliminate the disconnect between what the client wants to buy and what attorneys are really offering.

If the groundwork is laid properly, your client's primary goal is well-understood, a risk/reward is tied to that goal, and you and your firm have "some skin in the game," then both you and your client should have no difficulty working through any issues that might arise as the work proceeds.

Remember, neither side wants the billing arrangement to create tension. Lawyers don't want clients to be unhappy -- after all, the most valuable reward for any lawyer is future business. For clients, an unhappy lawyer might mean that other clients' problems take priority over their own.

TYPES OF ALTERNATIVE FEE ARRANGEMENTS

The contingency fee is a form of alternative billing that lies at the extreme end of the risk-sharing spectrum for attorneys. In this scenario, the attorney or firm assumes virtually all risk. On the other end of the spectrum, hourly billing places almost all of the risk on the client.

Many times, the midpoint works well, especially for commercial plaintiffs' litigation, where the client and attorney are willing to share the risk. The firm bills half its regular hourly rate, which the client pays as accrued. The half-rate discount is then coupled with a contingency, giving the lawyer a percentage of any recovery/savings. The choice of a particular point along the contingency spectrum (half regular rate plus one-sixth recovery, or two-thirds regular rate plus 10 percent recovery, etc.) will be influenced by a client's and lawyer's predictions of the most likely result and the probable cost to get there. Costs can be paid as incurred, or they can be advanced by the lawyer.

Modified contingency billing is the one choice of fee arrangement most likely to encourage teamwork between attorney and client because both truly share the risks and the benefits. While this form of alternative billing neither maximizes nor minimizes the cost of the litigation or transaction, it should maximize the client's confidence that you are behaving in its best interests.

BLENDED BILLING

If a client is focused less on the end result and more on reducing the cost to get there, a blended billing rate is likely to be the alternative fee deal of choice. A blended rate refers to a rate calculated by multiplying the hours worked times a single negotiated fee amount, no matter who does the work.

Because the blended rate will be lower than a firm's senior-most lawyer's standard billing rate, there is a strong incentive for the firm to assign tasks to the most junior attorney capable of handling them competently. This scenario benefits the cost-conscious client by ensuring that routine tasks are not done by high-priced talent, and it benefits the firm by providing learning opportunities for junior lawyers. The downside for the firm is that senior lawyers may not be appropriately compensated for the time they devote to the matter. This can be addressed by, for example, agreeing that once trial begins, standard (or enhanced) rates will apply.

TARGET BILLING GOAL

When the client is willing to pay for your representation, but is wary of a runaway bill, a fee structure should be created to incentivize you and your firm to maximize efficiency. Such a fee structure is known as a "Target Billing Goal."

In a Target Billing Goal structure, an attorney and client together set an amount (or range) that they jointly believe to be the most likely hourly-fee bill for a particular case or sub-part of a case (such as the discovery phase). If the invoices, as measured by standard hourly rates, exceed that targeted amount, then the client pays only half of the excess. If, however, the standard hourly bills fall below the targeted amount, then the client pays half the difference. If attorneys are efficient and accomplish their work for less than the amount predicted, they are rewarded with a financial bonus. If, however, they do not accomplish their work for the targeted amount, they are penalized financially.

How does the Target Billing Goal model influence a lawyer's behavior? First, both the client and the lawyer have an incentive to set the target amount as accurately as possible because one of them is certain to lose if it is wrong. Logically, they will work closely together to analyze the expected effort and cost, a process that builds team work between lawyer and client and helps both to make realistic decisions about strategy, tactics and achievable results. After the target figure is selected, the lawyer is motivated not only to meet the target, but to beat it. The client benefits either way: if the target is exceeded, it receives legal services for half-price; if the bills are below the target, the client pays less than predicted, even after rewarding the lawyer.

FIXED FEES

For some clients, the most important thing is not how much a matter will cost, but rather whether the cost will match the amount budgeted. Certainty and predictability are important, especially for large organizations. Sometimes clients in this situation are willing to risk paying more in exchange for knowing the final amount beforehand. For these types of clients, fixed fees can work well.

Matters can be broken up into subparts and fixed fees set for some or all of the parts. Another variation is to fix the amount of fees for a certain time period (monthly or yearly). At some point, this approach approximates a retainer fee -- another long-standing alternative fee arrangement.

How does a fixed fee motivate the attorney? In this scenario, there is substantial incentive to work efficiently, without involving more people than required to get the job done. Lawyers may find themselves working harder to cooperate with opposing counsel because usually more can be accomplished with less effort by cooperating, rather than fighting over every detail.

A variation on this structure is to put "collars" on fees. An attorney and client agree that a fee will be calculated via hourly billing, but neither exceed nor fall below a certain dollar amount, thus, fixing a fee within a range.

WHEN CLIENT WANTS TO BE NO. 1

In some instances, the client's top priority is knowing it is the attorney's top priority. This level of urgency may be triggered when: a lawsuit threatens the very existence of the company; a loss will set a precedent for numerous future lawsuits; or there is potential criminal liability. Clients should be willing to pay a premium to compete with other clients for your attention and advice, either by way of an enhanced hourly rate, a bonus, or both. A bonus can be a sum certain set in advance or a percentage of recovery/savings, or it may be measured as a percentage of the hourly fees. Sometimes a percentage of the hourly fees is held back by the client and only paid if its goal is reached.

CONCLUSION

As professionals, we should seek more in return for our efforts than money alone. We should enjoy the satisfaction of knowing the professional services provided were done well for a client that understands and appreciates the work and will hire the attorney again. Tested against that standard, appropriately chosen alternative fee arrangements beat hourly billing, hands down, every time.

*reprinted with permission 2010

Will U.K. Management Trends Influence U.S. Law Firms?
Gina Passarella, The Legal Intelligencer

Between new players looking to provide legal services and pushback from clients over paying for routine work, law firms potentially have less to do.

In response, some firms have looked to retool their business models, adjust the roles they play for their clients and, in some instances, get out of certain businesses altogether. For many firms, staying ahead of the curve will mean recognizing these challenges and figuring out creative ways to adapt, consultants say.

"Underestimating your opposition is a really bad idea," Edge International consultant Jordan Furlong said.

Furlong recently heard a general counsel say that her job is not to produce or deliver services to her clients but to manage solutions -- a role law firms would be served well by if they chose to embrace the concept, he said.

Firms should think of themselves as the managers of solutions and recognize they will do some of the work and send some out to other providers, he said.

"Smart firms will say they still want to manage the process and sit at the client's right hand," Furlong said, adding however, that they need to realize there are some things the firm is good at and other things a legal process outsourcer (LPO) may better handle.

The real battleground for law firms in the near future will be over who will serve as the quarterback, or the solutions manager, Furlong said.

Law firms in the United Kingdom seem to have been the early adopters of this model. Furlong pointed to Lovells, now Hogan Lovells since its merger with U.S.-based Hogan & Hartson. Lovells had gone out to find regional firms to do certain work at a lesser charge while Lovells would serve as the guarantor of the smaller firm's quality and liability.

Hogan Lovells London-based partner Michael Stancombe said the firm created what it calls its WAVE process eight years ago after some large clients started asking for some of the "smaller" work to be handled in a more cost-effective fashion while keeping Lovells involved in the oversight of the whole matter.

The firm came up with the idea of having clients give it all of the work, as opposed to the portion it had prior, and the firm would manage it with the goal of decreasing the client's legal spend by 20 percent. All matters came through Lovells and anything below a certain threshold would be sent out to two pre-selected regional firms to handle at a lower cost. In turn, Lovells was able to increase its rates for the high-end work it was doing given the fact that the clients were still saving money. That also made up for sending out some of the work, Stancombe said.

The clients could theoretically just contract with the two smaller firms and cut out Lovells, but they want the management capabilities and high-end work from the firm, he said. The key factor in the WAVE concept is that the lead firm maintains oversight of the entire matter. So far, around 9,000 matters have been handled under this system, Stancombe said.

Since Lovells merged with a U.S. firm, WAVE is still implemented, and Stancombe said his legacy firm is working with its new colleagues across the Atlantic to see if such a system might make sense for their clients.

London-based Berwin Leighton Paisner took that concept a step further. Rather than utilizing a variety of lower-cost regional firms, Berwin Leighton created one that it controls. Lawyers on Demand is a subsidiary of Berwin Leighton that provides less expensive, though still highly trained, lawyers to serve on an interim basis within a client's law department. The freelance attorneys have the support of, and are under the control of, Berwin Leighton, but they operate under a different cost-structure.

"We understand that work volumes are increasing yet many clients are coming under pressure to reduce legal costs," the firm said on its website. "All LoD fees are agreed in advance using a daily rate that reflects the expertise of the lawyer."

Other firms in the United States are using a distinct, internal attorney tier in an effort to reach a similar result. Adam Smith Esq. partner Janet Stanton called the concept a "light division" of attorneys. These lawyers are still part of the same firm but are perhaps resident on a different floor or office building and have no anticipation of becoming partner.

The idea is to combat the competition from temporary staffing agencies and keep as much of the commodity work in-house as possible, Stanton said. But this is just one type of service model and not suitable for every firm, she said. Some firms may choose to give up that work altogether and let the LPOs handle it.

Other firms are providing certain outsourced services themselves rather than let an e-discovery or document review LPO do it, Stanton said. They have created "e-discovery mills" or information centers in which lower-cost attorneys are working in lower-cost markets to handle work formerly done by more expensive junior and senior associates.

In an effort to make the work of junior associates more palatable to clients, the Practical Law Company is looking to team up with firms rather than work against them. Ian Nelson, head of the company's U.S. business development, wouldn't jump to call his company an LPO and said it has never looked to compete with law firms, though it does have some law department clients.

PLC provides online support for law firms, mainly in the transactional realm, that includes drafts of documents such as letters of intent, acquisition agreements or closing checklists. The goal is to stop lawyers from spending hours of research on how to draft these documents and instead focus on the legal services that can't be outsourced.

"There's a level of information that all lawyers at a certain level should have," Nelson said. "Clients shouldn't be paying for it."

Most of PLC's attorneys are former large-firm lawyers. Nelson said this isn't a lesser alternative but just a different way of training and providing services. Now that clients are interested in working with smaller firms, Nelson said, they are still expecting the same caliber of responsiveness and resources. Companies like PLC look to get lawyers up-to-speed faster, he said.

As with many LPO services, some firms have found a way to bring this research function in-house. And as with many business of law innovations, the concept hails from the United Kingdom.

Professional support lawyers started in the United Kingdom more than 10 years ago and some consultants say they may be migrating into U.S. firms. The role of a professional support lawyer is to serve the firm or a specific practice area by staying up-to-date on changes to the law and assisting or providing drafts of legal documents all in an effort to prevent younger associates from billing the clients for hours spent doing the same thing.

This attorney, who isn't billing time and can often work on a flexible schedule, might focus on researching new laws, draft documents and manage document systems, hold training sessions for younger lawyers and answer questions for billing attorneys on institutional knowledge within the firm.

The role is a cost center for law firms, as these positions are generally paid at a senior-associate level, but they can also be viewed as a way to combat the unwillingness of clients to pay for younger lawyers to learn on the job.

In February, London-based Clifford Chance was seeking a professional support lawyer for its New York office to work with the mergers and acquisitions and corporate finance practices. Some of the job descriptors included gathering and disseminating "know-how," collecting precedents and creating, updating and managing standard legal forms.

Regardless of whether firms are bringing the competition in-house, working with outside vendors or holding tight to the traditional law firm model, clients have an increasing number of options when it comes to service providers.

"There used to be one monolithic legal services provider -- the law firm," Furlong said. "Now there are many and clients will choose among them."

The "huge role" for law firms, he reiterated, is the quarterback.

*reprinted with permission 2010