ILN Webinar Series - Alternative Fee Arrangements Part II

Yesterday, we began with the first part of Tim Corcoran's webinar on the strategic role of alternative fee arrangements. After Tim's elephant analogy, he gave the attendees a short economics lesson. Using a graph with two parallel arrows, Tim said that essentially, we charge a rate that is higher than our cost to deliver. Price needs to be higher than the cost, and profit is derived from the difference between the cost and the price. 

But law firms do a poor job of calculating costs - other than their overhead and real estate, they don't know the cost of the delivery of their legal services. 

So the challenge is, as we saw in the recent downturn when there was downward price pressure, because we haven't fundamentally changed our delivery costs, our profit turns to loss. In the first part of the webinar, Tim had talked about the inevitable movement from premium and strategic to commodity, meaning that clients will pay less for something over time. That's what we're seeing - clients are refusing to pay for work that they believe doesn't have the same value it once had, but law firms who have not adapted their cost structure for this are experiencing loss. 

In the short term, firms can maintain profits by lowering overhead - they can reduce associates, limit travel, eliminate memberships, get rid of free soda and coffee - but they haven't fundamentally addressed the cost of delivery. So there is still the risk of loss, unless clients decide to pay a lot more for tasks and services that they know don't have that level of value. So what do most businesses do?

Most businesses incorporate a learning curve. Tim showed us that simply diagrammed, a learning curve is when you strive to lower your cost of delivery, you will always maintain profits even when revenues decline. If a client says that you've done the same task twenty times, and wants to know why they're paying even more for the twentieth time, when the firm still can't tell them what it costs in advance. Tim challenged everyone to imagine a world in which the lawyer says that they will charge the client less for this twentieth matter, and the firm will be more profitable because it's learned from its experience and can manage the delivery of those legal services in a way that reduces inefficiency. 

He said that this works whether the firm is billing by the hour, or embracing alternative fees. The concept is that profits are derived from lowering the cost of delivery at a rate greater than the revenue decline. However, revenue doesn't always decline - imagine that it picks up. Imagine that other law firms are desperately waiting for clients to pay more and that's the way that they'll generate profits again. But we've lowered our costs and continue to do so, so as revenues rise, profits are greater. 

These are simple economic concepts, and there is no shame in having a profitable enterprise. Clients want profitable, thriving partners - they want their outside counsel to do well, because they fear that when they're struggling, their work product suffers. But for law firms to thrive, it shouldn't be a zero-sum game - clients should also win. 

Tim shared some quotes from law firms: 

We've done more alternative fee proposals in the last four months than in the history of the firm."

It's difficult for clients to budget legal fees. In the past year, there's been an increased demand for flat fees. Hourly rates have too many variables in them."

We (law firms) have to get better at budgeting. Clients aren't looking for us to cut our fee or give them a 10% discount. What they really want is predictability." 

So how does a law firm embrace this learning curve? One way is to proactively pursue alternative fees - finding ways to lower the cost of delivery by figuring out what it costs to do different things, and matching that with the clients' expectations for value. 

Tim drew on a couple of slides from a study done by the American Lawyer Media Legal Intelligence team, commissioned by LexisNexis and CounselLink on alternative fees for law firms and law departments. He first acknowledged the obvious, that there's been an increase in alternative fees in recent years. They're finding that so many law firms have embraced these at a greater rate that it's become a meaningful part of their billings. 

Alternative Fees

Though Tim didn't delve too deeply into the various types of alternative fees, he did offer a slide that broke them down: 

 

  • Blended rate - sets an agreed-upon hourly rate that applies to all lawyers working on a matter, regardless of their seniority. Encourages firms to staff matter efficiently.
     
  • Capped fee - Limits the total cost of an agreed-upon amount of work. It is often used in conjunction with an hourly rate arrangement. Provides a degree of predictability to clients who are otherwise comfortable with hourly billing. 
     
  • Contingency - specifies that a firm will be paid only if it achieves a financial recovery or other agreed-upon result for the client. Typically, the firm receives a percentage of a total recovery. Provides protection from a bad result for clients who are willing to forgo a large portion of a positive result. 
     
  • Defense contingency - establishes an expected outcome for a defendant in a monetary claim and specifies that if the firm obtains a better-than-expected result, it will receive a portion of the savings. Encourages the firm to limit damages. 
     
  • Flat fee - sets an agreed-upon sum of money for a discrete amount of work. The firm, not the client, assumes the risk of cost overruns. Encourages firms to perform distinct pieces of work efficiently.
     
  • Flat fee with shared savings - sets a flat fee for a matter while allowing the firm to track the work on an hourly basis. If, at the conclusion of the matter, the hourly fee is lower than the flat fee, the client and the firm share the difference. Provides a guarantee of a low cost to clients who are otherwise comfortable with hourly billing. 
     
  • Holdback - specifies that the client will withhold an agreed-upon portion of the total fee unless the firm obtains a particular result. Encourages both the firm and the client to measure successes quantifiably. 
     
  • Partial contingency (or success fee) - sets a bonus that the firm receives in addition to its hourly, flat or capped-fee arrangement if the result meets agreed-upon criteria. Encourages the firm to obtain a positive result for the client. 
     
  • Phased fee - sets agreed-upon fees, perhaps using differing structures, for discrete phases of a matter. Gives maximum flexibility to both the firm and the client. 

 

Tim pointed out that there are disparate views about what it means to be an alternative fee. The blended rate, and even the capped fee, are based on an hourly rate, so by the strictest definitions, they are not alternative fees. An alternative fee ties the value of the services delivered to what the client is willing to pay and their budget - it has nothing to do with the cost of delivery. 

Lawyers on the plaintiff side have embraced contingency fees for years, and have been successful at it, and many defense firms have also embraced contingency fees over the years for certain matters - they were popular during the tech boom, for example. But we're seeing some others now, such as holdbacks, success fees, or partial contingencies. Tim said that he could spend a lot of time digging into these, but he wanted to illustrate that there are a lot of different models. As to which AFAs are optimal for your organization, it's a function of your client base, along with your firm's culture and practice area base. 

Benefits and Challenges of AFAs

There are benefits and challenges to alternative fees. As Tim talked about in the first webinar, the number one rule in business is "no surprises." So to the extent that AFAs position your firm as the firm that not only delivers quality legal work, but embraces the notion that predictability trumps almost anything else, then that's a differentiator that the procurement people can score you on, and this will trump other more subjective factors. 

There are downsides to AFAs as well, including perceived and actual risks. It boils down to a comfort level - using the elephant example again, Tim said that if we can overcome our tendencies and habits to embrace the norm, we will find that the benefits outweigh the risks. He added that he's not opposed to the hourly rate - it has its place and there are benefits to it. The challenges involve looking at the cost of production as a proxy of the value of the services delivered. If the client is happy with the number on the invoice, because it matches their expectations of the value delivered, then they are less concerned with the mechanics of the invoice. If you can find a number that's commensurate with the value they perceive, it doesn't matter which method you use.

However, alternative fees provide a much stronger ability to embrace predictability, and to tie value between the clients' perception and the law firm's perception. Tim showed a slide that emphasized that alternative fees are here to stay. 

R.U.L.E.S. Versus Learning Curve

Tim noted that under the R.U.L.E.S. model: 

  • Size matters: the more timekeepers we have, the more money we make.
     
  • Inexperience matters: the more we can bill, the more money we make.
     
  • Client satisfaction is incidental to profitability: firms aren't opposed to it, but somewhere in their analytics, they believe that for a client to be happy, they need to pay less, and for a law firm to be happy, they need to charge more. 
     
  • Realization is a lagging indicator: firms only find out afterwards what a client's perception of value is, because their realization suffers. 
     
  • Silo approach: firms are content under the traditional model - it's about feeding billables.
     
  • Rainmakers matter most. 

But under the new model: 

  • Efficiency matters: firms are more profitable when they're efficient.
     
  • Experience matters: firms are more profitable when they embrace their experience. 
     
  • Client satisfaction is critical for profitability: now it's about client retention and the long-term value of a client. 
     
  • Realization is a leading indicator: firms know in advance - they have a predictable AFA in place, and clients can pay at the beginning of the month, because they know what the numbers are. 
     
  • Team approach: efficiency requires lawyers to learn from each other, so they can't work in isolation. 
     
  • Clients matter most. 

Tim finished up with a Venn diagram, showing that business people are looking for business performance, the legal function to be in step with the business, managed risk and predictable costs. The legal department is looking for the legal function to be an adviser to the business, managed risk and predictable costs, while outside counsel are looking to be a trusted adviser, have managed risk and predictable revenue.  Where these overlap, loyalty is created and AFAs are a way to embrace these concepts. 

Questions

There were two questions after the presentation: 

How can we handle multiple clients with multiple billing formats and ebilling?"

Tim said that this is the challenge of being a service provider. There are multiple platforms, every client has their own version, and the challenge is to incorporate this into your systems. So firms should embrace a mindset that every matter should be conducted as if it's an alternative fee or ebilling matter - don't wait for the client to demand it. Operate as if you need consistent descriptions and task codes, act as if it will be analyzed and aggregated. Take on some of the tools that clients use and firms will find that they have the easy ability to export content into multiple billing formats because they've already embraced that. Doing it on an ad hoc basis can be challenging - if it's been adopted firmwide in advance, it's easier to adapt. 

Who should take the lead within the firm on establishing AFAs? 

This will differ by firm - Tim referenced an article from a few weeks ago about the increasing role of strategic pricing in law firms. The essence of the article was that law firm accounting and finance people are well-equipped with the traditional model, but they are not experts at strategic pricing. So there is a function growing in many firms, where they're bringing in someone whose job is to lead the charge to help the partners learn how to make better strategic pricing decisions. Tim said that firms don't necessarily have to get a pricing director to do this, but there is a big difference between the AFA committee of old, where a group of partners would sit down and talk about an AFA as an investment. Now they have a gating mechanism, and the partners who ask for an AFA have a rigorous process that they go through with their clients. This can be adopted by firms without hiring anyone specifically, but it does involve everyone in the firm getting on board. 

This afternoon, we'll be talking about contract lawyers and outsourcing, so keep an eye out for that recap to come! 

ILN Webinar Series - Alternative Fee Arrangements Part I

Part II of our Business of Law webinar series with Tim Corcoran took place in November, but things have been so hectic with travel and hurricanes and holidays that I'm only just getting to the recap! So without further ado...

The topic of the second webinar was the strategic role of alternative fee arrangements, which was a natural sequel to the first session on legal project management. Tim re-emphasized that the industry has changed, and we need to adapt to the changing times. 

He shared some results from Altman Weil's Chief Legal Officer Study, the one prior to the most recently released iteration, which shows that the top concerns for clients continue to be outside legal costs, lack of predictability, and the inefficiency of the hourly billing system. The difference between in-house counsel perceptions and outside counsel perceptions can be pretty great - outside counsel tend to think that the quality of legal work should rank more highly for in-house counsel. However, in-house counsels' perspective is that the quality of work is a given, so they're measuring their firms on additional factors. 

Tim delved into a recap of the first webinar, discussing client and law firm reactions to the economic downturn, budgeting and legal project management. For a full explanation, check out my part I and part II blog posts. 

Commoditization: Shift Happens

The word "commodity" has taken on a touch connotation within the legal industry - but in the pyramid of legal services, there are a set of tasks that are repetitive in nature. Using the pyramid to illustrate, Tim showed these repetitive tasks on the bottom. 

Following them are important tasks, which clients are willing to pay more for, but they're not necessarily looking for the best or most expensive law firm. Then, there are the strategic tasks, or the "bet the firm" work - and those are where the real opportunity is. That's what firms all seek, and they often plot their firm's course straddling somewhere between these strategic and important tasks.

The challenge is that in the last few years, clients have determined that even the most critical "bet the company" work has in itself some components that are tactical or repetitive in nature. And over time, there will always be a shift from the strategic to the routine - what we were doing ten years ago, we're not doing anymore because it's become a commodity task, and clients are no longer willing to pay premium rates. 

It's a simple face of business nature - and legal services are not any more immune to this than any other industry.  As Tim noted on his slide, "There is an inevitable and inexorable migration of products and services from leading edge to common place, whether the provider likes it or not."

Along with this, clients are involving additional people in the conversation, those Tim called the "arbiters of commoditization." He referred to a recent study by Dr. Silvia Hodges, who looked at the role of procurement in the selection of outside counsel. Although procurement has always been on the scene, in recent years, there has been an increased in involving them in the selection of outside counsel. Dr. Hodges study revealed that 41% of the budget for outside legal counsel is influenced by procurement. 

Law firms fear that when procurement is involved that they are not sophisticated enough to understand the subtle or even massive distinctions between law firms, and they're only concerned with finding the lowest cost provider. For the most part, however, a good procurement person is focused on finding the right provider to meet specific demands for a specific use case - this doesn't necessarily mean the cheapest. Procurement is always looking for other factors upon which to measure providers - not just price. Unfortunately, law firms do a poor job of differentiating on these other factors. 

Asynchronous Information

Tim used an example to illustrate the concept of asynchronous information. Not knowing much about wine, when attending a dinner party, he would be likely to choose an expensive bottle of wine, thinking that price is a proxy for quality. His point is that there are certain markets where only one party has the information about where the value lies. In the law firm business, the shift from a sellers market to a buyers market means that the law firm used to have the information about the value of services delivered, but now the buyer has as much, if not more, information. This is why alternative fees have become so important. 

Clients are using companies such as TyMetrix to quantify the role of their outside counsel.  Tim showed a few examples of what these scorecards and analytics might look like, and said that the challenge today is knowing that the client has a relative sense of what they're willing to pay, and the value of certain services, but not knowing what they know. 

Tim showed a rate analyzer, provided by a company that has collected, aggregated and anonymized e-billing data over multiple years. They can now produce reports for in-house counsel that show for certain SIC codes, industries, practices, timekeepers, etc. the various ranges for billing data so that they can make benchmark comparisons against the proposals they're receiving. This will inform their tolerance for their budget, and have a downstream impact on law firms. 

In-house counsel will also be able to compare law firms over various rates, look at the trends over time, and make assessments, not only about which firms are more or less expensive, but their relative value. Clients know that an hourly rate is not an indicator that should challenge them - they're willing to pay a high rate if they can get a good value, which is why the trending information, coupled with other analytics, is so helpful. 

All of this shows that clients now have as good, if not better, information about the value of services that law firms deliver - so how do firms collaborate with them to make sure that they maintain their profitability as a law firm?  Tim added that firms have every right to be a profitable enterprise, but that they need to look at their practices that are commoditized versus those that aren't, to get a greater understanding of the value of those services. By using hourly billing for everything, firms don't necessarily have that level of precision. 

R.U.L.E.S.

This acronym stands for Realization, Utilization, Leverage, Expense and Speed (or Speed of Collection). Tim said that these are the things that law firms grew up with - they understood that profits are a function of these elements. If we have timekeepers that are busy, and we capture that and invoice their time, and clients pay those invoices, that's realization. On each matter that we perform, if we have the right ratio of timekeepers, that's our leverage, and we can manage profitability.

If we manage our overhead (expenses) and keep these low, and if we bill and collect in a timely manner (speed), those factors will all reduce to that profits per partner or equity partner that firms strive for at the end of each year. 

Tim likened this to our belief that home values would always rise - law firm partners grew up under a model where they believed that the only way to achieve profitability was through these metrics. However, the rest of the world embraced a different concept - the "learning curve." This is where if you're good at something, you can continually lower your cost of delivery and achieve profits, even when revenues are flat or declining.

Tim asked the attendees to think about the challenges at a law firm - when lawyers become an expert at something, they charge a higher and higher rate. However, a client is saying that if the lawyer has done something multiple times, they should be charging a lower and lower rate. Tim suggested that it would be nice if we could reconcile these two views, and say that we're going to be more profitable by leveraging our experience, rather than our inefficiency. 

There is an anecdote about training a young elephant not to run away - if you tie its leg to a stake with a rope, the elephant will learn that no amount of pulling will free him.  So then as an adult, he's conditioned to not even try to pull the rope, and the same small rope and stake can be used to secure him. The point behind this is that if lawyers break out of the mold of how they learned that law firms make profits, they can achieve higher profitability through these methods.  

Tomorrow, we'll continue the discussion of alternative fees, and we're also hosting our third and final webinar on contract lawyers and outsourcing, so I'll be recapping that in the coming weeks as well! 

Are you Thinking...Alternatively?

Now, as I mentioned in my summary of the GC Panel at the LMA Conference this year, Jeff Carr says he's banned the word "alternative," because there should be nothing alternative about alternative fees.

But, for the sake of this recap, we're going to use it, as that's what the session focused on.  Tim Corcoran shared with us the salient points from the alternative fees session that he attended at LMA (and often speaks on himself). 

  • Most law firms are reactive when it comes to offering alternative fees because they're concerned that they're dilutive to profits. But the firms that have figured this out and are acting proactively are seeing business development opportunities and more work. 
     
  • There's a correlation between value and charging - lawyers need to understand this. 
  • Firms that are more proactive have a toolkit - there's recognition of what they use for various patterns, and a gating process for approval.

    • Firms still don't have the greatest monitoring. They need to meet threshold levels, so monitoring is critical. 
       
    • Continually revise this toolkit - after each matter, figure out what worked, what didn't, and what the scope was. 
       
    • Clients also have creative ideas - talk to them. 
       
  • Fees are moving from a last minute drop-in in the proposal stage to being done up front, with the rest of the proposal built around the billing. 

    • Don't even start the process until billing is in order.
       
    • This is still driven by lawyers, but it's becoming more symbiotic with marketing. 
       
  • Clients are coming to the table with much more information on billing (as I mentioned Janet Dhillon of JC Penney said), so be prepared! 

What trends are you seeing in alternative fees at your firms?  

 

ILN Conference Re-Cap: Law Firm Management Panel

One of our sessions during the ILN's 2010 Regional Meeting of the Americas in Houston focused on the always popular topic of law firm management.  The panel was moderated by our Chairman, Peter Altieri of Epstein Becker & Green in New York.  On the panel were Steve Arthur of Harrison & Moberly in Indianapolis, Indiana, Carlos Rodriguez-Vidal of Goldman Antonetti & Cordova in San Juan, Puerto Rico, Doug Winthrop of Howard Rice in San Francisco, California, Bill O'Neill from McDonald Hopkins in Cleveland, Ohio and Anders Lundberg from Hellstrom in Stockholm, Sweden.

Creating Demand

Altieri began by saying that one of the challenges in the current economy for firms is creating demand. In the past, they had much more pipeline work than there is now, in part because clients are trying to do more in-house. He added that even the big firms are coming in and being price-competitive, and asked the panelists to comment on this.

Winthrop said that his firm has been seeing a tremendous rebound in the litigation sector of the firm, which has them quite busy.  Now, they're facing the issue of whether to hire more attorneys on the litigation side, or ask the business lawyers to chip in.  He said they're concerned that they'll find themselves with overcapacity, so they've addressed the issue by doing both.

 

Rodriguez-Vidal said that Puerto Rico is very connected to the US, commenting that "When the US gets a cold, we get pneumonia." He said that there are 13,000 lawyers in Puerto Rico, with fewer than 600 in a law firm context.

Rodriguez-Vidal commented that usually when the economy is bad, firms see more litigation.  However, that wasn't the case during this crisis, because companies were being much more cost-conscious.  He said that the need to carry two associates for every partner is no longer there.

Associates - Work/Life Balance is a Priority

Rodriguez-Vidal said that the firm has found that a lot of associates don't seem to believe that they want to stay in the law firm, and there was murmured agreement from the other attorneys in the room.  An audience member asked whether this is because there isn't room at the firm, or because they don't want to, and the answer was both.

Arthur said that young people are more concerned with a balance of life, and don't buy into the idea that you work zillions of hours for a partner and then take over from them someday.  He said "Looking back over the years, they may have it right," and the audience laughed.  

He said that he doesn't even remember thinking that he had the option as an associate of turning a partner down when they called him in at 10pm to work.  Arthur added that he's not sure this attitude is all bad, but that it does create an economic issue for the firm.

Stuart Gerson of Epstein Becker & Green, Washington, DC said that he's not sure that it's sustainable.  He said there's starting to be the question of whether law school is valuable, because of the debt that graduates incur.  He feels that it will winnow out those who don't want this lifestyle - they just won't go to law school.

Arthur said that the paradigm has shifted in the last few years and that those coming out of law school just can't find jobs. He said that the market is such that firms probably could pay associates what they pay their secretaries, and they would take it.  He added that his firm doesn't do that, but they could. 

An audience member asked why firms don't pay associates less, whether it's because of pressure from other firms. Arthur answered that it just seems counterintuitive to pay someone with so much schooling and optimism so much less.

Blake Tartt of Beirne Maynard & Parsons said that 52 years ago when he started, he made less than a secretary makes.  He said that it was in the late 60's, early 70's, when they started these fantastic salaries for associates.

David Russell of Harrison & Moberly commented that the elephant in the room is really that clients are putting pressure on firms to do more for the same rates.  As a result, the associates are suffering unless the partners are prepared to take less money.  Bill Holder of Clark Wilson in Vancouver agreed, saying that partners have become used to a certain salary, so associates suffer.

O'Neill said that they've experimented with a two-tier system for associates, and gave an example of having a great candidate come in to work at an hourly rate as a test.  He said it worked out great with this particular candidate, and they offered him a full-time job.

He said that the challenge is finding great talent in these markets and added that his firm tries to be more creative about doing this.  Instead of using headhunters, they pay associates to recruit.  

Lundberg said that the internal challenges for him as managing partner of his firm in Stockholm are very much the same as in the US.  He said that his main challenge is to rejuvenate the firm, and they're finding that young lawyers aren't prepared to put in the same amount of work.  He added that they're also finding it a challenge to have associates come up to partner level.

He commented that Sweden hasn't been as badly hit by the global economic crisis, although most firms have taken about a 10% cut in the past three years.  He said that there's not much the lawyers can do about it other than hoping that the market comes back.

In the past, they used to take associates after a two-year clerkship, but now many firms are taking them right out of law school so that they can train them.  The issue is now distinguishing one law firm from another to clients.  Law firms need to have a clearer profile for why clients should use the firm.  This was later echoed in Jeff Carr's presentation from the client perspective.

Marketing Your Law Firm 

Rodriguez-Vidal asked whether firms have hired PR firms, whether it's been successful in helping them gain visibility, and how to quantify this.  O'Neill answered that his firm finally found a decent marketing director by hiring outside of the legal industry.  With her, they've had success with roundtables and client alerts.

Winthrop added that this isn't always quantifiable - he talked about an associate at the firm who started a blog, saying that "now you can become an expert overnight."  The associate's blog became so successful that he left the firm and is now working as a consultant.  

Arthur said that firms can spend time and money on marketing, but he feels that if you're good lawyers and deliver a good product, that gets out into the community.  He said that some of the traditional things lawyers have been doing all along in marketing still work, and that word of mouth is still the best strategy you can have for marketing a law firm.

Michael Lasky from said that the temptation is to look at ROI as calls from new clients, but that it should include benefits with existing clients.  It doesn't make it easier to measure, but ROI from engagements should include a reputation management component and defensive measures.  He emphasized, "Don't let clients ever think twice about using your law firm."

Arthur said that in Indianapolis, they're having merger mania, which puts a lot of stress on firms because they don't know what other firms will be the next big firm because of mergers. It's difficult to decide as partners whether to keep what they have or merge with a bigger firm.

Lundberg said that there's also a sense of desperation. The old way was to work hard and have partners with a lot of contacts.  Now, it's commoditized.  He feels that law firms should be more like a hotel - clients come in all the time and firms take advantage of this.  He recommended mixing clients and non-clients together.

Alternative Fee Arrangements

Altieri asked the panelists to comment on alternative fee arrangements. O'Neill said that they developed an alternative fee policy six months ago, and found that the challenge is whether the firm had had enough experience to properly price matters.

Winthrop said that his firm does a number of alternative fee arrangements, which are pretty varied, and added that some clients have no interest in them. He said that 9-10% of billable work in the US is under some kind of alternative fee arrangement, which is a low number considering the hype.  

He gave a couple of examples of the types of alternative fees that they do, including a business and litigation case where the parties were not as focused on the rates, but on the risk of one of them dropping out and not sharing the cost.  He also mentioned a flat monthly fee for as long as a case goes on.

Winthrop said that as to the problem of estimating costs for flat fees, it's better to do it when the firm has a good relationship with the client and there's an out for both sides.  He said it's more typical to see discounts and success fees, and emphasized that firms need to be proactively raising alternative fees with their clients.

Rodriguez-Vidal commented that in Puerto Rico, their fees are much lower, but they still get requests for alternative fee arrangements. He said that there isn't much disparity between the rates charged by young associates and top partners at the firm, but said that sometimes institutional clients will request flat fees or discounts.

Marty Beirne of Beirne Maynard & Parsons said that some clients have "most favored nation status," which keeps the firm from taking on anything cheaper.  His firm, which is litigation only, has a little over 17% that are fixed-fee revenue cases.  He said that if a firm is holding itself out as an expert, it should know what the costs will be.

In the last couple of years, all new clients think that the firm is trying to cheat them with an alternative fee. Beirne said that they have a deal with their clients that, even though they're using an alternative fee, they'll keep their time and do a true-up at the end of the year, splitting the difference.  He added that in each of those instances, they've gone to a flat fee the following year. It was simply necessary to develop that trust.

From a commoditization standpoint, Beirne thinks the legal industry will see a lot more fixed fees and said that the legal industry will see some pretty radical changes that might surprise everyone in the room.

Lasky asked whether any of the audience members use volume discount arrangements, and Michael Slan from Fogler Rubinoff in Toronto said that they do that a lot, often with banks. Lasky said that he's found it to be an extremely useful marketing tool.  He added that they offer it before a client asks, saying "If a client asks you for a discount, you're already in a bad place."

Winthrop agreed with him and said that it's important to have a dialogue about having more work with clients.  Rodriguez-Vidal asked whether firms give discounts for prompt payment, and the audience agreed that they do.  

Winthrop commented that firms will have to face the dis-aggregation of legal services and outsourcing.  He said that his firm is making sure that they're competitive, and he cautioned that other firms are looking hard at that, and you don't want clients to wake up one day and see that.

Gerson added that a lot of clients are more concerned with lawyers than with firms, so lawyers can almost put together a virtual team, which can also help to control costs.  Altieri agreed, saying that the days of taking underutilized associates and having them do document review are over.  He said that his firm uses a service to find their temp lawyers, which allows them to screen people and see their resumes.  He said there's an amazing amount of business savvy among this group, and said that it's all about keeping clients happy.

I was tweeting from the conference, and following along was our member from Santo Domingo in the Dominican Republic, Santiago Mejia Ortiz, who said that at his firm, they've been reducing a percentage from litigation for clients with a monthly consultation agreement.

Incentivizing Associates

Ricardo Cordero from Cordero & Cordero Abogados in Costa Rica asked the panelists how they incentivize associates on a good partnership track to develop business.  Rodriguez-Vidal said that his firm uses the incentive of commission, which has varied over the years. Currently, they're at 10%.  He added that it's also taken into account when the firm does reviews.

Winthrop said that over the years, they've emphasized business generation as associates come up through the ranks.  O'Neill said they've had a similar experience, and don't base their formula on compensation, but it is reflected in their bonuses.  He said they're placing greater and greater emphasis on business development and require their associates to have a plan for this in their reviews.

Lundberg said that they have a flat 10% commission as well, but also emphasize that it's becoming more and more important, particularly for senior associates. He said that in the long run, being a lawyer means attracting business.

Arthur agreed with his fellow panelists, saying that he's noticed that it depends on the person.  If they're not incentivized, only the go-getters will develop business.  But if you do give them an incentive, they'll figure out how to go out and develop business.

 

Re-cap of ALM's Law Firm CMO Forum: Inside/Outside Counsel Relationship

On Wednesday, May 12th, I was fortunate enough to attend a couple of sessions at American Lawyer Media's Law Firm Marketing and Business Development Leadership Forum. The ILN was a marketing partner for the event, and I spoke on a panel called "Going, Going...Global? The Worldwide Marketing for Legal Services." Unfortunately, I have not yet mastered the art of tweeting from a panel I'm participating in (and so don't have comprehensive notes for a re-cap), but the first session of the morning on the changing nature of in-house and outside counsel relationships was full of great takeaways for law firms and their marketing departments.  If you're interested in the full list of tweets from the conference, you can check out the #LCMO hashtag transcript.

On the panel were:

Main Lesson: Relationships Are Key

While there was a lot that came out of the panel, the overwhelming sentiment, from Ms. Chwat especially, was the importance of relationships. She let the audience know that although she does go to well-known large firms for some work, she's not going after name brands anymore. She wants a good relationship with a good lawyer, which broadens the competitive landscape for law firms.

In terms of re-capping the panel, they started with a fictional scenario of a new general counsel coming into a company and being told that she needs to significantly cut her legal budget.

The GC invites in her top 12 law firms of the 100 that the company uses (which the panelists commented was on the low side for most companies), and asks them how they can work with her to reduce fees. Immediately, two of the firms say that they don't do alternative fee arrangements and leave. The panel then addressed some questions that might come up and how outside counsel can better serve their inside counsel in this situation.

Outside Counsel: Be Part of Your Client's Team

Ken Handal said that it's the job of the GC to try to preserve the choice of outside counsel that they make in this new cost-cutting environment, which can be difficult because as Chwat pointed out, non-lawyers at major companies see in-house counsel who are purchasing legal fees as a cost center. Chwat advised law firms to start thinking of themselves as competing for business, because they are. She suggested that they ask themselves "how can I help my client? How can I be their partner and help them through this?"

Bob Robertson agreed, saying that the attitude should be that firms need to do all that they can to help their clients. If a firm gets a letter from their client about cutting costs, they should reach out to have a conversation with them.

Chwat confirmed this, saying that outside counsel build loyalty and trust with the attitude of "what can we do to help you," and this keeps in-house counsel coming back. She said that firms need to make themselves part of the team and show they're willing to work with their clients. She added that in-house counsel are "not trying to steal from you," they just want value for their dollar and help in dealing with the cost-cutting pressures that their companies are putting on them.

Help Inside Counsel Cut Costs

Chwat did caution that a need to cut costs doesn't mean she will compromise on quality. She wants her attorneys to think like businesspeople, to be thinking about how they can help their clients to save money. Practically, this can take the form of more efficient staffing on legal matters. She used outsourcing to India as another example of how firms can help to cut costs, though she admitted that Burger King has yet to do this.

Marty Beirne agreed, saying that firms are in the service business, and some firms forget that. He said that they need to have a budget that works and has some predictability for their clients. Robertson added that when lawyers have done a lot of one type of work, they know what things costs and can estimate fees for fixed arrangements or budgets.

Chwat said that if a firm comes in and says that they want to work with you and they know your business, the client will keep using that firm. She told the audience that she never pays full price for anything, and for any legal services that she purchases that cost over $50,000, she automatically requests an RFP.

An audience member asked how involved her non-attorney colleagues are in the decision to purchase legal services, and Chwat responded that they're not usually involved. She generally chooses the pricing structure that BK goes with, but she has to be prepared to defend it and will sometimes talk on a case by case basis with the CEO.

Build Relationships With Your Clients

She also talked a little bit about relationship-building, relating a story about when she first joined Burger King and a number of the attorneys in her department were out on maternity leave. She said that she seconded attorneys from an outside firm, and the firm sent her great attorneys, not the ones they just wanted to get rid of, and they didn't charge their full hourly rates. Because of this, she was not only very happy that the firm was willing to work with her, but she also developed relationships with these attorneys and now reaches out to them when she needs assistance.

She emphasized that companies are willing to expand the work that they give a firm based on their relationships (so lawyers, get out there and build your client relationships!).

What Else Gets Firms the Business? Reputation? Fees? Diversity?

Another audience member asked about the role of a firm's reputation. Chwat answered that it gets them in the door, but that's it. After that, the firm has to be able to show how they're different. She echoed what we've been hearing a lot lately in the legal industry - by the time a company wants to talk to you, they already consider you talented and high quality. They want to know what else you can offer them.

Chwat focused a lot on firms being flexible in terms of fees, and said that even at the RFP level, firms must be willing to discuss them. She added that many times, she's made the point of asking about alternative fees in her RFPs, and firms will come in to talk about the business and either won't be willing to talk about alternative fee arrangements or won't be prepared to talk about them. Alternative fee arrangements are not going away, Chwat emphasized.

Someone in he audience asked Chwat about the importance of diversity and she said that it's very important to her that not only is the firm diverse, but that her matters are staffed by a diverse group - she considers women to be a part of the minority group she looks for.

Another audience member asked about outsourcing some work, and Chwat admitted she's a little nervous about taking legal work to India, but said that the more GC roundtables she participates in, the more she's hearing that other companies are doing it and finding value in it. She cautioned firms again about overstaffing and Handal agreed with her. Chwat added that the more efficiently a firm staffs a matter, the more engaged the attorneys working on it are, and the more loyal they are to their firm.

Another audience member asked her about recent statements by a GC that companies don't want to pay for first year associates and that they're totally useless, and Chwat said that she considers first year associates to be in training to be good third and fourth year associates. She doesn't have many staffed on matters for her, but doesn't mind it. She did point out that she will not pay $300 an hour for a first year associate, and believes that firms should look at paying their first year associates as a training cost that should not be passed along to their clients.

Is the New Inside/Outside Counsel Relationship Permanent? 

Paonita asked the panelists if they felt the new relationship between in-house and outside counsel is permanent or if it will go back to the way it was. They all agreed that it's permanent and said that 70% of law firms interviewed believe that the change in billing and fee arrangements is similarly permanent.

This was the point at which Chwat emphasized that she's not going after name brands anymore, but that she just wants a good relationship with a good lawyer. She said it's about asking what it is about your firm that's going to make you a good part of her team. It's about chemistry. She advised firms to do their homework before meeting with a client and said that one constant that will always help a firm to get hired is when a firm is able to set themselves apart.

An audience member asked how much legal rankings mean to her when choosing a firm. She answered that they don't mean much; she cares more about relationships.

The panel finished up with a final audience question about how useful GCs consider client alerts. Chwat said she does read and archive them. She told a recent story about being surprised with a piece of litigation that she didn't know much about - she had a member of her team search through their files and saw one firm's name come up in connection with that area of law, in a client alert. Because they set themselves apart as experts in that area, she called that firm and gave them the business. So client alerts do help to set firms apart as experts in certain areas.

Final Takeaways

The lessons of the panel were overwhelmingly clear: work at the in-house/outside counsel relationship by showing how you can be a business partner for your clients and show your understanding of the cost-cutting pressures they're under by offering real, valuable solutions, whether in the form of alternative fee arrangements, more efficient staffing, discounts, or outsourcing.