Alternative Fees are on Their Way
Richard Stock - Lexpert, Vol 11, No. 3 (February 2010)
It has been 23 years since the American Bar Association created its Task Force on Alternative Billing Methods in response to the realization by corporate counsel and law firms that "current methods of valuing legal services and billing need to be re-worked. The result was a 225-page report entitled Beyond the Billable Hour: An Anthology of Alternative Billing Methods, published by the ABA and edited by Richard Reed.
Yet the knowing-doing gap was clearly greater than anticipated. By 1992, the ABA's thought leaders understood that little was changing in the economic relationship between corporate counsel and their law firms. The result was a billing methods roadmap on how to define and bill for "value" in legal services entitled Win-Win Billing Strategies: Alternatives That Satisfy Your Clients and You.
Fast forward to October 2008. In response to similar pressures from its members, the Association of Corporate Counsel launched its Value Challenge. 2009 produced more of the same : "Are you in Denial About Billing Methods" (in Law Practice, June 2009), "Value for Money - Inside the Value-Billing Process" (CBA's National, Sept 2009), and "The Future of the Billable Hour" (Washingtonian.com, October 2009). The Institute of Knowledge Management released a roundtable report on "egal Billing in Australia" (November 12, 2009).
Most firms will say that only about 10% of their fees are generated on other than a straight hourly or discounted hourly basis. This figure has barely budged in 20 years. Many of these alternative fee arrangements (AFAs) have been applied to recurrent and less complex work. Why has there not been a wholesale transformation in legal economics since hourly billing was introduced in the 1960s? There are several reasons. Three years ago, the demand for legal services outstripped the capacity of many law firms to deliver. Corporate and institutional clients simply wanted to get the work done - not change the system. It was a "sellers market". In too many cases, law firms prepared to offer alternative fee arrangements were faced with risk-averse clients.
Times change. The global financial crisis has placed enormous pressure on General Counsel to reduce their total legal spend in the last 18 months. This pressure will continue unabated. Most General Counsel say that they want more predictability in external legal spend. Others say they want more control. Still others say that if they do not significantly reduce external fees, then jobs in the law department will be cut. Wal-Mart froze its external rates for 2008. Many General Counsel followed suit with rate freezes for 2009 and are likely to do so again for 2010. However, this approach is neither sustainable nor sufficient in the long run. Other measures are required and are being used.
Companies like GE Canada and Bombardier in the UK, Europe, the US and Canada have resorted to formal requests for proposals as a first step their firms. The number of firms is then often reduced and multi-year agreements for services and fees are then put in place. Sandy Owen of Intel is concluding an RFP process that will result in reducing the number of firms from 8 to 5. She is also and introducing a blended rate with each firm for a portfolio of work for the next three years.
Only a small percentage of corporate and institutional law departments have formal multi-year arrangements in place with their firms. Most of the others avoid competitive processes because they are unfamiliar and therefore uncomfortable with "procurement" for professional services, preferring instead to freeze rates or to negotiate discounts. Progressive companies like DuPont (see http://www.dupontlegalmodel.com) maintain a suite of initiatives that cut costs and increase productivity in legal services. Early case assessment, the use of paralegal staff, and robust matter budgeting help them meet service and economic goals.
Alternative Fee Arrangements
Few are the law firms in any jurisdiction which have decided to compete for market share by addressing the concerns raised and malaise felt by corporate counsel about legal fees. It takes a critical mass, but by no means the majority of corporate clients to tip the balance. But some global firms have already reached this point. Eversheds (see Project Management at http://www.eversheds.com/uk/home/about_us/how_we_work_with_you/index.page?) claims it "will never charge you for anything you have not agreed in advance." Every one of its lawyers has been trained to use a project management approach that allows every matter to be fully scoped and planned. The firm is explicit in its belief that scoping, review and communications produce predictability and measurability.
When law firms apply project management tools to legal services and help their corporate clients to do so, it becomes much easier to agree on a fixed fee for a matter or at least for each major phase of a matter. From there, financial incentives can be introduced for efficiency or early resolution, and for specific results. General Counsel must be philosophically and practically committed to investing the time to forecast their requirements for legal work (by type, complexity, region and volumes) three years out, to become proficient in robust matter budgeting, and to stepping away from the pay-as-you-go hourly method of retaining counsel and to communicate all of this with their preferred firms. Telstra, an Australian telecom recently accepted an offer by a very capable firm (Gilbert and Tobin) for an "all you can eat " unlimited volume of legal work in exchange for a fixed fee each year. The law firm's strategy was to displace several primary law firms. There are many examples of innovation in pricing - and most can be adapted to the needs of legal departments in every setting.