Making alternative fee arrangements work for any size law firm

July 2015 | Around the ABA

The billable hour model still may be the most common way legal matters are charged, but the number of law firms offering alternative fee arrangements is on the rise. In fact, a recent report shows that AFAs have increased from about 5 percent of total revenue at the world’s largest firms in 2008-09 to around 22 percent in 2015.

Patrick Lamb and Paul Williams are no Johnny-come-latelys to this trend; their firms have been offering AFAs for years. Lamb and Williams are presenters on the webinar, “Insights Into Alternative Fees: How Firms Make Them Work,’’ co-sponsored by the ABA Section of Litigation, Law Practice Division and Center for Professional Development. Lamb is founder and partner of Valorem Law Group in Chicago and the author of “Alternative Fees for Litigators and Their Clients.” Williams is a partner at Shook Hardy in Kansas City, Mo. Lamb’s firm was started in 2008, specifically focusing on offering alternative fees. Williams says he has been doing AFAs, or value-based fees, since 1995.

And while the study mentioned earlier cited numbers for BigLaw firms, both Williams and Lamb stress that AFAs are good business for any size law firm.

AFAs are payments to a law firm based on a method other than billable hours. Lamb describes it this way: “An alternative fee is a fee that eliminates the incentive for law firms to spend more time on a matter and instead creates an incentive to achieve the same or better outcome in a more efficient manner.” He says clients want basically three things when it comes to AFAs:

  • More for less —“Because of more global and international competition, regulatory and compliance demands and budgets that are not going up, clients are bringing more work in-house because in-house lawyers are much cheaper than outside lawyers.”

  • Cost certainty — “This allows clients to live by and go through a much more rigid budgeting process than existed a decade ago.”

  • Better results faster — “Time is money. They want to do their business and get on to the next money-making venture. They don’t want to spend time on litigation, which is a cost item for the most part,” Lamb says.

The economy is an obvious driver for alternative fees, but other factors include clients wanting cost certainty and predictability, smaller legal departments, value-plus results and unbundling of traditional legal services.

“We’re seeing companies that instead of hiring one firm to handle a case from start to finish, they are unbundling the case and pricing it out to different firms to handle specific pieces such as brief writing, e-discovery and record collection,’’ Williams says. “This is a significant trend today.”

Williams and Lamb say three forms of AFAs are trending up:

Portfolio

“The concept of taking on a client’s portfolio is to take on their whole docket of cases,’’ Williams explains. “It’s coming up with ways to approach the work so that the end game isn’t $100,000 but less than that so that a client realizes a savings based on your approach. Key is that you can bring some predictability to the process.”

Lamb is also a proponent of Portfolio pricing, which he says is not used as much as it should be because the pricing creates the best opportunity, particularly for smaller firms. “Guaranteed money is much more valuable than a higher amount of uncertain money,’’ he explains. “If I’m guaranteed $1 million a year for handling a portfolio, that guarantee is more important because I can make decisions on who to hire, who to assign to a case and how to build efficiencies. It’s easier to plan than if you’re not certain the money this month is going to be the same next month or even if it will continue at all.”

Value-based

In a value-based fee arrangement Lamb says it’s not always about coming in lower but giving the client the best value for the work. “If a client has a difficult issue on a case, they can’t afford a negative outcome,’’ he says. “You might have to assign your most experienced staffer to that case, but because the outcome is so important the client is willing to make that commitment in fees.”

The phased fee approach, according to Lamb, is the most common for clients, especially for those new to the alternative fee concept. “It is a step-by-step approach that people are comfortable with,” Lamb says. And Williams says it’s “an easier sell” to clients.

Risk sharing/Alignment of interests

This fee approach also has its benefits for both the client and firm. “Everybody has skin in the game,” Lamb says of this arrangement. “If at the end of a case we have achieved a certain predetermined outcome, we are going to get some kind of premium. The client is paying for outcome, not just the effort to get the outcome. And because there is a premium involved, clients know they are going to get the best effort and best people on the case.”

Some AFAs that are losing popularity include:

Reverse auctions, which involve a competitive bidding process where multiple law firms contend for the same project. Lamb says: “Let the buyer beware.”

Capped fees, which are one-sided. “A situation where all the benefit goes to the client and all the risk goes to the firm,” says Williams.

One size fits all, which are inflexible. “Pricing should be customized for that particular client and not just present them with a list of here is what we do,” Lamb says.

In order to know how to select the right AFA, Williams and Lamb advise assessing each case to determine what the right approach is. “The bottom line on pricing is it’s all about identifying what the client’s objectives are and about putting some incentives in place–both ways–so that whatever the program objectives are, both the client and the firm are motivated to act toward the interest of that program in some identified and aligned way that sets the program and client relationship up for success.’’ Williams says.

So, it’s been established that alternative fees are trendy, but are they profitable? Absolutely, says Lamb. The key, he says, is controlling cost. “The question becomes how to reduce the cost of production, which is not hours but your actual labor cost, your overhead cost,’’ Lamb explains. “And in order to maximize the reduction of those costs you need to operate as efficiently as possible.”

There are tools to help streamline the flow of information both for the client and firm that are important to being profitable, but Lamb and Williams say the keys are communication, establishing what the objectives are for the client and adapting as changes need to be made throughout the process.

“Do the right things in the right sequence at the right time – that is the efficiency you are striving for,’’ Lamb says. “You don’t want to do things on the chance that you might need them. You don’t want to run down every rabbit hole because clients hate that. It leads to surprises.”

At the end of a case, Williams and Lamb say it’s crucial that you do a critique of the process in addition to a client satisfaction survey.

And be prepared for the feedback that you get from your clients, both good and bad.

So confident is Lamb and his company in the AFA work they do that he says every bill his firm sends out includes what he calls a value adjustment line, which reads: If you think the value of what we did is different from the amount of this bill, then change the amount of the bill and whatever you write in is the amount due.

“The reason we do that is because we want our clients to be so happy that they never write down and in some cases they write up the amount of the bill,’’ Lamb said. 

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