In Search of Perfect Client Service

Associate Pay Raises

I was just reading the Chicago Daily Law Bulletin.  Seems that Mayer Brown, DLA Piper and Latham are joining the growing tide of firms raising the starting salaries of their first year associates to $135,000.  Mark Jungers of Major Lindsey & Africa, a prominent recruiting firm, predicted that Kirkland, Sidley, Winston and McDermott will quickly follow suit.  I would be surprised if any of the top 10 or so Chicago firms hold the line.  The expectation is that there will be $10,000 bumps (in some cases "only" $5,000) to the salaries (or at least annual compensation) of all associates in the firm.

What do these salary increases mean for firms and their clients?  Simple math will tell you that these "bumps" are multi-million dollar hits to the firms bottom lines.  There are, at the end of the day, only two choices.  Do the partners make less (while the associates are making more), or do clients pay more for the same work?  It does not require an advanced degree to know that the partners will not make less.

It is at times like this that the pressure to increase total hours is at its most intense.  Some firms may be forthright and acknowledge that hourly requirements will go up.  Others will do what what I have heard referred to a "manage hours up."  Other firms will increase rates.  But however it is accomplished, firms will capture this revenue from their clients.  All for the same work.

Has the value to the client increased?  Of course not. 

There has been so much negative buzz lately about value received, hourly rates, paying for associate training, and so forth.  This salary increase will do nothing but increase the economic pressures that drive wedges between clients and some of their lawyers.  Perhaps this will be the event that marks the death knell of the hourly rate.

Its Not Price. Its Value.

Dan Hull has a good post on his What About Clients blog about price competition.  His approach is not to compete on price but instead to compete on service, not price.  His insight, which I cannot improve on in any way, is that "if clients come to you for price, they will leave you for price."

This thinking mirrors Tom Peters' view.  Tom has a great slide that he uses: "You can't compete with China on cost or Walmart on price."  So don't. Compete on value.

Outsourcing Litigation Oversight

In December, I ran a post about outsourcing the legal function or at least parts of it (here).  My thesis was (and remains) that certain inside functions could be handled better by outside counsel on a fixed fee that would be competitive with or less than the cost of the inside lawyer).   The Wired GC has written a very interesting critique of this idea.  The first noteworthy comment is about benefits from the process of considering whether work could be outsourced:

Nevertheless, this process can have the effect of forcing the GC to take a hard look at what work is being done. Some may be outsourced to law firms. Some may be redistributed internally to lawyers, given to non-legal staff, or restructured using appropriate technology. And–possibly best of all–some work may no longer be done at all.

Frankly, these collateral benefits were ones I had not even considered.

Wired GC goes on to find some potential problems with the example I used, including the again increasing salaries for new associates and the fact that most lawyers would not like to "oversee" litigation being handled on an hourly rate by others. 

It is, quite obviously, impossible in short posts such as those in our blogs to provide a detailed proposal and analysis of the benefits of any significant idea, particularly those such as this one which are so very fact-specific.  But let me say this.  My use of the term "oversee" (as in "overseeing litigation") was a poor choice of words used to summarize the many responsibilities an inside lawyer has with respect to a lawsuit.  Issues such as budgets, settlements, insurance coverage, keeping business units apprised, setting reserves and so forth all are significant factors.  But I continue to believe my hypothesis is true--not for all but for many.  The functions I described above could be performed as well or better by a senior litigator whose salary prices her out of the marketplace for many inside counsel positions.  Why would a firm perform such work on a fixed fee akin to her what it would cost to handle these functions in-house?  Many firms (and I know this from my own experience) would be thrilled to do so to get a foot in the door.

I am thrilled that the Wired GC found my post worthy of comment.  I hope he and other inside lawyers find the idea worthy of consideration.

New Book by Ron Baker: Pricing On Purpose

Thanks to Michelle Golden at Golden Practices for her discussion of Ron Baker's new book, Pricing on Purpose.  The book is available here.  Baker is a thought leader in the area of value pricing, and I have rarely seen Michelle as worked up about a topic as she is in her post of the book.   I've already ordered it.

Four Realities of Value Based Pricing--The Second Reality

In November, I began a discussion of value-based pricing. I had clipped a piece that discussed the "four realities" of value pricing but had omitted to clip the name of the author.  I now know that it was Mike McLaughlin of Guerrilla Marketing for Consultants.  Now that I can attribute the material to Mike, I'd like to continue the discussion today focusing on his second reality:

Reality #2: Clients are reluctant to leave their comfort zone.

For decades clients have used the simplicity of the hourly rate to help make decisions on choosing consultants. The hourly or fixed rate gives clients an apples-to-apples comparison—at least on price—of their alternatives.

Sure, the firm with the lowest hourly rate isn’t always the winner, but clients like having a standard measuring stick. Consultants know that old habits die hard, and that the hourly rate or fixed-fee pricing won’t go away quietly.

Many clients need a powerful incentive to budge them from old habits. After all, if a client can hire a consultant on a fixed-fee basis to help reduce manufacturing costs, for example, what would motivate that client to pay a value-based fee, which is likely to be higher?

 

“You have to demonstrate a dramatic difference in measurable results as compared to the rest of the pack...”

The answer is reflected in just about everything you do, from marketing and selling to delivery. You need to rethink your marketing communication, sales approach, and your value proposition to effectively convert clients to a value-based billing approach.

You have to demonstrate a dramatic difference in measurable results as compared to the rest of the pack or your clients will head right back to their comfort zone—the hourly rate.

I have struggled with this concept.  I absolutely agree with the premise--old habits die hard.  But I am a litigator--how do we discuss "value" in the concept of litigating a case.  If the case could potentially cost a client $100,000 to defend, and there is a 10% chance of a $1 million dollar verdict, perhaps the value is $200,000.  But how does one distinguish--really distinguish--between a 10% and 20% chance of a certain result?  That difference--$100,000--might be real money to some.  As long as we are left with these kinds of vagaries, I have reservations about a company moving to "value" pricing for litigation.  Certainly budget considerations might drive the litigant to something other than hourly rate payments.

Cutting Inside Counsel: Perfect Opportunity For Fixed Fee Agreements

About I month ago, I wrote about "Outsourcing The Legal Function."  Today, I was reading this article at law.com about five questions law firms face for 2006.  The fifth question is whether client relationships are more critical than ever.  The author observes that "according to a recent law firm study by BTI, the vast majority of companies are shrinking their in-house counsel team, in part because they believe this will cut costs."  I attended the seminar where BTI first presented this data, which is very strong.  The reason, BTI believes, for this phenomenon is that reducing inhouse body count cuts inhouse costs, and that these numbers are more important for General Counsel than outside counsel spend. 

Whether the reasoning reflects the truth of the situation, it is inescapable the General Counsel should be thinking about outsourcing parts of the legal function.  Certainly the work can be handled by outside counsel.  For example, if a company has a lawyer overseeing litigation, any work she is doing likely could be done as an outside lawyer.  In terms of the value of the work, that value is fixed--what was the all-in cost for the inside lawyer?  Might the law firm be able to provide superior service?  Possibly, especially if the outside firm has the breadth of talent to manage (not necessarily handle) litigation with greater expertise brought to bear.  And quite possibly, someone more senior to the inside lawyer will make better judgments about tactical and strategic matters.  Experience does count for something after all.

With this said, I wonder why more General Counsel are not considering outsourcing as a solution.

Clients, Not Firms, Control The Future Of The Billable Hour

Another American Lawyer piece on the billable hours. Author Douglas McCollam does a terrific job analyzing the flaws in the system and some of the reasons it remains entrenched.  Here is an interesting insight:

The question remains then: If the billable hour is so unpopular, why hasn't it been replaced? For starters, it's a huge moneymaker for firms. To a large extent, reliance upon the billable hour is responsible for the pyramid structure of the modern law firm. With legions of associates toiling away on behalf of a narrow band of partners, the modern megafirm generates huge revenue. Take away the billable hour, however, and the foundation of the pyramid collapses. If the basic commodity sold becomes knowledge, not time, then the modern megafirm suddenly begins to look like an obsolete smokestack industry.

What if the basic commodity sold was results?  Makes me wonder how many CEOs would tolerate the system tolerated by their GCs?  If Jack Welch or others of his stature were ever charged with creating an efficient, effective legal marketplace, what would the over/under be on the future of the billable hour?  My bet would be on less than a New York minute.  CEOs like results.  Apparently the GCs are willing to focus on process.

The bottom line is that clients will continue to be offered what they buy.  All the carping in the world isn’t going to cause the fundamental, systemic change needed to banish an economic model that is not in the best interest of the consuming clients.  If clients pay for “legions of associates toiling away,” that is what they will get.  If they pay for hours of research on an issue that is at best a sideshow, that is what they will get.  If they choose to pay for results, that is what they will get.  The market moves to the money.  Always has.  Always will.

The Annual Rite Of Passage: Raising Rates

Check out this post on Law.com. Brenda Sandburg of The American Lawyer reports that amongst the Amlaw 200:

• Billing rates will continue to go up. Fifty-three percent of respondents expect to increase billing rates by 5 percent or less; 46 percent anticipate raising them by more than 5 percent.

• Profits will keep rising, too. Sixty-eight percent of respondents expect profits per partner to grow more than 5 percent; 27 percent think profits per partner growth will be 5 percent or lower.

Its amazing—99% of law firms “expect” to raise rates, nearly half by more than 5%.  Did they ask their clients?  Are their clients raising their prices?  How many of their client legal departments are facing cut-backs or cost constraints?

At the same time, profits per partner are going up.  More than 2/3 think the PPP will go up more than 5%.  I wonder how their clients feel about that.

I will say that this might be misleading, akin to a peacock showing off its tail feathers.  Impressive, but not relevant.  How many of these firms will be offering discounts that more than offset the increase?  How many “negotiate” the bill on top of the discounts?

As I have said before, the system is phony.  Maybe this is the year some clients will wake up and smell the coffee.

 

This Is Really Pathetic

https://thebillablehour.com/clocks.php

https://thebillablehour.com/watches.php

Some people find these timepieces funny (checkhere). It strikes me as sad. 

Four Realities Of Value-Based Pricing--The First Reality

I clipped something to post about and when I went back I realized I had forgotten where I found the material.  If you recognize it, please let me know so I can edit this post to provide proper attribution.  I thought about not posting because of this problem, but the ideas are too valuable not to share and discuss.  As you can see, the author identifies four realities of value-based pricing.  I will reprint them with some commentary in four separate posts.

EDITED AS OF JANUARY 6, 2006.
I received a comment from Andrea Harris at Guerilla Consulting who kindly advised me that the material I had clipped but forgotten where I found it came from Mike McLaughlin, co-author of Guerrilla Marketing for Consultants.  Mike, my apologies.

 

Four Realities of Value-Based Pricing

The logic of value-based pricing for consulting work is sound. Why shouldn’t consultants be paid based on the results of projects, rather than the number of hours they log on them? And to take the logic another step, if a consultant’s work generates big savings for a client, shouldn’t the consultant share in that windfall?

I think value-based pricing will take hold in the consulting business, so facing the realities of this approach now will prepare you for the changes ahead.

Reality #1: Clients care about the performance of their businesses—not yours.

“Clients are interested in their results, not your profit margin or how much time you put into a proposal or a project.”

Most clients are looking for tangible results, at the best price, when they hire a consultant. Of course, clients will pay a premium if they believe they can achieve faster, better, or more permanent results with a higher-priced consulting firm.

But never lose sight of the fact that clients are interested in their results, not your profit margin or how much time you put into a proposal or a project.

Some clients will express enthusiasm for and negotiate a value-based fee with a consultant, only to get cold feet at the last minute and ask for a time and materials or fixed-fee proposal. Clients sometimes perceive less risk and lower cost with the hourly rate option, even when that does not reflect reality.

Keep your pricing options flexible even if a client shows a strong interest in value-based pricing. You’ll avoid scrambling at the last minute to create a price for services.

My take:  I agree with this to a point.  A savvy client will want you to earn a profit too since happy vendors or service providers can really help a business advance and grow.  The relationship should be one of shared risk, but also shared benefits.  One way streets are headed in the wrong direction.

Another Problem Solved By Alternate Fee Arrangements

Rees Morrison has an interesting post reporting on law departments imposing staffing profiles on outside counsel (X% of work to be done by senior partners, this type of work to be done by junior lawyers, and so forth).  Rees’ conclusion:  “I have my doubts that someone can so precisely define the roles of law firm lawyers in these buckets of tasks and percentages of time.”  As busy as people are these days, this metric is just another problematic overlay.  The real problem identified is that inside lawyers don’t trust outside lawyers to handle matters efficiently.  Certainly a fixed fee arrangement (with a kicker for results, of course) shifts this concern away from inside counsel who really should not have to waste their precious time reviewing bills to see what percentage of total time lawyers spent on various tasks. 

The arguments against the billable hour system just keep piling up.

Alternative Fees. Boutique Firms Relentlessly Focused On Client Service. I Rest My Case.

One of the blogs I read regularly is The Wired GC.  I just read this post in which the Wired One analyzes the results of American Lawyer’s recent mid-level associate survey in terms of what the results mean for client service.  One great observation:

Since midlevel associates are often regular service providers for many law firms, I do cringe when I think that those entries on the monthly invoice represent clock-fixated young lawyers who resent their firm’s partners. What do they think about the firm’s clients? Am I part of the problem?

The Wired One the analyzes what clients should do about this problem.  He says:

Well, you could choose firms based upon quality-of-life surveys. In reality, however, that’s not the way firms are selected–it is nice to see, but not a sufficient criterion.

The other thing a GC could do is migrate work appropriately to good firms that have lower billable hours targets. Would these firms have associates with better attitudes? Maybe. Would the firm charge less per hour? Probably.

But his conclusion is killer:

Most clients of major law firms have probably restructured operations and staffing in the last 10 years to reduce costs, increase quality, and meet competitive challenges.

How long can law firms continue to meet their challenges by raising rates and hourly targets?

The survey says: perhaps not much longer.

Let me add a couple of suggestions for clients to consider.  The real solution is abandoning hourly rates.  But I realize most clients won’t just jump wholesale to this model.  So my advice?Experiment.  Send some of your work to firms that will do it on a modified fixed fee arrangement. (I say modified because I am a big believer in law firms having “skin in the game” so that the incentive to get the best result is palpable.)  Not worrying about hours or hourly rates is liberating.  Try it.  Also, try a firm who doesn’t have a list of blue chip clients a mile long.  See what it means to be a prized client.  And find a firm whose commitment to client service is demonstrated.  Find out what it means to be treated by a law firm the way you are when you check in at the Ritz or the Four Seasons.  You can get much more for your legal dollar than you do.  You just have to demand more.

Is There A Cost To Change Counsel?

We have all heard (or been heard) inside counsel bemoan the performance of a lawyer or a law firm.  Such laments invariably beg the question, “why not change?”  One barrier frequently mentioned is the cost of switching counsel.  In the vein, I draw your attention to an excellent post by Rees Morrison in his Law Department Management blog.  His conclusion is that “such concerns are over-rated.”  I tend to agree, and for many of the same reasons.

In addition to the points Rees raises, however, there are a couple of others worth considering.  First, the “learning curve” process is one that fits perfectly with a fixed fee concept, allowing inside counsel to know exactly what the cost will be.  Likewise, fee agreements with respect to the balance of the case should be much easier to negotiate.  In other words, there is no excuse for inside counsel to be left wondering how much new counsel will cost.  The only issue should be whether the change is worth it.

Last point.  Given the ease with which such a situation plays into an alternative fee agreement, I encourage inside counsel to think beyond the immediate case and consider whether the opportunity at hand is really an opportunity to experiment with alternative fee arrangements so you will know whether such arrangements are within your comfort zone and help solve some of the problems you may have with outside counsel.

Advertising to Lawyers Still Pushes Increasing Billable Hours

Dennis Kennedy has a nice post on Intel’s new advertisement for lawyers on the benefits of mobile computing.  So I followed the link he provided and went to the right column as he directed.  Finally, I hit the “Explore Legal Demo” link and Intel’s ad popped up. And what does Intel say?  “You need to be more efficient.  You need to increase billable hours.  You need an edge.”  There is a whole section of this ad devoted to increasing billable hours.

Here’s the rub.  Efficiency should provide a benefit to a client in the form of lower billable hours, or at least the same billable hours in a shorter time frame.  But someone who knows a lot about selling to lawyers believes that focusing on “more billable hours” is a good sales pitch.

I wonder if clients react positively when they see ads like this talking about ways for outside counsel to bill more hours to their matters.

Joel Hennning disses hourly billing

Nice profile on Joel Henning of Hildebrandt in the Front And Center column of the Sunday Chicago Tribune business section.  Most of it is background or Chicago-focused, but I did like this Q and A:

    Q:          Some attorneys are leaving the profession because they can't compete against billing cheaters--lawyers who inflate their monthly billable hours.  Can anything be done to curb this?

    A.            I'm encouraging corporate general counsel not to put up with that kind of nonsense any longer.  Right now, I'm working with a $30 billion company.  They're demanding they be treated better, with a consistent team to work on their matters and a competitive price,  not necessarily the cheapest, but competitive.

So his answer acknowledges the problem, and then makes it look as if corporate general counsel are not demanding enough.  I agree, but I hope he's really encouraging them to demand much more than a steady team and a competitive price.  At the sake of repeating myself, in-house counsel have enormous power.  They have what every outside lawyer seeks--business.  Demand more and I believe you'll get it.  Maybe not from your current counsel, but from someone just as good who won't take your business for granted.

SURVEY OF IN-HOUSE LAWYERS

This appeared recently on Adam Smith, Esq.:

At a meeting at Milbank yesterday, a senior partner had occasion to recount the tale of the pencil-sharpener, which was an actual employee at the firm decades ago.

The pencil-sharpener's role was to circulate throughout the office collecting used pencils and replacing them with sharp ones. So far, so good, and so far, so invisible.

But one day the senior partner had reason to visit a paralegal's cubicle and noticed that all the pencils, while sharp, were very short; and all of his pencils were very long.

You can intuit the rest. The pencil-sharpener provided partners with long pencils, associates with medium-length ones, and paralegals with short ones. Legend has it that a partner presented with a short pencil threw it back at the pencil-sharpener, and a lesson was learned.

A quaint tale of a bygone time where associates and paralegals were duly put in their place, silently and (almost) invisibly, but with utter certitude and devastating effects were they to be reflected upon for a moment.

Isn't it great we all know better now?

Now for the survey questions:

1)  How happy would you be paying for such essential overhead today?

2)  Do you think firms have eliminated this kind of waste?

For an answer to the second question, check out this entry from Anonymous Lawyer, a blog written by a large firm lawyer (oh yeah, its all “fictional” too):

" I got a call at seven in the morning on my cell phone from a summer associate, frantic.

"I couldn't sleep all night and I wanted to catch you right when you got up."

"How'd you even get my number?"

"The firm directory."

"What is it you need?"

"I think I gave you the wrong advice yesterday. I've been torturing myself over it. I told you the provision cut in favor of the client, but I've been re-reading the case law over and over and I think it cuts the other way. I don't think there's a case here. I'm so sorry. I know you were counting on me, and I screwed it up. I feel terrible about this. I don't want this to be your first impression of me."

"You think I take your advice without checking with an associate first?"

"Excuse me?"

"You think I actually believe a summer associate can do anything right? The project I gave you wasn't even for a current client. We solved it months ago. It was just busy work. You needed something to do, so I dug that up from my e-mail. You think it mattered?"

"But I was in the office until 2:30 in the morning working on it."

"No one told you to stay that late."

"But I thought--"

"You're here to get a taste of life as an associate. But we're not expecting you to actually do anything. Don't worry about it. I don't care if you got the answer wrong. The important thing is you got some experience. Calm down."

"But I thought--"

"I'll see you in the office later this morning. You probably still have time for a couple of hours of sleep."

"But I thought--"

"Goodbye." 

Just imagine what a Six Sigma Black Belt Efficiency Expert could do at law firms.

Alternative Fees Should Go Beyond Specific Matters To Build Strong Relationships With In-House Counsel

I consider Nat Slavin, the publisher of Corporate Legal Times, to be a friend.  But even if he were not, I would be a regular reader of Corporate Legal Times simply because every issue contains at least one nugget of insight that really makes me think and reevaluate what I believe, and most issues contain more than one.  The July 2005 issue is a great example of multiple nuggets.

Nat’s column is entitled “A New Economic Model For Law Firm Billing,” and his new model, while not that new, is presented in a way that is really intriguing.  The proposal is that law firms bill on a fixed fee basis on a quarterly basis.  The rationale for the model is the need for business people to bridge the gap between budgets and actual expenses.  The rationale is presented in the context of a public company that needs to forecast and make projections to manage Wall Street expectations.

As most who have read any this blog know, I am a staunch proponent of a modified fixed fee approach—fixed fee with a success incentive (either recovery of hold back or bonus) so law firms remain “interested” in the outcome.  Whereas Nat is looking at fixed fees for a given quarter, which allows a firm to make up any losses from the prior quarter, I have been advocated for a fixed fee on a given matter.  In the context of the business need for prediction, neither approach is on the money.  Nat’s approach fails because budges are set months in advance of a given quarter if not even more so.  During breakfast with a GC a week ago, he mentioned how he is now fixing his budget for 2006, and there is no line entry for new litigation.  The system evens out because litigation ends while other suits begin.  In this GC’s experience, things tend to even out.  My approach works on a micro, or matter, level, providing the grist for fixing a specific line item on a departmental budget.  But my approach does nothing on a macro level, which is where much of the budgetary pressure resides.  But Nat’s analysis that the gap between budgets and actual expenses has to be bridged is on the money, so my view must evolve from micro to macro, from matter budgeting to budgeting for groups of litigation.  We must move beyond matter focus to something broader.

I did say that there was more than one nugget in the July CLT.  Laura Stein, the General Counsel of The Clorox Co., authors the Inside Perspective column, which is entitled “Management Needs Lawyers It Can Trust.”  The article is about the trust relationship between inside counsel and management, but the lessons must be the same for outside counsel.  While Ms. Stein’s article does not mention fees per se, but she underscores the need to help management obtain business objectives in a cost-efficient manner.  Certainly this must include the budgetary process.  But as important, Ms. Stein underscores the importance of  a relationship built on trust.  And while a trust relationship between inside and outside counsel extends beyond fee issues, it certainly must include them.  The persistent failure to learn and understand the internal budget pressures faced by inside counsel and to respond in a manner that helps solve the problem rather than exacerbate it is certainly a cornerstone of a trusting relationship.

Courage. (And no, this is not a tribute to Dan Rather)

Much has been written here and elsewhere about the utter significant problems inherent in the billable hour system.  Indeed, there seems to be something meaningful happening, if only rhetorically.  The question remains, when will conduct match rhetoric?  When will inside counsel begin to insist on budgets with meaning, on alternative fees, on their counsel having skin in the game?  When will outside counsel offer, and really push, alternative fee arrangements that are mutually beneficial?  When will we be sufficiently motivated to take that first step into the unknown?

Tom Peters has an interesting entry today about Steve Jobs and his commencement address at Stanford.  The entire address can be read here, but the gist of the speech is captured in Tom’s slides.  Speaking of the importance of work in our lives, Jobs says:

“ Sometimes life's going to hit you in the head with a brick. Don't lose faith. I'm convinced that the only thing that kept me going was that I loved what I did. You've got to find what you love, and that is as true for work as it is for your lovers. Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work, and the only way to do great work is to love what you do. If you haven't found it yet, keep looking, and don't settle. As with all matters of the heart, you'll know when you find it, and like any great relationship it just gets better and better as the years roll on.  So keep looking. Don't settle.”

Having told us of the importance our job plays in our lives, Jobs has a few words of advice on how to do our jobs in a manner that is personally rewarding:

“But someday, not too long from now, you will gradually become the old and be cleared away. Sorry to be so dramatic, but it's quite true. Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma, which is living with the results of other people's thinking. Don't let the noise of others' opinions drown out your own inner voice, heart and intuition. They somehow already know what you truly want to become. Everything else is Secondary.”

Having told us of the importance of our jobs and the need to do things our way (think, Frank Sinatra singing “My Way”), Jobs concludes with this:

“Stuart and his team put out several issues of the The Whole Earth Catalogue, and then when it had run its course, they put out a final issue. It was the mid-Seventies and I was your age. On the back cover of their final issue was a photograph of an early morning country road, the kind you might find yourself hitchhiking on if you were so adventurous. Beneath were the words, "Stay hungry, stay foolish." It was their farewell message as they signed off. "Stay hungry, stay foolish." And I have always wished that for myself, and now, as you graduate to begin anew, I wish that for you. Stay hungry, stay foolish.”

Maybe we don’t need to be out there on the lunatic fringe (to quote Jack Welch), but then again, maybe what seems bold today will seem as mainstream as Apple just a few years from now.

The Boat, Part IV: Can Willing Buyers Find Willing Sellers?

The last major insight from the Boat roundtables was the incredible difficulty inside counsel seemed to have finding lawyers who would pursue litigation on a contingency or other alternative fee arrangements.  For the most part, big firms simply will not engage on the topic and when someone does, he or she frequently does not have the experience to assess price risk, cut fat from the defense or prosecution of the case in order to make the alternative something other than a glorified hourly rate, or to be able to determine what the lawyer’s margin is or will be on the engagement.

This difficulty dovetails quite nicely (and unexpectedly) with an article in the June issue of Corporate Counsel that suggests in-house counsel use contingency fee arrangements for certain kinds and sizes of litigation.  One of the benefits the authors attribute to such arrangements is better and earlier case assessment: “be prepared to engage in a brutally honest, rigorous, and thorough pre-retention assessment of your case with potential contingency counsel. Qualified business attorneys presented with a potential contingency case are going to take a long, critical look at the merits and the potential recovery before agreeing to handle the case. This can be difficult and stressful. Business litigation, like any litigation, can be very emotional.”

This somewhat counter-the-mainstream view is justified because “even business plaintiffs often come to a lawyer with a very one-sided view of their case colored by anger and the desire to exact retribution.”  While “hourly lawyers learn the details of the case as the representation progresses, contingent fee lawyers need to make a reliable assessment and valuation before beginning. The client can also learn from this intensive pre-retention assessment.” 

The better assessment?  According to the authors, “the contingent fee lawyer is likely to be much more candid about the strengths and weaknesses of the case than an hourly attorney who is paid regardless of the outcome.”

If the inside lawyers participating in the roundtables are representative, the real problem is not the willingness of inside counsel to cede the kinds of cases discussed to lawyers on a contingency fee basis, but rather finding suitably qualified business litigators who will work on a contingent fee basis.  Perhaps this site could become a clearinghouse matching interested buyers with interested sellers.  Those who have read any of my entries on fees know well my interest (and my firm’s) in litigation of this sort.  Perhaps we should market ourselves as a one-firm pilot project.

Seriously, there should be a way by which willing sellers can be introduced to interested buyers.  Suggestions?

The Boat Part III--Skin in the Game

During the roundtables, the discussion frequently turned to a question of me—what type of fee did I think had the best chance of succeeding.  My answer was direct—a fixed fee with a success kicker, whether in the form of a pure premium or recapturing a hold back or a combination of those two.  Here’s why I believe this:  in-house counsel need (1) budget certainty; (2) to eliminate the “temptations” created by the billable hour model to overstaff, overlitigate and miss resolution opportunities (“But Mr. Client, if we make an offer now, the other side will view it as a sign of weakness”); and (3) maximize outside counsel’s interest in the outcome.  The fee structure I proposed accomplishes all of these things.  The fixed number by its nature creates certainty and it creates strong incentives for counsel to manage a case as efficiently as is possible, while at the same time maximizing the incentive for a good result.  The incentives will cause behaviors to be modified in ways one can never image.

There appeared to be widespread agreement on this concept.  One issue left unresolved by this discussion was how to set the fixed fee.  Another was what happens if the case settles early or late in the process.  While those details are important, the threshold issue of the general structure of the fee seemed to be an area of agreement.

I am hoping that this blawg will serve as a basis for discussions of these points, by roundtable participants and anyone else with an interest.  If you want to guest-author a post, let me know.

Report From The Boat--Part II

Since I haven’t received permission from anyone to use their names or attribute comments, I won’t.  But in a moment of great insight, one Assistant GC described one significant impediment to use of alternative fees—the risk of public failure.  What happens to a rising star when he or she starts using alternative fee arrangements and those arrangements don’t work out?  Is the loss of stature (or in the extreme case, loss of job) worth it?

My suggestion was that the use of alternative fees be constructed as a pilot project, with certain defined goals.  Start off on a small matter.  Can we get better, predictable budgets?  Does the cost of handling the case go down?  And so on.  Come up with a list of potential measurables and ask the higher ups to sign off?  Pilot projects that fail aren’t that big a deal, but those that pay off can be expanded.

But what do I know.  Any suggestions for this in-house lawyer?

The Boat Report--Part I

You may recall that I was to host several roundtable discussions of in-house counsel on the Norwegian Dawn cruise ship in an event sponsored by Corporate Counsel magazine and Richmond Events.  The focus of the roundtables was alternative fees.  In my view, the event was a terrific success by any measure, but the discussions on alternative fees were especially enlightening.

We conducted a survey of those participating in the discussions.  In the aggregate, the in-house counsel reported that they were under significant pressure with respect to their budgets, but at the same time they reported receiving poor to fair budgets from their outside lawyers.  With but a single exception, they reported that hourly rates were too high and, significantly, that their firms’ hourly rates interfered with the quality of the relationships they had with their outside counsel.  The biggest area of interest for alternative fees was litigation.

Virtually without exception, the in-house lawyers all had negotiated for discounted rates, cut bills that they thought were excessive and had not had meaningful experiences with law firms suggesting alternative fee structures.

It was clear to me that this group of in-house lawyers will not continue to operate business as usual and that they are actively investigating the options they have, including greater use of smaller firms (which are viewed as more responsive, by and large) and use of alternative fees.

Part II of The Boat Report will focus on the types of alternatives that the outside counsel seemed most interested in.

The Five C's of Value

Ron Baker, a leading thinker and author on alternatives to the billable hour was a participant in LexThink, a program I attended in early April.  His view is that the client should determine the value of the work that needs to be performed, and that value should drive price rather than price determining value.  He identified the five C’s of value from the service provider’s prospective:  comprehend, create, communicate, convince, capture.  But more illustrative was his explanation for the cost structure of the Corvette.  The car was designed and then built, the cost calculated, a profit added and then a price determined.  When Lee Iaccoca drove the Corvette around, everyone he spoke with loved the car but hated the price.  Ioaccoca always asked what price people would pay.  Finally, he went to the Ford engineers and asked them to build a similar car at a specified price.  The engineers took that number, backed the profit out, knew the cost and then designed a car that could be built for that cost.  Ron relayed that in two years time, the Mustang generated profits of $1.1 billion, while over 13 years, the Corvette had generated profits of only$600 million.

What does all this have to do with value?  Clients need to figure out what a solution to a problem is worth to them, and they can’t use billing rates x hours to do so.  But maybe we lawyers need to play the Lee Iaccoca role and help them set the value.  How many of us can say we’ve ever done that?

Is It Possible To Work That Hard?

While preparing to lead several roundtable discussions later this week on the topic of the billable hour and alternative fee arrangements, I came across a piece from the Yale Law School Career Development Office.  It goes through a series of calculations to show how long you have to work each month to hit certain billable hour targets.  For example, to bill 2200 hours a year, a “normal” number at many big firms, you have to work, on average, from 7:30 a.m. to 8:30 p.m., Monday to Friday.  Plus, you have to work from 9:30 a.m. to 5:30 p.m. on three Saturdays per month.  All of this assumes you have a half hour commute.

Its one thing to talk about hours like this when you are on trial or in the midst of preparing for trial.  Then, there are simply not enough hours.  But day in, day out, year in, year out?  At what point does the brain simply go into low gear and the payoff on that high hourly rate plummet?

This is part of my handouts and I am anxious to see the reaction of those whose votes counts—the GCs and other inside counsel who hire lawyers.  I suspect these roundtalbes will provide fodder for many entries in the next week or so.

In the meantime, what do you think?

A Link to the McGuire Woods ad! (I hope)

I received a request for a link to the McGuire Woods ad.  Let me say right upfront that in addition to being a blawg neophyte, I am technologically challenged.  With that confession as a precursor, here goes.  Try this: http://pm.typepad.com/professional_marketing_bl/2005/04/mcguirewoods_ad_1.html

And if anyone can share with me the art of having words appear with the link underneath, I would be indebted.

Will McGuire Woods Now Totally Abandon The Billable Hour????

Well, the McGuire Woods ad campaign attacking the billable hour has started.  And its worse than I anticipated.  “The longer lawyers take the more money they make.  Does that align their interest with yours?”  Can you think of a less enlightened question.  “Does the fox in charge of the hen house have the same interest as the hens?”  What’s particularly scary is that this is the same McGuire Woods that said it wanted to be a “cutting edge” law firm in its release announcing this ad campaign.  Wow, they really are standing on the outside precipice with observations like this.

But it gets worse.  The ads continues: “Whether it be a fixed fee, success fee or some other alternative, we have learned that companies make better decisions when they know their cost up front.”  Really?  Does that mean McGuire Woods is penalizing all of its clients that continue to be charged by the hour?  I mean, McGuire Woods is preventing them from making better decisions by not insisting that they bill on some non-hourly basis.  At least according to the wisdom espoused in the ad.

My fear that clients would see this ad campaign as mindless pandering is greater than ever.  Trivializing the need to align economic interests, focusing on client service, providing real value to clients are more than marketing slogans.  I’ve written before on the separation of firms that talk the client service talk through their marketing departments and those that truly walk the walk.  From my standpoint, I see McGuire Woods lips moving with no evidence that their feet have gotten the message.

The chicken or the egg?

My kids are now old enough to ask questions to which I have no answers—Which came first, the chicken or the egg-type questions. (At least we’ve moved on from why did the chicken cross the road types!)  But McGuire Woods’ shocking discovery that client service is a good thing and newfound commitment to alternative fees begs a similar question:  Do we not have greater movement away from the billable hour because clients don’t want alternatives or because law firms won’t offer them?  A vote please.

As I have mentioned before, I have the opportunity to host a series of roundtables of inside lawyers in a couple of weeks, and I am really looking forward to hearing the perspective of inside counsel.  But as I have prepared for these roundtables, my own thinking has evolved further.  I have to confess that I used to fall into the category that feels that inside counsel must demand the change and vote with their feet.  I still believe that to a degree, but I am starting to understand there is more there than I had allowed for.  If alternative fees simply become a surrogate for billable hours, the only real advantage is certainty, assuming the alternative used creates that element.

Perhaps the answer is that more must be offered for inside lawyers to feel use of alternatives on a widespread basis is something other than a play for enhanced profits per partner, a statistic that regrettably has become an industry driver.  But I found one piece of insight that I think might reflect the real situation:

“The most important and effective method for converting existing clients to a value system is to offer new value. There is no reason in the world for a client to move from the hourly or daily rate to a fixed fee for the exact same value the buyer is now receiving. Think about it: If people change only in accordance with their own self-interests, then “What’s in it for them?” Why abandon a clear, reasonable and long-standing billing arrangement?
Well, you abandon it if a new system provides more value and better appeals to your self-interest.”

Alan Weiss

Value Based Fees, 2002
(part of The Ultimate Consultant Series)

Perhaps the question we should be focusing on is what added value we can provide.

 

One thing seems clear—change is coming.  As General Eric Shinseki, former Chief of Staff of the U.S. Army, recently said, “if you don’t like change, you’re going to like irrelevance even less.”

Is McGuire Woods walking the walk?

I woke up this morning to this headline in the Business Section of the Chicago Tribune: “Hourly Legal Fees Under Attack.”  I thought to myself—finally!  But the article is simply a puff piece on how McGuire Woods is starting an advertising campaign touting its willingness to use fee arrangements other than straight hourly rates.  The advertising is limited to Crain’s Chicago Business and the midwest edition of Fortune Magazine, and the strategy is designed to grow the firm’s Chicago office.  According to the article, the firm has decided that one way to compete with the Kirklands, Sidleys, and Mayer Browns is “to be more responsive to our clients.”  The article concludes with a quote from Robert Pristave of the Chicago office: “We want to be a cutting-edge law firm.”

Forgive me if I stifle a guffaw.  Does anyone believe there is a “cutting edge” switch at law firms? “Yesterday, we were staid and conservative.  [Flip Switch!] Wow, today we are cutting edge!” It just doesn’t work like that, and it certainly doesn’t work that way in branch offices.  In my mind, this kind of marketing plays into client’s cynicism about lawyers use of alternative fees.  In the minds of many clients, lawyers take a “I”m with you win or draw” approach to alternative fees, taking upside risk for good results but never taking downside risk.  That approach will never work.

I honestly hope McGuire Woods is successful, since any progress in efforts to bill our clients according to the value (to them) of our work is a step forward.  But forgive me if I don’t bet the ranch just yet.

The billable hour? Don't get me started!

I'm certain that this blawg will provide ample opportunities to discuss billable hours.  We'll read some story somewhere about some tireless associate billing a client 4,000 hours to write a motion to dismiss a complaint that has a minor pleading defect or some such nonsense, and I won't be able to control myself.  But in the meantime, I am excited to announce that I will be hosting a series of roundtable discussions among General Counsel and other in-house counsel on the Norwegian Dawn cruise ship during the Corporate Counsel Forum, a partnership of Corporate Counsel magazine, an American Lawyer Media publication, and Richmond Events, the leader in senior-level executive forums held on ocean liners.  The event is happening during May 12-15.  I can't wait to hear why more GCs are not pushing for their outside counsel to abandon the billable hour. 

In the meantime, all comments about the billable hour are welcome.