Last week, BTI Consulting reported that alternative fee arrangements have “soared to an all time high,” noting that AFAs generated savings of nearly 14%, or an average of $2.7 million for law departments. These savings are significant, but as I have often said, much greater savings are possible if AFAs are deployed with other important tools.
As part of BTI’s research to develop the data on AFAs, BTI identified 22 law firms that are “best at delivering Alternative Fee Arrangements.” The 22 firms were identified by corporate counsel “in an unprompted manner.” Here is how BTI described the 22:
Clients identify 22 of the 650 law firms serving Fortune 1000 and large clients as absolutely best at developing and implementing alternative fee arrangements. Clients share 6 reasons these firms stand out:
Partners have authority to enter an AFA quickly. These partners do not have to wait for committee meetings or partner reviews of agreements. The negotiating partner also knows the parameters the firm will accept and approval is all but assured, and swift.
Confidence, comfort and enthusiasm in pursuit of the AFA. The firm’s enthusiasm and commitment to AFAs is contagious.
Flexibility. The firms who stand out listen to the objectives and offer to change the approach as the objectives evolve and are agreed upon by all concerned.
Willing to take some risk. The outstanding AFA firms have convinced clients they have skin in the game. Clients love the idea of risk sharing they can see and understand.
Focused and efficient. The firms have learned to make a beeline for the client’s goal. Much of the strategizing and planning has been done as the fee is negotiated—and clients see their law firms operating like an Olympic swimmer—no wasted strokes.
Stick to the agreement and never complain. The law firms don’t go back and ask for changes and live with whatever outcomes occur. Apparently many law firms ask for changes when things don’t go well—the best don’t. And the best have tight project controls to ensure they don’t need to ask.
Here are the 22:
Law Firms Best at Delivering Alternative Fee Arrangements:
Bartlit Beck Herman Palenchar & Scott
Blake, Cassels & Graydon
Covington & Burling
Fish & Richardson
Foley & Lardner
Kirkland & Ellis
Lee Tran & Liang
Orrick, Herrington & Sutcliffe
Quarles & Brady
Schwartz & Ballen
Simmons & Simmons
Valorem Law Group
Wilson Sonsini Goodrich & Rosati
We feel pretty good today, thrilled to be in such elite company, one of the 3% of the 650 firms to be recognized by the clients we are so fortunate to partner with. This recognition is particularly satisfying given the incredible leap of faith we took 8 years ago to build a new firm model to deliver AFAs that work for clients while providing unwavering client service in the process. We look forward to continuing the leap.
Michael Rynowecer of BTI Consulting had a great, must-read post today on his Mad Clientist blog. In the post, which I strongly recommend, Michael makes these points:
- Spending on AFAs is way up—nearly 20% CAGR over 4 years
- Outside counsel spend under AFAs jumped to over 35%
- Almost 70% of companies
- The reported savings from AFAs are 13.9%
- The savings from AFAs add $2.7 million to the average client’s legal budget.
- The AFA-of-choice, by a wide margin, is the fixed fee.
I get a picture of Samuel L. Jackson staring out from the TV saying “What’s in your wallet?” Except he is saying “Why aren’t you using more AFAs?”
I have two points to add to those made in Michael’s post. First, what has taken so long? Just kidding, the last 8 years since we launched Valorem and became “the alternative fee firm” have flown by. Ok, mostly flown by. But it is gratifying to know the market is moving decisively to where we thought it should be when we started.
Second, there is room for so much more savings. AFAs are not the end game for delivering value. They are but one of a serious of tools that combine to deliver the greatest value. Think about a Swiss Army knife. If you just use the short blade and none of the other tools, you are not getting the most value from it. As clients focus on these other tools, some firms will do so too, or at least say they do. Which leads to the second reason there is significant room for more savings: Most AFAs are still calculated based on estimate hours x hourly rates, so the AFA is really a wolf in sheep’s clothing, or as a friend from Australia prefers, hourly billing in drag. If firms are not radically reducing their cost structure, basing fees on cost of production rather than the amount they would earn if billing hourly, they are not doing the things that create real savings for clients.
What firms say and what they do remain very different things, and clients must insist that firms do the things that create savings. Or vote with their wallet.
I wrote my first blog post on April 10, 2005, and I have published 968 posts since then. To be candid, not all of the posts related to client service issues, the blog’s name notwithstanding. But a good many of the posts have addressed client service. It has been a passion of mine since long before I even heard of blogging, let alone actually did it. When that passion is recognized by those at whom and for whom it is directed, it is a very special moment. Actually, it is quite humbling.
I am honored and humbled to have been recognized as a Client Service MVP All-Star for 2016. The MVP designation is for those who have earned this distinction multiple times. I have been fortunate to have been named a Client Service All-Star in 2012, 2014, 2015 and now in 2016. The MVP bar has been set by H. Rodgin Cohen, the Senior Chairman of Sullivan & Cromwell, who has been named an All-Star 14 times, a truly admirable accomplishment.
What makes this recognition truly special is the way in which BTI Consulting about identifying the All-Stars> From the report (available here):
No attorney or firm can self-nominate, self-refer nor pay to be included. The only possible avenue for becoming a BTI Client Service All-Star is for corporate counsel to identify an attorney who stands out—above all the others—for delivering superior client service, in an unprompted manner. Only clients select and decide.
Clients are the ultimate, indeed the only, judge of value and service quality. I am privileged to represent great clients, and this recognition means that I now have to set the bar higher.
Great article by Sara Randazzo in today’s Wall Street Journal, Legal Fees Cross New Mark: $1,500 an Hour. Set aside the wisdom of such rates when firms provide discounts on demand and realization rates average near 80%. What stands out for me is the utter hubris of this statement by John Altorelli, previously of Dewey fame and now speaking for DLA Piper:
We just raise them every year.
There must be a law somewhere that requires firms to do this. I missed that day in law school, apparently. But again, set aside the wisdom of increasing rates every year.
It makes on wonder whether lawyers understand the concept of public relations? Does DLA understand that many clients don’t like the “we just raise them every year” mantra they hear from outside counsel and instead think they, the client, get to decide whether rates increase or not?
I used to ask why clients didn’t say no to rate increases. Now, more and more clients are doing so. I wonder how many more will do so when they see rates like these.
Most complain that their law firms are not meeting their needs. Some law departments bring work in-house. Some change law firms. But the problems persist.
Outside the law department, companies solve this kind of problem by creating a solution. Often, the company’s engineers work with a willing vendor to find the right solution.
Is the time coming when an innovative law department will choose to follow this path?
I recently read the 2016 Report On The State Of The Legal Market by Georgetown Law and Peer Monitor. I was struck by the clarity of the message being sent by clients, and equally struck by how law firms seem not to hear it. Consider these messages.
- More work is going places other than law firms.
It is not as if the amount of work inside law departments is less or even the same. The amount of work is greater than ever and increasing every year. Where is that work going? Certainly not to law firms.
2. Law Firms keep raising rates. Clients refuse to keep paying.
Notice how the gap between standard rates, billed rates and collected rates is increasing. That is a reflection on client pressure to reduce spend and their refusal to “go along” with regular rate increases. This message is made crystal clear here:
Law firms are collecting a decreasing percentage of their standard rates every year. What message to they believe is being delivered? The fact that the percentage of billed v. standard is declining so precipitously means law firms know that clients won’t tolerate being billed higher amounts, but the continual rate of decline means firms are not addressing the fundamental problem or are doing so ineffectually.
At the same time, client satisfaction with law firms’ client service is declining. From a recent post on the Mad Clientist (BTI Consulting):
56% of corporate counsel issued RFPs for law firms in 2015, up from 45% in 2014. We now face a majority of clients using RFPs to hire new law firms. The increase is due directly to the rock-like drop in client service performance clients are experiencing.
What does it all mean?
It means the greatest revenue opportunity for law firms is not raising rates. The greatest opportunity is increasing realization rates. Perhaps the road to doing so is by improving client service. The combined data certainly suggest that clients are delivering a clear message.
I wonder if law firms need to have their institutional hearing checked.
I am sure Simon and Garfunkel never thought their lyrics would find their way into the law (this line has been used by judges in their opinions, so I am not breaking new ground) but when a line fits so perfectly, it is hard not to use it. In August, I wrote a New Normal Column for the ABA Journal, How Lawyers Can Embrace Mistakes. It was premised on a simple logical syllogism. Lawyers are humans. Humans make mistakes. Therefore, lawyers make mistakes. The column suggested that lawyers learn from their mistakes so they can avoid making them again, and therefore be better at what they do.
You would have thought I had tugged on Superman’s cape. How dare I raise the mere possibility of lawyers making mistakes. The first comment addressed an issue I did not:
If you learn a lesson, you are unlikely to repeat the mistake you made. Consider this like turning on a flashlight while walking around in the dark. It helps you avoid running into a piece of furniture.
If you learn a lesson and share that lesson with others, your colleagues, your outside law firms and more can learn and avoid the mistake you made. This is akin to turning on bright overhead lights so everyone avoids running into a piece of furniture.
While this is really an obvious insight into the obvious, there are roadblocks that get in the way of making it so. I’ve written about some of these before (in my New Normal column)–I encourage you to read the comments because they illustrate the problem as well as anything. My next column is going to talk about the value of lessons learned from the client’s perspective.
I wrote a series on Signal and Noise here, here and here. The problem clients confront is that most law firms look and sound alike. When we started Valorem in 2008, no one was talking about alternative fees, no one was offering alternative fees and the world, by and large, thought we were crazy. Now, of course, everybody claims they offer non-hourly billing. The only problem, really a minor one, is that few of the firms making such claim can explain how their proposed fee differs from an estimate of what they would charge on an hourly basis. The challenge for clients, which is specifically address in the second and third post, is about how to differentiate between true signal and mere noise.
I recently received the January/February issue of Law Practice. The cover featured two stories on client service, including the aptly-titled Let Client Service Be Our Watchword. It appears that more is being said and written about the importance of client service than every before, which means that every law firm will start talking about how important
[fill in blank] client service is to them. They won’t actually change anything, they will simply talk about the importance of [fill in blank] client service so they cannot be immediately identified as not making [fill in blank] client service a priority for the firm.
The hard truth is that client service is not a policy you adopt, or a marketing department gimmick. It is part of a person’s DNA, a product of extensive training and an institutional commitment that few firms know how to, let alone are willing, to make. Clients deserve more than noise. What and how you do it should be something that can be shown. What are the design elements that show that client needs and desires were the drivers of the design?
There are a number of questions like this a client should ask to separate signal from the noise, and I’ll address those questions in a future post.
Here’s just a flavor for the reasons the author provides in this must-read article:
- Disrespectful: Being on time is about respect. It signals that you value and appreciate the other person. If you don’t respect the meeting’s participants, why are you meeting with them in the first place?
- Inconsiderate: Unintentionally being late demonstrates an overall lack of consideration for the lives of others. You just don’t care.
- Big-Timing: Intentionally being late is about power. It’s showing the other person, or people that you’re a “big deal” and have the upper-hand in the relationship. It’s also called being a dick.