My recent post Discounts: It’s like putting off necessary surgery drew this thoughtful comment, which I believe merits a response. First, the comment:
Although you suggest that hourly billing law firms which discount will merely increase the number of billed hours to prop up their bottom lines, there is no evidence to suggest AFA firms will not act in other ways to promote their bottom lines as well. Is there some reason to believe that AFA firms/lawyers are less profit driven than hourly billing firms? No. Does anyone really believe that AFA law firms are more altruistic and benevolent with their revenues than hourly billing firms? Of course not. For AFA to work, the law firms must make money, and at the same time the corporate client must benefit.
An item from February 11, 2010 by Zach Lowe in AmLawDaily titled Emerging Trends in Law Firm Litigation? (found at http://bit.ly/dxRx6d) referred to instances of lawsuits being filed by AFA law firms against their clients because of disagreements on the scope of the AFA in which the law firms felt they were entitled to a greater monetary recovery than the corporate client felt was appropriate. The article quotes a New York attorney who said "we may see more of these sorts of fights between firms and clients because alternative fee arrangements are˜not as simple as contingency fee or time-based fee arrangements." Certainly, this suggests that AFA firms expect significant revenue production from their new agreements not based on hourly billing, and AFA does not guarantee outside counsel and in-house counsel will agree on how much is an appropriate recovery.
Additionally, the suspicion persists that AFA firms will actually do less work of value on AFA files so they can handle more matters, which is just another way of saying a discounted hourly billing firm will increase the number of hours billed on a file.
The way to prevent either of these two scenarios (AFA firms giving less attention to files and hourly billing firms "churning" file) from occurring is for in house counsel to carefully scrutinize the work being done by their law firms and to foster a strong relationship with the firms based on value. An hourly billing law firm which attempts to increase the number of hours billed can be promptly brought back into line if the client closely reviews the bill and indicates that the billing suggests work was performed without value. In all instances, corporate clients should have billing guidelines which restrict the opportunity for overbilling to occur, at a discounted or full rate, such as not permitting some types of work done (or a number of hours performed on those types of work) without client authorization. If a corporate client is willing to properly monitor its lawyers, AND also receives a discount from the law firm, there is no reason why the client cannot reduce its overall outside counsel expenses and receive value.
Similarly, corporate clients must be willing to work closely with an AFA law firm to ensure the lawyers are giving a matter the attention it deserves. It does a client no good to get a lower legal bill if it is later discovered that a much better result could have been obtained. Further, the addition of success or efficiency incentives might not sufficiently affect the law firms actions, but without proper monitoring by the client, that would also be discovered too late.
E. Leigh Dance posted a very interesting item on February 10, 2010 titled Four More Ways to Work Together to Improve the Value of Legal Services (found at http://bit.ly/aKYyUE) based on information conveyed at the December, 2009 General Counsel Roundtable discussion. She noted as follows:
"I was interested that corporate law departments’ primary issues all revolve around better collaboration with outside counsel. This is certainly not research, but the consistency of responses is notable. The General Counsels’ top issue (of 9 we suggested), by a narrow margin, was:"working with outside counsel for improved value and results." This was followed closely by 3 other issues, all tieing for 2nd most important: obtaining skilled legal coverage in growing/emerging markets; demonstrating value to the business, defending budgets; controls, monitoring and reporting for compliance."
These results indicate to me that although GCs believe overall expenses are very important, they want good value from outside counsel. There is absolutely no reason why close relationships with hourly billing lawyers cannot be at least as "valuable" to corporate clients as value obtained from AFA firms so long as the clients stay actively involved with their lawyers. If an hourly billing based firm is willing to give a discount, and the correct amount of legal work is accomplished (i.e., no churning), the result will be reduced costs and increased value to the client. The key to all of this, however, is effective involvement of the client for both AFA and hourly billing.
Steve Pietrick
My response:
Let’s begin with a fundamental truth: in any fee structure, a client gets what it pays for. If you buy hours, you will get hours. If you buy efficiency, that is what you will get.
Steve posits that the way to avoid the "too many hours" problem is for in-house counsel to do a more effective job in policing the work done by outside counsel to ensure the problem is caught and fixed. I am sure that there are many in-house counsel who capably do this. That they spend their time avoiding being taken advantage of by their own counsel, however, is something I see as an indictment of the hourly billing model. Protecting your client from being ripped off by your outside lawyer is a waste of resources, certainly not the highest and best use of the inside lawyer’s time and talent. This "policing" approach also assumes that in-house counsel has the time needed to carefully review and monitor all bills.
Steve also posits that there is no evidence that AFA firms are less profit driven or won’t do things to improve their profits. To the contrary, I think there is compelling evidence to believe that AFA firms are as profit driven as their hourly rate colleagues. The whole point of AFAs is to use that profit incentive to drive a different kind of behavior, one where firms actually think about the cost to produce a result and how to lower that cost.
Steve then points out the most common criticism of straight fixed fee arrangements, that is that firms will not devote adequate resources to the matter as the pendulum swings from one extreme (too many hours) to the other (too few). This problem is, of course, well documented and frequently described, if only by anecdote. But Steve then goes on to say "the addition of success or efficiency incentives might not sufficiently affect the law firms actions, but without proper monitoring by the client, that would also be discovered too late."
Of course, the government might declare a three-day work week, but mere possibility does not mean much in this discussion. Experience, both our own and that of several other firms and clients, had demonstrated that firms devote resources needed to achieve success bonuses. I know of no examples where a firm devoted inadequate resources in the presence of a success incentive.
But the real point is this: clients need to figure out what matters to them and how they want to be involved in a matter. I submit that the most productive involvement is in strategy and tactics of a given matter, not in policing those who are supposed to serve you. Granted, there are no doubt people who prefer to have an adversarial relationship between client and attorney, euphemistically referred to a "healthy tension." But I believe those desiring to act as policeman to their outside counsel are the minority.
So, while I agree with Steve’s point that inside counsel desire value, I could not disagree more with his conclusion that "there is no reason" those who bill by the hour can’t have as good a relationship with their corporate clients as those using AFAs. While there are, as I have said many times, examples of firms who bill by the hour who are not caught up in maximizing hours, there are too many stories and too much data to dispute the conclusion that a shift from hourly billing to well-thought out AFAs produces materially greater value in the eyes of the client.