In Search of Perfect Client Service

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.

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“I’ve talked to many in-house counsels who say, ‘I just make a phone call, and I get a discount.’ Law firms are doing something that car companies did about a year ago, with the employee discount pricing. It becomes a frenzy of discounting.”

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I don't know why I didn't see this article before, but I just read Inside Counsel's September 2009 article on game-changing law departments.  CN, a multinational transportation company, shifted work from large firms to smaller firms.  How has that worked out?  Well, it seems.

The results have been surprising.

"I was expecting to pay X per hour, for Y number of hours," he explains. "So according to my calculations, we should have achieved a 25 to 50 percent reduction in legal spend."

But what Rudnikoff didn’t expect was that the work at these small firms would be handled by more experienced lawyers than the large-firm associates who previously handled the company’s less sophisticated work. As a result, they complete the work much faster at a smaller hourly rate, generating closer to a 75 percent reduction in cost.

And the risk of not having the work done by big firms?  Not a risk at all, as it turns out.

He adds that there is less risk in this approach than many companies may think. "Because we can afford to go with the most experienced lawyers in the small towns, the risk is lower," he says.

In this day and age, with so many big firm lawyers having left those firms, it is easier than ever to have the same lawyer you would have had at a big firm just a few years ago now doing your work at a fraction of the cost.  It's not like lawyers have their brains siphoned when they leave the halls of BigLaw, after all.  But BigLaw alums aside, lawyers who have run their own firm, who have dealt with the issues of meeting payroll and paying health care costs, have had an infusion of business experience that  counts for something as well.  Brand counts sometimes, but too often it is just an excuse.

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Let's start with a huge caveat.  The guy doing the talking in this interview, Stephen French, is the Managing Director of Legalbill.  According to the firm's website:

Legalbill is committed to providing corporations worldwide with unsurpassed solutions for legal cost analysis and management.

So, in real world terms, Legalbill manages hourly billing data, slices and dices in ways that are then used to help companies save money when dealing with hourly rate lawyers and firms.  If there is no hourly billing, there would be scant need for Legalbill, at least unless it came up with new, more relevant offerings.  So Mr. French's company has dog in this hunt.  But even with that caveat, he has some interesting things to say.

Watch AmLaw's video interview of Mr. French here.

Alison Frankel of AmLaw reports that:

There are two big problems with fixed rate or flat fees, as French sees it. First, clients don't get the same level of work from their lawyers. "When you get [fees] down to the lowest common denominator, it also has an impact on the responsiveness of counsel," he says. "It has an impact on the qualitative nature of the representation, and it also has, certainly, an impact on the cost effectiveness."

And second, alternative fees erode the very economic foundation of law firms. Especially with so much lateral movement and merger activity, French argues, it's very difficult to measure and compensate performance without hourly billing.

The second claim, that alternative fees erode the economic foundation of law firms is true.  That is why the firms need to change their business models, something at least some have started to recognize.  But to say that a business selling services should not change to meet the needs of the buyers of those services is an argument that, if accepted by law firms, will lead to their eventual demise.

The first argument is premised on the mistaken notion that "fixed rate or flat fees" are the essence of non-hourly fee arrangements.  There is scant data to support that assumption.  In-house lawyers who move toward use of non-hourly arrangements understand that every fee structure has strengths and weaknesses, but modifications to those structures can avoid the problems.  The problems identified by Mr. French are eliminated by including performance-based payments in the fee formula. 

I found it interesting, though, that Mr. French was straightforward in admitting that, for most law firms, the use of alternative fees is a marketing gimmick to appease clients.  There is evidence to support his impression, found in the fact that many law firms have not made the kind of systemic changes needed to maximize the profits from alternative fees.

Nothing in this interview is going to change the course of human events, but it is interesting to hear a robust defense of hourly billing.

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Altman Weil has just issues its flash survey on 2010 billing rates. Apparently, many law firms have decided to shoot themselves raise rates in 2010.   The survey reports that “US law firms project an average overall increase in rates of 3.2%.”  The increase will be higher in bigger firms, an average of 4%. Few firms, just 13.1%, are raising rates across the board. Interestingly, even after many firms laid off associates and froze or reduced salaries, firms are asking their clients to pay even greater increases for associates:

Thirty percent of law firms indicated they would adjust their rates by timekeeper class…. Firms that made their billing rate decision based on timekeeper class were asked to estimate their rate change within ranges for equity partners, non-equity partners, associates, counsel, contract lawyers and paralegals. The largest increase, according to the survey, will be in associate billing rates with 45.5% of firms making an increase in the 4%-6% range and 11.4% making an increase of 7% or more.

Wow.

So clients, how’s that working out for you?

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Above The Law recently revealed some internal documents from Simpson Thatcher.   If Simpson Thatcher reflects what is going on in large law firms, it is clear that the recession is hurting BigLaw big time:

In 2007, our realization was 110%; in 2008, our realization was 97%; for 2009, we originally budgeted 93%, and we are now running at a realization of around 89%.

The firm's reaction is equally interesting:

We want incremental business and we are realistic about what is needed to obtain attractive incremental business. We think we are value-added and should be paid as a top-tier firm with top-tier talent, but we need to be competitive with rates. We are giving discounts on some litigation; we are giving discounts on bank and investment bank house account matters; we give busted deal discounts; we are willing to fix fees. If a particular partner rate or particular class rate is a sticking point, we can discount those rates to be competitive. We can quote a blended rate. In brief, we are flexible on rates and want to do what we need to do in order to expand our share of the high-end business out there.

Apparently, desperate times call for desperate measures.  Well, not that desperate:

We considered lowering our rates, but rejected that idea since we are collecting 100% or close to 100% on a high percentage of our business and are able to provide a discount on most of the rest of our business. We think lowering our rates would have a substantial negative impact on our revenues.

Which translates to this: If a client wants to pay us at higher rates, we'll take it!  But if the client says it will pay us less, we'll take that too."

It doesn't sound like Simpson is committed to changing its business model to deliver greater value over the long run, does it?  I wonder how many other firms are engaged in this "treading water" approach to value?

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Following up on my last post on how clients can determine whether the alternative fee quoted is a good one or not, I invite you to read this article from Corporate Counsel, United Technologies Takes a Stand, Puts Billable Hour 'On Life Support.'  Here's the punchline from the story:

These days it's easy to find law firms willing to work for United Technologies under some kind of alternative fee arrangement. They're a big customer; the Hartford-based global conglomerate raked in nearly $59 billion in revenue last year selling products like elevators and helicopters. But to truly impress United Technologies, firms now have to do more than propose working off the clock. They have to explain exactly how they came up with their flat fee, and how they'll make money, something many can't do. "Sometimes they tell me they have no idea," says associate general counsel Chester Paul Beach.

I know from experience that no lawyer can wake up one day and decide to quote alternative fees and be any good at it.  Being good is like any other estimator's job--it takes experience and a detailed, nuanced understanding of your cost structure and your financial objectives for the engagement.  Kudos to United Technologies for asking precisely the right question.

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When giving a speech a few months ago, I was asked by an in-house lawyer how a client was supposed to distinguish a good alternative fee from a bad one. Great question.

My answer? Ask the firm to explain in detail how it came up with its number.

I recall the first time I quoted a fixed fee more than a decade ago. It was a very unpopular thing in my firm, and the “bosses” were heavily involved. I came up with number in a very granular way. How many motions? How many depositions? How much time reviewing documents? How long for summary judgment? It was an exercise designed to identify the number of hours we would spend on the matter. We then multiplied the hourly rates of the people who would be doing the tasks and came up with a total.

That was only the beginning of the process. Rates were likely to increase during the period the case was expected to be active, so we had to build in a “bump” for the fee increase. We had to build in another “bump” to protect us in case we were wrong about the hours. And finally, we had the self-congratulatory “aren’t we great for doing this for our client” bump. That was the number we gave to our client. As you can see, it had a huge amount of profit, indeed, a premium, built in.

These days, I’ve heard from a number of in-house lawyers that the alternative fee quotes they are getting appear to have gone through a similar design process. As I tell everyone who asks, any explanation that includes something to the effect that we calculated the hours we would spend and multiplied by hourly rates needs to be rejected immediately. The firm’s hourly rates are where their profit is located. Rates x hours = revenue. Revenue – expenses = profit. If the firm is not putting some of its profit at risk and altering the way it works, it is not using the alternative fee to client’s benefit.

So what’s a good answer? I’ll answer that question later.

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But let's not get to the point where we're mocking folks who are trying to move in the "right" direction. At one point you say you can't move from fish to fowl overnight, so don't mock the baby steps. Maybe right now they don't "get" that they need to squeeze out those 200 hours on every engagement, but aren't these steps in the right direction? All the writing I've read on shift to fixed fee billing suggests it's hard, and there will be missteps along the way. At some point, aren't these stories showing a glimmer of recognition?

From a comment to my post on the  Wall Street Journal article on the billable hour.

If the steps discussed in the WSJ article are, in fact, in the right direction, the commenter is correct that these steps should be applauded, not mocked.  After all, the journey of a thousand miles begins with a single step.  Point well made and taken.  So the question becomes, are these fledgling steps in the right direction?

It is, of course, impossible to tell at this nascent moment.  After all, how does one look into a man's soul and know what he really believes.  So I don't know, but I suspect, and would wager some real money on this (the lottery tonight is $250 million and I know I have the winning ticket), that what we are seeing from most of the firms identified in the Wall Street Journal article is window dressing. 

Why do I believe this?  First, there is incredible pressure on large law firms to get revenue in the door any way possible these days.  Overhead has to be covered.  So when you have people sitting around twiddling their thumbs, it no longer matters if they work at a comparatively low effective hourly rate so long as they are generating revenue.  So it is economically easy to  perform fixed fee work when the alternative is sitting around doing nothing.

Second, I don't see any structural changes in these law firms.  Working under a fixed fee arrangement places a premium on experience, not body count.  More time is worse than less time.  You've got to put people through a re-education process: everything they have been taught to value suddenly isn't very important.  People have to learn to evaluate risk--their own risk--on operate with a level of uncertainty they have never dealt with.  Not only not easily done, but it cannot be done if a person is given one fixed fee assignment while they have other hourly rate assignments. Picture the spinning heads of the fembots in Austin Powers.

Third, people like Fred Bartlit and other experienced observers of the profession, for whom I have enormous respect, don't see real change here.

Last, I don't think one takes baby steps into a paradigm shift.  You either are fish or you are fowl.  You cannot be both.  Having spent 25 years in firms laboring under the billable hour model, including 18 years at an AmLaw 100 firm, and now having spent almost 2 years at a non-hourly firm, that is what I believe.

Bottom line, when I see evidence of earnest change, I'll stop my mocking.  Until then, I can't control myself.

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The front page of today Wall Street Journal contains an article, 'Billable Hour' Under Attack,that poses more questions than it answers.  Amongst the useful insights:

• corporate spending on flat fees is up 50% over the same period last year
• corporations using flat fees are experiencing 15% average savings over those not using flat fees

But the article contains some stunning quotes that merit some commentary.  Barry Ostrager of Simpson Thatcher is quoted as saying "a client can't expect to have the absolute best team of lawyers from a a firm and have the lawyers give up all the other work they could be doing on a regular fee basis to work 18 hours a day on flat fee engagement."  I'm certain many clients are asking "why not?"  After all, firms like Bartlit Beck and Valorem, as well as others, do this routinely because the focus is on payment for results, not payment for time.  After all, you can spend lots of 18 hour days and if the client doesn't get the results it needs, are the 18 hour days all that meaningful?

There's more.  The article states:

Orrick … has tripled the revenue it generates from alternative billing arrangements …but maintained profitability through efficiencies. … Financial analysts file biweekly reports describing how lawyers’ time is being spent. “You find that someone may have spent 200 hours on something” that isn’t crucial…”

That's great--the firm has added to its overhead to catch the wasted 200 hours, something it apparently did not do before when the client paid for that waste.  But more importantly, if the fixed fee is really working as it should, the firm should have a handle on the work that is going to be done before it is performed so that only necessary work is undertaken.  I've written before how BigLaw doesn't get it when it comes to fixed fees, and that one cannot suddenly stop being a fish and become fowl.  It doesn't work, and this kind of example illustrates the point perfectly.

Then there's this. Saul Ewing, which offers fixed fees only for certain due diligence and Pennsylvania Insurance Department administrative hearings, is featured thusly:

Saul Ewing recently investigated a client’s potential acquisition under a six week flat fee engagement. The matter was handled about 10% more cheaply than it would have been under a billable hour deal. … “It was still fair to the firm because we were incentivized to get done in 10 hours what another lawyer at another firm may have spent 12 hours doing.”

One must immediately wonder about that 17% wasted time under the hourly system and why Saul Ewing could only do it 10% more cheaply.  But Saul Ewing aside, the point is that the firm has just admitted that it can do ABC work on a fixed fee as effectively but more efficiently that it did when it was doing it on an hourly basis.  Why would that same conclusion not hold true for all its work, including the substantial majority of work it is not doing on a fixed fee basis?  Why would any of its clients pay full freight again?

The Wall Street Journal article should provide major impetus for change.  Anyone refusing to at least  discuss AFAs and experiment with them may be having an interesting discussion with the CFO in the near future.

ADDENDUM:  In a post on Legal On Ramp, Fred Bartlit writes:

Another truly hilarious example of paradigm shift science: " Financial analysts file biweekly reports describing how lawyers’ time is being spent. “You find that someone may have spent 200 hours on something” that isn’t crucial…”

This firm is saying "only when we have a financial incentive to be efficient, check for wasted time, do we do this. The rest of the time we make big bucks on inefficiency"

They are openly admitting this b/c they just do not get it.

Fascinating, truly fascinating

That's from someone who used to be at the pinnacle of BigLaw.
 

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In two separate articles, long-time law firm consultant Joel Henning and former GE GC Ben Heineman, Jr. and William Lee, co-managing partner of WilmerHale, have highlighted the plight of the profession borne of the billable hour and the model that creates a ponzie-scheme-like need for ever increasing revenue in law firms.

Henning's article, A Broken Business Model,begins with this observation:

Law firm economics are pretty simple. There are only a handful of drivers of law firm profitability: productivity (billable hours), leverage, realization, expenses and rates. It's self-evident that — for the past decade — law firm profitability increased by upwards of 10 percent annually and even more in some firms. But only one profitability driver was operating: unrelenting annual increases in hourly rates.

Henning then takes the bold step of advocating for opening the legal profession to outside investment, as has been done in the UK:

Moreover, the case against our retrograde regulatory environment is relevant to our hand-wringing about legal costs and the lame law firm business model. University of Southern California Gould School of Law Professor Gillian Hadfield, a lawyer and an economist, argues that regulatory barriers keep us from reducing the high cost of corporate legal services. She suggests that — but for proscriptions against the unauthorized practice of law and our monopoly over certain legal matters — other professionals trained in a variety of disciplines could offer innovative and efficient methods of managing business relationships that now can be handled only by lawyers.

But that's not all. Regulation also keeps us from bringing in outside investors who would cast a cold eye on the inefficient and costly ways in which we deliver legal services. Although such a transformation in the American legal profession seems revolutionary, it is already taking place in Commonwealth countries including Australia and England.

If we moved to such a system, the current model would simply fade away.  As Henning concludes:

If this were to happen, the billable hour and the lawyer compensation systems grounded upon it would largely become anachronisms. Savvy outside investors would find that too many smart lawyers and too few smart systems currently inhabit our law firms.

Heineman and Lee are not as visionary in their piece, Two Veteran Lawyers Say Now Is The Time For Fixed Fees. Their point is simple if not especially novel:

Seen in its best light, fixed fees thus have significant benefits for both in-house and outside counsel: reduced billing hassles, more predictable cost to the client, more predictable and timely payments to the firm, and, ultimately, better alignment between the cost and the value of the legal service. The credit meltdown and the deep global recession may provide the impetus for real change in this corner of the economy, as in so many others.

Recognizing that results matter, Heineman and Lee suggest a Valorem-type holdback bucket:

Even with good processes, law firms under fixed-fee regimes will, of course, also be judged by the quality of their results. The fixed fee can make incentives or demerits easier to design and implement. For example, the monthly payment in a litigation could be 80 percent of the fixed fee. If a satisfactory settlement (defined at the outset) is reached, then the firm receives the withheld 20 percent. If the matter goes to trial with a positive result, the firm receives 125 percent of the fixed fee. If neither a good settlement nor a good trial outcome occurs, then the firm receives the original 80 percent of the fixed fee.

Similarly, some part of the fixed fee can be held back until after a deal is completed and acquisition integration occurs. Then the client can see if the due diligence done by the outside firm properly identified problems. A bonus could be possible if corporate performance is better than the pro forma projections. Moreover, if a law firm is managing a book of business, like labor arbitrations, as well as preventative measures inside the company, a bonus payment can be designed if the number of labor disputes declines year over year.

As I have said many times in many places, the best fee agreement for a client is one that rewards those things most important to the client and does not reward those things the client wishes to avoid.  And since no client ever goes shopping for hours, hours is the one thing that should never be rewarded.  This message gone from cacophony to symphony.  Are clients listening?

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The sophisticated buyer has to understand that the historic leverage, billable hour model on which virtually all law firms is based is a system that is fundamentally at war with how firms committed to the fixed fee (especially with a results-based holdback) are modeled.  For example, perhaps the most successful fixed fee firm is Bartlit Beck.  It has 53 partners and 16 associates.  There is no billable hour firm built with that kind of ratio.  Bartlit Beck and others, like Valorem, are built with an emphasis on experience because profit comes from getting results faster and more efficiently than other firms. 

No matter what big firms say in their pitches to clients where they offer fixed fees, you cannot easily or quickly eliminate a culture that prizes long hours and pushes work to the lowest levels to then be redone by people at more senior levels. 

So my advice to clients is this: if you are the beneficiary of a fixed fee proposal from a large firm, make sure you have a results-based holdback to guard against all the work be done by inexperienced lawyers, and ask the firm how they have changed their culture to support fixed fee arrangements.  Then get a competitive quote from a firm that is modeled on generating profits from fixed fee engagements because of the results the firm achieves, not because they add in "a premium and a contingency."

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Dave Bohrer of

recently published an article,

which discusses the impact of using alternative fees in patent defense litigation. [I should be able to post a link to the article in a few days.  Email me for a copy in the interim.]  Dave is a former BigLaw IP partner, and he knows the cost of defending a patent case as well as the benefits that his new model creates.  Thus, I was particularly interested in this portion of his article:

In the case of fighting trolls, hi-tech does not want to pay the $5 million-plus charged by hourly firms. The fixed-price discussion necessarily focuses on lowering the cost to levels where it is less expensive to fight than settle. One of the unanticipated advantages of this process, according to Neal Rubin [of Cisco], is that "counsel's willingness (or unwillingness) to share the risks and rewards of litigation can help  [Cisco] assess the strengths and weaknesses of its case. While firms are not equally risk positive or averse, a firm's willingness to accept risk provides a useful litmus test that can help instruct the client whether it has realistically assessed the strength of the case. The straight billable hour model provides no such feedback."

If lawyers won't put their skin in the game, perhaps it is because they think the bet isn't likely to pay off.  And if your lawyers think that, shouldn't you take a much harder look at whether you are accurately assessing your position in the case?

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While the good news out of all the reports on lawyer overbilling is that the majority of lawyers do not engage in overbilling practices, the bad news is the compelling evidence that a sizable minority of lawyers throughout the profession do engage in abusive billing practices and that the insurance industry has been a particular target of billing abuse. It is clear, then, that prudent insurers need to take definitive, defensive steps to further guard against becoming the victims of lawyer overbilling.

Insurers need to adopt a comprehensive, three-step defensive program that includes: clear billing guidelines based upon the ethics of the legal profession, a good e-billing program, and an effective legal bill review program. Employing all three defensive measures is critical. For just as a three-legged stool cannot stand on just one or two ends, a successful program to defend against overbilling lawyers cannot succeed without all three necessary parts of the program.

 

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ACC blog post notes that Jones Day is charging Chrysler hourly rates ranging from $400 per hour for the youngest lawyer to $950 per hour for the most experienced. 

Wow.  Let's run the numbers.  Assume that because work is slow, the $400 lawyers work only 2000 hours per year.  That's $800,000 of revenue.  Salary, benefits and overhead are, say, $300,000.  That cool half a million dollars of net profit per baby lawyer is not bad.

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Mavericks At Work: Why The Most Original Minds in Business Win is a terrific book, written by Fast Company co-founder William Taylor.  The book has many attributes that make it a "must-read," but the one I want to focus on here is a company discussed in the book named NineSigma.  Here's the backdrop to put this discussion in context.

The discussion of NineSigma takes place within a discussion of the open source movement.  In that context, consider this discussion of P&G:

"We have 7,500 R&D people who operate in 150 different areas of science," [Larry] Hutson explains. "But when you look around the world at these 150 areas, you see that there are one and a half million people outside of P&G with training that is equal to or better than our people.  In other words, for every one person we have in a particular area, there are 200 people on the outside of equal minds or better.  Now it's pretty obvious that 200 can invent better than one--you don't have to be a genius to figure that out."

It's Hutson's mission to figure out how Procter & Gamble can tap into that outside genius.  His initiative, called Connect + Develop (that's C+D, as distinct from R&D), has a mandate to help the consumer giant import half of all new technologies and product ideas from beyond the walls of the company.  It's hard for an outsider, Hutson says, to appreciate the stakes of this shift: "Here you have a nearly one-hundred-seventy-year-old company with an unbelievable sense of pride in its science and marketing.  And we're viewing the outside world as the other half of our R&D lab.  It's an absolute sea change."

This alone, without more, should inspire people to imagine change.  But there's more:

Hutson is also a tireless champion of NineSigma, a fast-growing outfit in Cleveland that has built what it calls a "Managed Exchange"--an Internet-based global network through which companies can issue a call for help to researchers around the world, any of whom may be hired to deliver a solution.  Forget sending a run-of-the-mill RFP to the same old suppliers, NineSigma uses the Web to identify the best minds in a wide variety of fields and sends targeted RFPs to every corner of the world.

There is substantially more discussion of this in Mavericks,but this little hors d'ouvres should inspire lots of thought on how this same model could be modified for the practice of law.  For example, a few ago, I posted on Jeff Carr's 4 buckets--advocacy, counseling, process and content.  The NineSigma approach to content is obvious--no highly paid associate that the firm is really training should be doing basic, blackletter law research.  That can be done by a pre-qualified researcher at a much lower price.  The firm's value-add becomes what it does with that basic information.

I am just at the front-end of thinking about this.  But if a company like P&G can go through the sea change described in Mavericks (and you will marvel at the examples provided in the book), perhaps there is some cause for optimism that the legal profession can move forward as well.

One further thought: I have written about Legal On Ramp before, and, indeed, many who read this will be reading it on LOR's website.  Legal On Ramp is precisely the kind of company that could be the NineSigma of the legal profession.  Be sure to think about the possibilities in that context.

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The President's proposed solution to the economic problems created by the easy loans made during the housing bubble requires banks and other lenders to keep 5% of the loans they package and sell.  The belief is that if lenders have "skin in the game," they will refrain from making bad loans since doing so will cost them money.  All this is according to an NPR story:

Banking industry consultant Bert Ely, 67, remembers when sitting down to apply for a home loan was like going before a judge. "You sat down with a sober banker," he says. Today, "these mortgages are made with the intent of selling, not keeping."

Ely explains that over the years, banks and mortgage lenders started making loans and then selling them off to investors, and when that happened, lenders became more like salespeople. Mortgage brokers and loan officers got their commission regardless of whether a loan was good, and it was somebody else's problem if the loans went bad.

"The lender doesn't care as much about the riskiness of the loan or the eventual likelihood of default if he's going to sell it and not retain any risk," Ely says.

So basically, lenders often don't have skin in the game the way they used to because they're not lending out their own money any more.

Listen to the full story here.

All this is interesting if you're into following the economy, of course.  But it's also interesting to those who follow issues relating to the billable hour.  Isn't the problem identified in the story essentially the same issue raised in indictments of the billable hour model?  When you are economically divorced from the outcome, when your profit is guaranteed regardless of what happens, you behave differently than when you have skin in the game.

There are those who take exception to this claim, who believe they are just as efficient using the billable hour method.  There may be the exception that proves the rule, but in this case, I find the claim that "I am just as efficient as I would be if I had skin in the game" to be like Woodstock, which everyone above a certain age claims to have attended even though most didn't. 

Skin in the game on legal fees drives efficiency.  And results.

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Here's a sentence that should scare the bejesus out of every inside lawyer:

"Other firms, however, are taking work they would typically farm out to contract lawyers and instead are giving it to associates who might not have much on their plates."

So says Raunn Ross of Agency Legal Staffing in Los Angeles.  Apparently, some firms are resorting to the argument that its better to have work done by experienced employees "who have a proven track record."  This is the gist of a Law360 article, Temp Attorneys Boon For Some, Liability For Others.

If you're an inside lawyer, you've got to wonder.  When assignments are being made in a law firm, say for document review, exactly how much consideration is given to the permanent associate's track record?  But more importantly, is the law firm so out of touch with the market for contract lawyers that it doesn't realize the number of high quality, high caliber lawyers who suddenly are on the market.

Once again, clients have to be saying to themselves, "with friends like this..."

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The AmLaw Daily contains a fascinating post, GCs, Law Firms And Flat Fee Arrangements: A Matter Of Trust.  One outside lawyer is quoted as saying that "the single biggest obstacle to flat fee arrangements is fear."  The reporter goes on to say that clients worry about the quality of work they will get and outside counsel worry that they will lose money if something unexpected happens. 

Most outside lawyers still don't get it.  Start with this:

At the conference, some outside counsel said companies have an obligation to ensure their firms don't lose money if a turn of events isn't due to the firm's negligence.

This is, at core, a view that clients must insure the firm's profitability.  The article does not suggest that outside lawyers worry that they will make a windfall if something unexpected happens that reduces the work they need to do  and increases their profit margin. So, for the outside lawyers, flat fees must be a win or break-even proposition for them to be acceptable.  How quaint.

This quaint view that their profits must be guaranteed infects many fee proposals.  Silvio DeCarli, DuPont's Chief Litigation Counsel, notes that DuPont frequently gets fixed fee proposals where the firm makes money if DuPont loses the case and makes even more money if the Company wins. 

As more firms try to offer alternative fees, clients should be wary of this "heads I win, tails I win more" approach to fee calculation.  Real partners win together, but they also lose together.

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I read with interest a law.com story, New Approaches, New Firms on Corporate Clients'  Shopping Lists.  The story reports on recent findings from a BTI Consulting survey.  Here's the key finding:

Clients need new approaches to fees, staffing and billing -- including a shift from hourly to flat rates, he said, but when they've reached out to the largest Am Law firms for solutions, they are told "We're not sure we know how to do that. What kind of volume guarantees can you give us?" The Am Law 100 and 200 are a ranking of the highest-grossing U.S. law firms by The American Lawyer, an affiliate of the Daily Report.

This finding is consistent with discussions I have had with friends in management at AmLaw 200 firms.  And it consistent with my experience--one does not start pricing "flat fee" (more on that in a moment) work all that easily.  The tendency is to guess the number of hours a piece of litigation or other work will take, multiply by the hourly rates of people who will be doing the work, build in some cushion (10-15% seems to be the norm) and, voila, a fixed fee!  Sorry, but it doesn't work that way.  One of the key benefits of a flat fee (more on those later) is that they generate efficiency on the part of the lawyers.  But if the firm uses the calculation methodology some have confessed to using, none of the efficiency benefits are shared with the client. 

Put aside the lack of experience in calculating a fair fixed fee.  Put aside the cultural obstacles to doing fixed fee pricing effectively.  A flat fee, by itself, does not incentivize success.  It leaves in place the fear clients have that firms will push down work to the lowest levels while the partners keep working for clients who pay their high hourly rates.  Flat fees leave in place clients' fears that firms will simply stop doing work once the fee is concerned.  Flat fees provide no incentive for the firm to tell the client not to do something.  The essential element to making flat fees work is for firms to have skin in the game.  Whether by way of significant holdback or results-based premium, skin in the game is the answer to the kinds of concerns expressed above.  It also will force the firm to do a candid evaluation of the matter at the outset and share the outcome of the evaluation with the client.  Clients benefit early from a candid evaluation of the matter even if the evaluation is that the matter is not worth the firm's risk.

Back to the law.com article, clients need to educated consumers so they don't accomplish budget certainty by paying a higher total fee than they should.

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This headline caught my attention: "Billable Hour Hullabaloo is 'Overblown, Drinker Partner Says."  Courtesy of the ABA Journal, The headline is true to the article. 

“The billable hour is an overblown issue,” said Drinker Biddle & Reath managing partner Ed Getz, in an interview with the ABA Journal.

Getz goes on to say that clients are focusing their attention on capping total fees and budgets, but are not so interested in abandoning the tried and true billable hour. 

This defense seems to be "because it is, it will be."  Comfort with the status quo is a given.  Were it not true, there would not be a status quo. 

In various posts on Legal On Ramp, Fred Bartlit has made the point that the last people to change are the people who do best under the old system.  Everyday, BigLaw proves the truth of this conclusion.  It is hard to see that a client concerned with budget certainty and fee caps is interested in something other than buying six minute segments of time.  By refusing to see the client's real concern, law firms are missing an incredible opportunity to rebuild themselves and seize market share.

On a personal level, I loved this quote from a partner at my former firm:

Arthur Hahn, the national chair of Katten Muchin Rosenman’s financial services practice, said his firm will continue to increase associate training and invest in technology to increase value to clients. But, the democratic partnership structure at the core of the legal profession will survive.

Said Hahn, “The practice of law is a profession, not simply a bottom-line business."

When I left Katten in 2000, things were different.  It actually took pride in being a bottom-line business.

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Awwww.  The billable hour model is not so bad, just misunderstood.   Such is the hypothesis of a new law.com article, In Defense Of The Billable Hour: Bad, Or Just Misunderstood?.   One expects a vigorous defense of the poor 'ole hourly rate, but that is not to be.  Instead, the article takes issue with reliance on the arbitrary rate number chosen by a firm for a lawyer's block of time and instead underscores the importance of these things:

• Knowledge counts.
• Experience trumps.
• Magic matters--the ability to see a solution when others can't.
• Wisdom is key--the insight to know when to say no to something.

Bottom line of this article?  The Billable Hour is bad, not misunderstood.  Which leads to this question:  Is there no one who will seriously defend the billable hour?  Are there any takers?

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I've mentioned my friend Dan Hull any number of times in my posts.  He is thoughtful, an extraordinary writer and someone who shares my passion for providing great service to our clients.  He sees things through the same client service prism I do.  I don't always agree with him, but when I don't, I devote a lot of time to thinking about why.  I don't want to miss an insight he has that I might have missed, leading to bad judgment in staking out a position.

Dan's What About Clients? blog contains a new post, The Scramble for Value, that asks whether the focus on new business models, work-life balance and other issues has caused us to lose sight of the importance of client service.  Dan frames the question much better than I ever could:

Lawyers are not special. We are servants, if often well-paid ones. Billing models, partnership structures, staffing alternatives, the care and feeding of associates, firm culture, collegiality--they mean nothing unless designed and maintained for clients' day-to-day needs. We are not royalty. We serve. We anticipate, prevent and solve client problems. Nothing more. Can we focus more on the real deal: the Art of the Client. What else is there?

In this circumstance, I agree and disagree.  We are, as a profession, spending a lot of time talking about what "this" means for lawyers and how firms must alter their business models to survive, and so forth.  Not client centric at all, and regrettably so.  But at the same time, there is no discounting the fact that, in the main, service flows from the business model, or the business model acts as a levy and interferes with client service.  Not 100% of the time.  Not every lawyer.  Not every firm.  There are exceptions.  Notably, Dan's firm seems very much the exception, focusing on long term relationships and ensuring that bills reflect value.  But if we focus on the exceptions and lose sight of the norm, we miss too much.  Having seen both the hourly rate business model and the alternative fee model up close and personal, I am 100% convinced that the latter model provides more for our customers.   Not 100%, every firm every time, but much more so than the hourly rate model.  I've written about the reasons at length and won't run on here.  Time will tell, but in the meantime, as Dan suggests, let's keep our eye where it belongs: on our customers.

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When we created the Valorem website, we boldly declared that "The Billable Hour Is Dead."  It was a bold statement, clearly relying on the "dead man walking" concept.  Today, a former partner and still friend of mine brought this blog post to our attention (Thanks Debra!):  Billable Hour Admitted To Hospital.  It is riotous.  Here's a sample:

Look, it’s no secret that the billable hour suffered an intense loss when his good friend mortgage-backed securities essentially passed away in early 2008,” explained legal commentator David Lat during an interview with Fox & Friends. “Now, people are turning on old billable hour while the economy’s in the toilet and he’s got nowhere to turn. I wouldn’t be surprised to learn that the billable hour tried to take his own life.”

A small candlelight vigil for the billable hour has already started to take shape outside of the Lenox Hill hospital. “I came here out of respect for a dear, dear friend,” explained White & Case LLP partner Leslie Davenworth. “People may say things like ‘the billable hour is dead’, but as someone whose ascent to partnership was based solely on my logging of 2,500 or more hours per year, I refuse to believe it. I’ve just become too attached to my good friend to say goodbye right now.”

The post is from Litination.  (By the way, the Associate Photo captions are worth a visit.)

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The AmLaw Daily reports today that an insurance company has sought to compel arbitration against a prominent Los Angeles based firm over the reasonableness of its fees handling a toxic tort matter.  Among the allegations are an associate who has not yet passed the bar charging $450 per hour.  Over a 4.5 year period,the firm charged the insured nearly $22 million.  The petition also refers to the size of the legal team:

 For the most part, the team of 15 attorneys and 11 staff spent their time reviewing the same things and then billing to confer among themselves about what they had reviewed.

The firm declined to comment, and it appears from the article that the firm was charging a blended rate, which led to the $450 per hour issue. 

A couple of things bear comment.  First, as I have said before, lawyers who bill by the hour and firms built on that model have a cultural ethos that seeks to maximize hours.  There is no simple way around it--if your model begins with an intent to charge for time, people will look for ways to maximize the time spent.  It doesn't matter what the firm says to contrary in its marketing materials or even if it occasionally negotiates non-hourly fee arrangements.  Institutional culture trumps one-offs every time.

Second?  I'm thinking how much lower the total paid could have been if a results driven fixed fee had been agreed to.  But then, don't get me going on insurance companies and the money that industry wastes.

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The March 30 issue of National Law Journal contains an article, reprinted on Law.com, discussing how some inhouse lawyers are responding to the economic crisis by asking their firms to slash hourly rates.  The discounts discussed in General Counsel Pressuring Firms Amid Recession  are not quantified, but include references to "we'll match any qualified offer" and similar gimmicks.  Those inhouse lawyers seeking discounts to offset budget decreases of up to 35% of ignoring the fact that the hourly rate is only one component of the cost equation.  This point is effectively made in the article by Joel Henning of Hildrebrandt and Susan Hackett of ACC.  It's a point I've made before as well.

The articles does note that some customers are moving their work from large firms to smaller firms where the value offering is much higher.  This is a smart step, but it should not be the only step.  Lawyers at any firm want to make money, and if the hours are available, the numbers on that side of the equation will pile up.  The keys are efficiency and quality, two attributes never associated with the hourly rate model.

General Counsel faced with unprecedented budget cuts need to be more creative than simply seeking discounts or moving work to lower priced providers.  There are systemic solutions there to be had.

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Accountancy Age encourages financial advisers to "charge by the hour if you want to survive."  Essentially, the argument is this:  hourly fees are more predictable than commission-based income.  Meaning, you can more more if you charge for your time than if you charge for your results.

Pathetic.  Especially when you realize that the minute the market starts north, people will abandon the hourly rates to return to lucrative commissions.  I propose this slogan for the financial advisers who adopt this approach: "We'll soak you silly when you win, and then soak you more when you lose."

Thanks to Trey Meyer and his LexKansas blog for the tip on this article.

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My friend Dan Hull of Hull McGuire and author of What About Clients? is interviewed by "Charon QC" in a podcast covering a wide range of topics.  Dan offers insights on topics ranging from the economy to client service to lawyer layoffs to cross-border collaboration and more.  I was riveted and I suspect you will be too.  Among Dan's many insightful comments is his observation that the problems with the billable hour are not inherent to the billing form.  I know Hull McGuire delivers extraordinary value to its clients and does so billing by the hour.  My take from my off-line conversations with Dan is that the intimacy of the relationships he and his colleagues have with the firm's clients overcome any of the negatives associated with hourly billing, and I can certainly see the validity of that circumstance.  I value his insights that challenge my own views on hourly billing and I encourage you to carefully consider Dan's thinking and this and the other topics he addresses.

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For quite a while now, Pat Lamb, my partner in Valorem Law Group, has encouraged me to write a “guest blog” entry (we affectionately call it a “glog”) on his blog.  Never one to shy away from either a platform or a new adventure, I told him I would definitely do so.  That was several months ago.  In the passing time I considered a number of topics and spent more time than I care to admit on some drafts.  And now, if for no other reason than to put myself (and Pat) out of misery, I’m taking the plunge.  So here is my inaugural glog post – directed to in-house counsel, primarily, but also borne out of my own glogging experience.

Much like diving into the blog world, in-house counsel need to take the plunge into the world of alternative billing arrangements.  And not the dip-your-toe-into-the-water-and-slide-in-slowly plunge.  I am talking about the type of cannon-ball plunge that is loud, draws attention and sends torrents of water over the edge of the pool.  Because while everyone is psychoanalyzing inertia, the safety of the status quo, and the phenomenon of human resistance to change, time is awastin’ (yes - pun intended).  The power is in YOUR hands to demand whatever you want from the industry – especially in this economy.  So why have so few taken advantage of this power to move away from the billable hour (and also to require the staffing and promotion of minorities and women  -- different topic for a different glog, but I couldn’t resist)? Are you trying to be judicious with your influence? How is that working so far?

Please don’t tell me that the legal industry just can’t change that quickly.  It can if you drive it – if not with words, than with your business. It’s true that large firms so embody the billable hour model that radical change is simply not an option for them. To borrow a phrase from Pat, it would be like trying to turn an oil tanker around in a bathtub.  But are you willing to hitch your star and your company’s future to an outdated and ineffective model when everything about it is at odds with your company’s own profitability and survival? Even though large law firms can’t or won’t change, many other ones have already.  Valorem joins Bartlit Beck, Exemplar and the recently created Confluence Law Partners (and there are others) as law firms just waiting to not bill you by the hour.

The operative question isn't whether the legal industry is ready, willing or able to change – it is whether you are.  We are constantly hearing from clients and prospects about how their budgets are shrinking, litigation costs are increasing, and their outside counsel costs are exploding.  And yet, rather than do what is needed to remedy the problem, they continue to funnel the vast majority of their work to their old firms and they continue to complain.  A few years ago I would have thought the country was resistant to change – but the best example of people’s tolerance (and desire) for change just got sworn into office last week…twice!

If you really abhor the billable hour model, the ever-rising hourly rates (how did you like those rate increase letters this year?) and the disincentives to being efficient, creative and results-oriented, then trade in the most hated 8 words in the English language (“because that’s how it’s always been done before”) for three more profound (okay, practical) ones – “Take The Plunge.”  Why wait for the tipping point, when it takes time and sends out only a ripple? Why not make the type of splash that makes people sit up and take notice (and while you’re at it, take some friendly GCs from other companies with you).  The ability to change is in your hands – now take them, wrap them tightly around your knees, and jump.

Phew, that’s it. I’ve done it. My first glog post. And believe me, when it comes to blogging, I’m no Pat Lamb – but it only took a moment to realize that now that I’ve taken the plunge, the water really is quite comfortable (even if my hands are pruny).

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Nearly 75% of all law departments are facing budget cuts in 2009.  Over 30% are facing cuts of between 11% and 20%, while 35% are facing cuts between 6% and 10%.  These are among the bleak results from an Altman Weil flash survey of General Counsel.

So, how do the respondents plan to deal with these cuts?  Over 50% plan to use more alternative fee agreements and 53% plan to use lower priced counsel for some work.

The punchline of the survey is this:  the top three concerns of general counsel are (1) outside counsel costs; (2) lack of predictability of legal spending; and (3) litigation risk.

One last result of note.  Over 82% of the respondents currently spend less than 10% of outside counsel fees on alternative fee arrangements.  This excludes discounted hourly rates and blended rates (which are not, in any real sense, alternatives to hourly billing).

So let's do some analysis.  Fifty percent plan to use more alternative fees.  Eighty two percent are spending less than 10% on AFAs now.  GCs want lower costs and predictability.  Hmmmm.  There seems to be an answer here.  But will change win out over inertia?

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Before founding Bartlit Beck in 1992, Fred Bartlit was "the man" at Kirkland & Ellis.  As big and impressive as K&E is now, it was that and more when Fred was there.  His departure to set up Bartlit Beck was big news.  Few have seen big firms, big clients and small firms and big clients as up close and personally as has Fred Bartlit.  So when he shares his insights on the thinking of big firms, the concerns clients have and on pricing for trial work, he's worth listening to--closely.

I've written before (here, for example) about Legal On Ramp.  I wrote more about it when Fred Bartlit joined LOR.  Since joining, Fred has been a frequent contributor in several outstanding discussions about the practice of law.  You need to be a member of LOR or join to get the full discussions, but I wanted to share some of his input:

Two decades ago I had an epiphany.

It dawned on me that the litigation market was an anomaly. All other markets drive competing business models. Dell and HP, for example.

But the litigation market, rather than being the driver of many different business models, was driven by, was both the creation and captive of a single business model: the "billable hour"

It seemed at the time obvious that there were alternative models which would much better serve the interests of both clients and trial lawyer. So, 16 years ago my partners and I started a law firm devoted to a superior business model.
We thought at the time that the advantages for both lawyers and clients were so dramatic that new models, including ours, would soon overwhelm the billable hour model.

We were wrong. We forgot the basic rule of paradigm shifts: "those who have done best under the old, wrong, paradigms are the last to see the need to change"
So, 5-6 years ago I gave up preaching our new model.

Now, with economic crisis, there are powerful new forces for change. As Rahm Emmanuel said "a crisis is a bad thing to waste".  Drucker's great book on innovation points out that much innovation over the years has been driven by major outside forces impacting a market and making the need for innovation much more striking and evident.

For these reasons, I have determined to use Legal On Ramp to restate the premises as we first saw them 20 years ago and have continued to drive our law firm.

Right away, you know you're getting a chance to hear some things that are based on meaningful experience and that Fred hasn't addressed publicly for a while.  Elsewhere, he says:

3. Why do I say "no metrics" - because in almost any market of such huge size, competitors would have detailed metrics on the costs to them of every task under the son. Almost NO ONE knows what tasks should cost done right. I usually ask meetings of General Counsel and other inside lawyers "what should it cost to prepare for and take the deposition of an economic expert in a 100million antitrust case", I get answers ranging from "$30,000 to $500,000 in the same room"

So, to me, we have a dramatically atypical situation facing us: a huge market that is not competitive, that does not foster innovation in business processes, and has NO useful metrics for comparing efficiencies of different competitors or calculating roughly what various aspects of litigation SHOULD cost.

and then:

Dead bang right. 18 years ago it finally dawned on me that, for example, 3 highly experienced partners will always do a much higher quality job than 20 associates, 4 junior partners, chief trial lawyer, etc WHY? Because it makes no sense to have people preparing a case for trial who have never seen a trial. Such novices will always waste huge $$$ doing "projects" that will never see light of day at trial or change anything. Likewise, a 3 person team of great trial experience means that knowledge is concentrated, not fragmented. It does no good if someone in the back of the courtroom knows the answer; the person on her feet must know it.

So, my ideal law firm is 55 partners, maybe 2-3 associate novices in training/mentoring. And, many of our biggest cases (we do almost nothing under $100 million at risk) are handled by 3 lawyers, all of whom have lst chair jury experience, and NO associates.

These are just tastes, appetizers really, to a main course discussion that is extraordinarily provocative.  Agree with Fred or not, if you read the discussion, your brain will be engaged.  And that is always a good thing.

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Jim Hassett has posted the first of five posts on Alternative Fees in his terrific Legal Business Development blog.  The first post in the series is What's wrong with billing by the hour?   It's a good summary.  I'll provide links to the next four posts as they appear.

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When legendary CBS Evening News Anchor Walter Cronkite announced his opposition to the Vietnam War in February 1968, President Lyndon Johnson is reported to have said, "That's it.  If I've lost Cronkite, I've lost middle America."  It was a turning point in the war.

Evan Chesler is a senior partner at Cravath, Swaine & Moore   Forbes Magazine just published a piece authored by Mr. Chesler titled "Kill The Billable Hour."   Here's a sample:

The billable hour makes no sense, not even for lawyers. If you are successful and win a case early on, you put yourself out of work. If you get bogged down in a land war in Asia, you make more money. That is frankly nuts.

There is nothing novel presented in Chesler's article.  But the fact that a Cravath partner is making the argument is, on some levels, newsworthy.  I'm not saying that the Chesler article will have the same impact as Cronkite's editorial.  I hope it does.   The AmLaw Daily thought the Chesler acknowledgment of the obvious was newsworthy enough to interview Mr. Chesler about it.  The article contained this insight:

Chesler says that he’s been raising this issue with clients and in private talks for the last few years. Thus far, he says that he has "just a few situations, in the single digits" with clients who have abandoned the billable hour. "There's a lot of inertia, a lot of the devil you know in this area," he says.

Inertia.  The devil you know.  More on "the devil" in a subsequent piece,  For now, let's celebrate the acknowledgment by a partner at one of the country's leading firms that the method they use to bill their clients is "nuts."  Welcome to the club, Mr. Chesler.

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My eyes were drawn to the bolded Law21 on my list of blogs.  A new post from Jordan Furlong.  Mind vitamins, to be sure.  I got my money's worth in the first couple of paragraphs:

First is this National Law Journal article about how law firms are responding to the recession (short answer: myopically). Among other things, firms are laying off staff and paralegals in droves, perhaps in part because underutilized associates are keeping for themselves the work they normally delegate to these para-professionals:

“It’s a desperate move to keep their billables up,” said [Chere Estrin of paralegal training company Estrin LegalEd], noting that paralegals have told her that some associates are doing their own document reviews, deposition summaries and other research. “It’s gotten worse lately, and it’s not good for anyone.”

Not good for the paralegals, vulnerable employees placed at greater risk of layoffs in an economic storm. Not good for the associates, whose legal skills atrophy as they rediscover how many words they can type per minute. And not, by the way, so good for clients who wind up paying associate-level prices for staff-level work. Pretty good for the firm’s bottom line, though.

I wrote about similar phenomenon, the one where partners start writing briefs for associates, and the other associates were typing their own briefs instead of delegating that task to paid professional assistants.  As firms become less busy, the incentives to hoard hours and do work that should rightly be delegated are profound, and cost clients plenty.

What should clients do?  I mentioned before the importance of watching the ratio of partner to associate hours.  Jordan Furlong's story convinces me that paralegal hours need to be included in that ratio.  So if you see changes in the ratio of partner to associate to paralegal hours, investigate further.  The same result can be obtained by examining the average effective hourly rate, since more hours by people charging higher rates will raise the effective hourly rate.

It's easy enough to find out if you're being victimized.  The real question is what you'll do about it.  One thought is to insist that the firm provide an analysis of the past two years and update it each month for you.  If its clear you're tracking the number, they should get the point.  If they don't, perhaps they deserve to be replaced.

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It's that time of year for the associate set.   The payoff for surviving a year of crazy partners and even crazier hours.  We're past Thanksgiving, when every associate who still has a job gave thanks for still having a job.  Now we are into payoff season.  Bonus time.  And this annual seasonal frenzy has yielded some stellar posts on bonuses and whether clients should care about them.    The story started with Above The Law, a post that has generated nearly 1500 comments.  Carolyn Elefant followed up in Legal Blog Watch, asking "Should Firms Cut Bonuses In Response To Clients?"  My friend Dan Hull then offered an inspired post in  What About Clients, aptly titled "In any year, just firms--not sophisticated clients--should care about associate bonuses."  The discussion was brought to a head in an f/k/a post entitled "smart clients care about bonuses and marketplace "value"."  All are worth a careful read.  The discussion veers toward a discussion of value billing, which is interesting but really off target.

For what its worth, I find myself falling into the Dan Hull camp.  For this reason:  clients need to care about their own cost structure.  That means, how much they pay for firms to perform legal work that needs to be performed.  Let the firms worry about their own cost structure.  If a firm pays huge bonuses and, as a result, charges too much (under whatever billing structure), wish them well and find a replacement.  It is asking too much for clients to manage their own law departments, advise the business they represent, understand the industry in which their company competes and micromanage each of the law firms that does work for their company.  Set the bottom line and let the firms worry about how best to get there.

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I recently posted on the 10% game that clients and their law firms play.  The client representative wants to feel like he or she has achieved a real discount with the law firm.  So the representative insists on a "10% discount."  Lawyers, being the smart people they are, can do the 10% math, so they raise their base rates so that after giving the 10% discount, the firm gets its regular rate.  The game is truly perverse.  No one cares about actual cost.

Here is a story I recently heard.  Well-regarded midwest firm is meeting with a large client.  Large client tells firm that its rates are dramatically lower than the New York firms with which the midwest firm shares the workload.  Hundreds of dollars per hour less.  Client is utterly uninterested in moving work to the midwest firm so it can save hundreds of dollars per hour.  Client simply asks midwest firm to give it a 10% discount.

Here's the latest on the 10% game.  From the American Lawyer survey of the AmLaw 200:

Aric Press, the Managing Editor of The American Lawyer and one of the most informed and astute observers of the profession, commented on these results in The AmLaw Daily.  In his typical pithy manner, Press says:

And yet, they tarry. One reason seems to be that clients still see these plans not as a way to agree on a price, but another way to wrest a discount off the billable rate card.

He is equally critical of law firms when it comes to the move to alternative fees.  Be sure to catch the entire post.

Suffice it to say here, clients need to realize they cannot wait for law firms to lead them to the promised land.  Aric Press' post quotes one managing partner as warning him to "stop writing that story [on alternative fees].  It's not going to happen."  Clients need to realize also that the move to alternative fees is not all or nothing.  Clients that need a change for nothing other than reasons of economic survival should think about an experiment.  Move some portion of your workload to alternative fees so you can develop a basis for making an informed judgment.  Valorem, as an example, has bet its future on the fact that you will save money and enjoy budget certainty by making this move.  There are many firms like ours--you simply need to plug in to the underground.

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The American Lawyer's annual survey of Managing Partners to AmLaw 200 firms (112 respondents) is out.  In light of my recent posts on the economy and hourly rate increase, two survey questions jumped out at me.

So, notwithstanding the enormous difficulty our clients are experiencing, 97% of the AmLaw 200 expect to raise hourly rates.  And 2/3 of the firms expect an increase in profits per partner in 2009.

One can only marvel.

But the same issue contains some incredible information about how clients are responding.  For more on that, be sure to read my next post.

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   On its November 21, 2008 broadcast, NPR's Day To Day program ran a story on the looming demise of the billable hour.  You can hear the story here.  Valorem's own Nicole Auerbach is quoted at length, along with Susan Hackett, the General Counsel of Association of Corporation Counsel and Steven Williams of Corporate Executive Board.

Each time a person stands up for an ideal,
or acts to improve the lot of others...
he [or she] sends forth a tiny ripple of hope,
and crossing each other from a million different centers of energy and daring,
those ripples build a current that can sweep down the mightiest walls of oppression and resistance.

Robert F. Kennedy (1925 - 1968)

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"I don't care what you raise your rates to, just make sure you quote me a 10% discount."

In a number of meetings I have attended recently with leaders of large firms, similar stories are being told.  The firm proposes an alternative fee and the client declines to pursue the alternative fee, instead asking for "10% off" the firm's hourly rates.  According to these law firm leaders, at least some personnel at their clients are not really interested in cutting legal spend but instead are concerned that they be able to demonstrate this 10% savings.  I've heard enough similar stories that either there is a grain of truth to the stories, or, alternatively, there is a single client out there obsessed with this 10% discount and I was simply lucky enough to be in meetings with the client's law firms. I'm going with the former.

I've spent enough time investigating, proposing and writing about alternative fees to know that reactions to non-hourly fees for a continuum that is quite long.  I also have heard enough to know that when many firms propose non-hourly fees, the proposal amounts to  "pay me a lot up front and then a lot more if we get a result'."  There is no true risk sharing on the firm's part. 

Suffice it to say that when firms hear the "10% solution," they are smart enough to know how to set their "base rates" so they get exactly what they want when the 10% solution is applied.  Presto!  Through the magic of a spreadsheet, the client saves nothing and believes it is saving 10%!  Everybody's happy, right?  Everyone except for the CFO, shareholders, and the General Counsel whose bonus is predicated on reducing actual costs instead of achieving such pyrrhic victories.

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Discovery.  The great black hole.  The Interim Report on the Joint Project of The American College Of Trial Lawyers Task Force On Discovery and The Institute  For The Advancement Of The American Legal System contains this nugget:

• 64% of the respondents (member lawyers, so people who try lots of cases) say law firms' economic models encourage more discovery than is necessary.

Shocking.

That the number is so low.

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   Wake up and smell the coffee.

    If you run a law firm, heck, if you work at a law firm, wake up and smell the coffee.  What, exactly, do you think you're going to do if the economy continues to head south (which I just wrote about).   If life for your clients continues to worsen, what exactly do you think you're going to do?  Think for a minute about how clients will feel when they receive that letter telling them that you're raising your rates.  Think how they will feel when they read about BigLaw complaining that their profits per equity partner are down 10% (but that partners are still making millions, all the while the company's stock price is down by two-thirds).   Think about the struggle everyone at our client's is experiencing everyday to do more with less. 

Now think about what will run through each client's mind when he or she considers how you and your firm have reacted during these troubled times.  Did you help their situation or did you hurt it?  Did you feather your own nest at the client's expense or did you tighten your belt so your client didn't have to tighten its belt as much?

My friend Gerry Riskin has repeatedly advised law firm leaders to discuss the strategic and managerial implications of the economic meltdown.  I hope people are lining up with Gerry and others like him to discuss the issues raised, because these issues go to the heart of most firms' business model.  I don't think I am wandering too far from reality to suggest that firms that are slow to reinvent themselves during these times will be in peril.  Already the early indicators are there:  the recent ACC study showing client's taking more work inside; the warm, enthusiastic reception to ACC's value challenge (subtitled, "kill the billable hour"); some major counter-cyclical practices not cycling up; decreasing executive compensation and other factors that blow chill winds into most law firms. 

Now, more than ever, is the time for zero-based thinking.  Everything must be on the table for critical examination.

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As I flew from Chicago to Boston this morning, I had an opportunity to read the October issue of The American Lawyer, which fortuitously arrived yesterday.  I smiled as I read a piece labled “The Going Rate: With the economy down, will fees go up?”  Readers of this blog will know I wrote about that issue a few weeks ago. I relayed a personal story about someone from a large firm telling me the firm was planning to raise rates.

AmLaw quotes Peter Haugh, managing executive of the legal group at Wachovia Corporation, as saying “Contrary to what one might think, it has become very evident that law firms are raising their rates and feeling more convinced about it.”  Feeling more convinced about it?  To quote a line my mother wore out uttering to me as a child, “good god, man, are you nuts?”

This stunning revelation comes on the heels of yesterday’s release of Association of Corporate Counsel/Serengeti Law’s study showing that in real dollar terms, corporate America is spending less on outside counsel.  I’ve regularly questioned whether lawyers have business sense, and I guess time will tell whether the strategy of throwing kerosene on the fire is the right approach to this development.  One might have thought  growing market share by actually lowering rates or looking at value fees as an option would be a better long-term strategy.  Oh well, what do I know?

So as I sit here on my flight, two pieces of advice come to mind.  For outside counsel at firms that raise rates this year, my advice is to immediately go to your phone, pick up the receiver and dial 1-8-0-0-P-S-Y-C-H-I-A-T-R-I-C-H-E-L-P and follow the instructions you receive.

For outside counsel who are shaking their heads wondering what else law firms can do to make your life difficult, my advice (at least for those who have litigation needs), is to go to your computer and type in www.valoremlaw.com.  While that last sentence is written with (hopeful) tongue in cheek, I do seriously note that firms like Valorem (my firm) and Summit Law Group and others comprised of ex-BigLaw partners who have seen the future and realize it should not include the billable hour or at least not BigLaw rates, provide a real option to help you meet your litigation needs.

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Friday's Financial Times on-line version contains an interesting article on "innovative" billing arrangements, meaning, of course, arrangements not tied to hours.  The thesis of the article is that  "many law firms have also become disenchanted with hourly billing, which they feel fails to adequately reward them for the value they can create for clients."  The article then provides several examples, including that of Eversheds' arrangement with Tyco International.  The arrangement is:

Eversheds’ performance is measured by groundbreaking comprehensive metrics. Hours for all the basic work are extrapolated from the previous year and priced at a fixed amount on the basis of breaking even. If Eversheds achieves the same level of work with lower hours, it keeps half the difference.

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Today's Washington Post contains an article suggesting lean times will hurt the billable hour.  The article provides some entertainment in that several lawyers are quoted defending the billable hour.  It's like being the lawyer for a mass-murderer caught in the act.  But my favorite bit is this comment:

As an associate at a large firm I love the billable hour...NOT! It is a total scam which leads to corporations being charged based on how much the billing partner thinks he can get them to pay. The hours are always generated by an associate rewriting the same memo for three days.

And then there's this one:

Do law firms really believe that their associates or anyone else can work efficiently - not counting finding lost glasses, fixing computer glitches, taking bathroom breaks, or retrieving wandering minds - for 2000 hours per year?

Truth found in such obscure places.

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Market forces work in law firms, at least to an extent.  When hours become scarce, they become more valuable--more valuable, that is, to the person who records them.  Hours are not more valuable to the client who has to pay for them.

Consider this from a post on law.com:

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  I'm guessing that a lot of law firm leaders are starting to think about hourly rates for 2009.  I know they've probably heard some rumblings about the economy.  Maybe they've noticed that their portfolios are worth about 40% less today than just a week ago.  Home values?  Same thing.  Hmmmmm.

So as these law firm leaders sit down with their favorite beverage in the evening, I'm sure they are wondering what to do about rates?  Tough decisions.. ..hmmmmm .....shall we raise rates by 7 or 8 per cent? 

Apocryphal?  I kid you not, I had this discussion.  On pain of death, I will not disclose the name or city of the firm, but the firm thinks there "is room" for the increase.  It will be a most interesting next few months as we find out whether firms will have the temerity to raise rates while their clients are suffering through generational economic displacement.  From a competititve standpoint, I hope firms do raise rates.  It only serves to make the Valorem approach look that much better.

On the other hand, part of me hopes that the profession takes a long and sober look at itself and sees the folly in the system, even if only for this year.  It is hard for outside lawyers to appreciate the pressure to squeeze costs that our in-house colleagues confront each day.  This could be the year when tolerance for that lack of understanding ends.

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True story.

I was interviewing a potential admin assistant.  She was asked why she was thinking of leaving her position as a very prestigious firm.  Her answer didn't surprise me since I had heard rumors of this--the firm was not that busy and she was the kind of person who liked being busy.  Good answer.  But the next piece of information floored me.  The associates, (and I'm guessing partners too) were typing their own briefs so they could keep their hours up.

Well, I'm sure that ought to make the clients feel better. 

The creativity of lawyers in finding ways to take advantage of clients never ceases to amaze me.

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This message is directed solely to in-house lawyers and any business people who might happen along.  If you're an outside lawyer, press the back arrow on your browser.

I've said many, many times that real change on legal fees, on the economic relationship between lawyers and clients will come only when clients insist on it and lead with their feet (taking their wallets with them) when they don't like the way a firm is treating them.  But don't take my word for it.  Take a look at Seth Godin's post, You Get What You Pay For. 

If you don't like bait and switch marketing, where promises don't match the product, don't buy it.

If you don't like snarky, angry blogs, don't read them.

If you deplore the lousy service at big chains or certain airlines, don't shop there, even if it's cheaper.

There's a new asymmetry, with loud consumers able to connect and actually have an impact.

We're all hypocrites, and we get what we pay for. The market is astonishingly quick at responding to what consumers do (and incredibly slow at reacting to what we say).

Of course, we can always ignore the rest of the world and use the lawyer's old standby excuse that "the legal world is different."  To quote my wife, "of course it is, dear."  (She utters this when a look that reflects and incredulity that I could be as dumb as I just sounded to her--I only wish there was a way I could capture that look and insert it here. )

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A client walks up to a litigator and says, "I have a lawsuit I need you to defend.  I don't expect there to be more than 5 depositions.  The contract involved has just three provisions, and there are probably only 500 pages of relevant documents.  There is a single legal issue.  If I give you $5 million, will you handle the case?"  Does anyone believe there would be a shortage of lawyers lined up to handle the case?

Okay, we've established that you can fix a fee on litigation.  No more of this sophistry that you can't figure out how much a piece of litigation will cost.  The only issue is what is the margin of error and how do you deal with it?

Actually, it's not quite that simple.  Figuring out the margin of error is not that simple.  The first impulse is to figure out how many hours it would take, multiply the hours by the applicable hourly rates and, presto, you have your benchmark.  Of course, those hourly rates have a staggering profit margin built in.  The first goal needs to be to understand cost, because a fee above cost ensures profit, with the only question being how much profit.  Then, once your fee is set, you have a strong incentive to lower cost to increase your profit margin.  That serves you and your client well, so long as your effort to lower cost does not reduce quality or effort.  To ensure against that, a performance incentive (holdback or bonus) can be implemented as part of the fee. 

There is one further point.  There are few businesses that are guaranteed a profit.  Lawyers tend to view themselves differently, although I cannot fathom why.  But even if a lawyer knows her cost structure cold, there is no rule that says a budget must be in excess of the cost.  Obviously that is sound business, but bear in mind that a budget is simply an agreement to not spend more than a specified sum.  While the client--the payor--presumably hopes its service providers make a profit, the important number is the budget--the amount it pays.  And using that definition, everyone can provide a number.

So, moral of the piece:  everyone can provide a  budget.  Everyone can live with a budget.  The real questions are whether lawyers will agree to do so and whether clients will walk with their wallets when lawyers don't.

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Martin Rose, the Dallas lawyer representing McAfee in the fee dispute, alleges in his latest complaint that WilmerHale, which brought in East Coast lawyers to represent Goyal in a San Francisco trial, charged almost $200,000 in expenses for luxury hotel rooms, limousines and charges for room service and bar tabs. The software company described WilmerHale as "unrepentant in its greed."

C'mon, Mr. Rose, you're a lawyer, you know better -- drop the faux indignation. We're talking Biglaw. This is how they roll.

(Seriously, for a case that went to trial, $200K in expenses does not seem unreasonable. Sometimes firms take over an entire luxury hotel in connection with a trial. Don't expect them to stay at the Motel 6.)

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Lawyers won't have to be slaves to the billable hour for much longer, according to the panel of experts participating in "Flexing the Workplace," a roundtable discussion held in the New York offices of Davis Polk & Wardwell and sponsored by the National Association of Women Lawyers.

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    Great (and lengthy!) post

    Finally, I elaborate a bit on the thinking behind my suspicion that "GC's don't really want to change," by analogy to shopping at Tiffany's:  ... I violently agree that we lack sensible or compelling measures of the "quality" and the "value" of high-end legal services today. If the shocking durability of the billable hour teaches nothing else, it teaches that we are by and large at a loss to determine value (a/k/a price), since we are throwing up our hands at valuing the output and resorting to the blunt instrument of summing the costs of the inputs (with a profit margin built in, to be sure).

    My point about the imprimatur of a brand name, or "quality," as Paul nicely puts it, may be a bit more subtle or at least a bit different than the implication that GC's will pay a price equal to the "detriment...if they didn't have it." My point was that having a Magic Circle or a New York Elite firm's name on your acquisition agreement or your IPO registration or your massive IP licensing deal has an in terrorem effect against challengers. It's like buying your diamond engagement ring at Tiffany's instead of on 47th Street. It may not actually be better quality, but it's perceived that way, and at some (I would suggest fairly self-aware) level that's precisely the bargain the buyer is striking.

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Don't belabor the rise -- the cost of a company's raw materials goes up just like a firm's. Instead, GCs should treat legal fees just like the C-level execs down the hall treat business issues that cross their desks.

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Daily time entry is a good thing. I defy anybody to maintain good accounting of what they did day to day and then record their time at the end of the week or month. Daily time entry is good business hygiene. You do right by the client and right by the firm.

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     "One reason that dollars times hours continues to prevail is because its hard to devise a fair alternative.  Columbus setting out from Spain, destined, in some minds, to sail off the end of the Earth, probably had a better idea what he was headed for that either a lawyer or a client at the inception of a piece of litigation."

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          “When I talk to law firms, I have one hand on my wallet,”       
says William B. Solomon Jr., general counsel of GMAC. “With the pressure on firms to increase revenues, they don’t care very much about cost effectiveness.”

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"Law firms can't say they are actively seeking ways to reduce costs and then pay incoming associates $160,000 per year."
                                                            Christine Helwick, GC,
                                                            California State University

"I always ask if we can have arrangements other than the hourly fee, but law firms shy away and offer reasons why it won't work."
                                                            Christian Na, GC,
                                                            Mitel Networks

"I hold my thumb on my outside firms.  It's very labor intensive on my side to prevent a runaway budget."
                                                       Paul Risner, General Counsel,
                                                       Boca Raton Community Hospital

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With corporations slashing their legal budgets, more law firms are offering or accepting these kinds of cost-saving fee arrangements. The billable hour, while still the dominant form of billing, is under assault.

"Legal fees continue to increase at a very high rate, and I think companies are also becoming more careful as to how they spend their legal dollars," said Richard Baer, executive vice president and general counsel for Qwest. "As a result they're just more critical in their decisions about who they're going to retain and what they're going to have those law firms do."

Since joining Qwest in 2002, Baer has reduced the company's reliance on national law firms that charge top dollar and reduced its legal staff.

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"Put most bluntly, the most fundamental misalignment of interests is between clients who are driven to manage expenses, and law firms which are compensated by the hour."

My answer to this question is therefore simple: first, winners will be those who are able to standardize services to meet clients’ cost management and predictability needs where very good is good enough. Second, those who can differentiate themselves by providing the top notch of customized services, where that is needed, will also win. In some cases, one firm may be able to do both. But my bet is that despite the consolidation trend we’re seeing today, top quality boutiques will thrive while the cost structures of larger centralized firms will put them at risk.

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• 58% of the GCs believe the newest increases are "outrageous".  Only 20% were indifferent to the increases.
• 100% reported that no panel firms had contacted them to discuss associate salary increases and what they mean for that GC and his or her company.  At the same time, 84% believe that they should have been contacted.
• Among the comments:
  • Law firms are presently riding high on high utilization rates. It will not always be this way. In economic terms, law firms are causing "demand destruction." Over time, clients will learn how to demand less legal services from the major firms, and they will be left with squadrons of overpriced, under-utilized associates who they will have to surplus. Markets have a way of correcting themselves.
  • May cause us to use second tier firms more aggressively on certain matters.
  • This is just one more factor that goes into the selection of law firms. The big pricey firms are only going to get tapped by us when we absolutely need that kind of lawyering, and we are going to insist on budgets and ridge herd on the process. The tension level just keeps increasing between the outside firms and the inside departments.
  • It's making us seriously evaluate our outside counsel selection more urgently than we have done in the past.

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Morrison & Foerster Chairman Keith Wetmore said the costs of the $160,000 scale will be born internally — even if it comes from partners' profits.

"We will make a little less money this year," Wetmore said.

He also said his firm won't hike hours requirements or billing rates.

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The rash of raises has some big-firm clients worried.

"There seems to be no end in sight," said James Hall, director of intellectual property at Silicon Valley's Quantum Corp. "At some point I think it has to impact how much I'll pay in legal services ... That money has to come from somewhere."

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While you might argue that it's the expertise of your staff and the product that you sell, the actuality is that what the client pays for is the time your staff spends on their behalf. Value billing is a great concept, but even after all these years of trying to move clients over to this method of billing, many clients still want to see how much effort, in the form of time, is being spent on their account.

Regardless of the rates and service levels that your staff provides to your clients, one great truism prevails—time is a non-renewable resource. Once it's spent or wasted, there's no getting it back.

That makes time a precious commodity and resource, one well worth using wisely. The time component of time and billing is designed to do that. By keeping track of the time spent on practice matters, you can make sure that not only will you bill for every precious minute and second, but you will also (hopefully) be able to see where time is wasted or spent poorly.

Baker's response ranges from pithy ( I wonder if Mr. Needleman asked Porsche how long it took to make his car?) to contemtuous (But what's worse, is this totally unsubstantiated, spurious, economically illiterate, and just plain stupid contention), with several stops in between.  As always, Ron Baker makes the case for value billing like no one else can or does.

With the caveat that you will do yourself a disservice if you don't read the entirety of the post, here is a sample nugget:

Customers don't buy time, Ted. If they did, I'm sure they'd buy it from someone cheaper than a CPA. And yes, time is a non-renewable resource. So what? It is for Bill Gates and Microsoft, too, but you don't see them doing timesheets. You don't see Pixar doing timesheets. Why not? Because they don't think they sell time.

Review all the time and billing programs you want. They are the buggy whip of the knowledge economy, and I personally like the idea of you investing your intellectual capital studying dinosaurs, like a paleontologist. We need musuems. But don't think majorities determine truth, they don't. At one point, we thought the earth was flat. And today, a majority of CPAs and time and billing software developers think CPAs sell time. They are wrong, and we've proven it.

[sound of applause]

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General Counsel who believe their outside counsel have padded their bills ...73%
In-house counsel who believe that billable-hour targets encourage padding ...95%
Law Firm partners who believe that billable-hour targets encourage padding ...50%
In-house counsel who believe project-based billing is the best alternative to the hourly rate ...68%

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• Ross polled 5,000 attorneys from various walks of life throughout the country, and 251 responded. He worked with Reed Business Information to generate a random sampling of lawyers who work at law firms. Two-thirds said they had “specific knowledge” of bill padding ? a finding virtually identical to one reached by Ross in a 1995 billing survey.
• Also, 54.6% of the respondents (as compared with 40.3% in 1995) admitted that they had sometimes performed unnecessary tasks just to bump up their billable output.
• The percentage of attorneys who admitted that they had double billed rose from 23% in 1996 to 34.7% in 2007. And only 51.8% regarded the practice as unethical in 2007, as compared with 64.7% in 1995.

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I love finding examples of time sheet errors, be they deliberate or not.  Intentional deceit makes the more compelling case against use of the billable hour method, but negligent error also makes a compelling case for change.  In the August 2006 edition of Inside Counsel, Executive Editor Rob Vosper pens a piece about the use of timesheets in law departments (hey, isn't getting rid of time sheets the primary reason to go inside?).  His piece draws upon his own experience as a paralegal:  Writes Rob:

Every Friday around 4 p.m., the office manager would walk the halls to collect our time sheets.  Because I was too lazy to fill out mine on a daily basis, I had to spend a good hour every Friday afternoon recreating my work week.  It was also never clear to me who should pay for my mistakes.  Should I charge the client for the 25 minutes it took me to extract its mangled pleading from the bowels of a jammed copy machine?  And what about the 15 minutes it took me to clean the ink off my hands after a run-in with my Bates stamper?  And who should pay for the four-and-a-half hours I once spent summarizing the wrong depositions?

All fair questions, with no suggestion of deceit.  But the questions beg broader questions about the value of what was done.  Tick.....tick.....tick.  Time is running out on the billable hour (I hope!). 

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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https://thebillablehour.com/clocks.php

https://thebillablehour.com/watches.php

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

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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.

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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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?

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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.

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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?

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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.

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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?

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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?

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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.

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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.

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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:

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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.

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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.

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