Hourly Rates and Alternatives

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I just finished reading Mary Juetten’s post in Above the Law, Time Is The New Black. I was struck by this statement:

“Also, all should reject the value billing theory that recording time is unnecessary.”

Since there are few statements with which I would disagree more, I decided to parse the article and respond to the arguments the author makes in favor of the necessity of timekeeping.

Argument No. 1: “Considering the Big 4 accounting firms track time, BigLaw should pay attention.”

Apparently, we are left to simply accept the notion that the Big 4 do everything precisely the right way.  I am not ready to make the blind leap. The leverage model is a dying one.  Most of what young lawyers and accountants do day-to-day will be automated in the near future. Indeed, a lot of it already has been. If a machine can do weeks and months of tasks in a milsecond, how is that hourly model working for you then?  Beyond that, real businesses don’t sell time—they sell outputs. Law firms provide outputs and that is what clients want to pay for.  Deal with it.

Argument No. 2: “Timekeeping is the key to understanding your costs and pricing because human effort is still the law’s largest expense.”

Again, the growing significance makes this statement less than accurate and less true with each passing day.  If a law firm invests in technology for the betterment of its clients, it should be able to charge for the value that software provides, not the time it takes for the computer to do a task. The author makes a nifty argument that “Ford knows precisely how much it costs to build my F150 for both materials and labor.”  What she ignores is that Ford knows that information before it begins to manufacture the vehicle and if there is a breakdown and the time to complete a vehicle is longer, the price does not increase.  Third, there is a discrepancy between using time as an element of “cost” when the resource devoting the time is not paid based on time.  A lawyer who works 7 hours to complete a task is rarely paid more than a similar lawyer who takes 6 hours. When that is true, what difference the difference in time make? And what about lawyer who can reuse work? If time plays a role in price, you end up overcharging purchasers of the work-product.

Argument No. 3:  “Recording the non-billable or non-client hours can also help evaluate the efficiency of the department or practice administration.”

The time from task assignment to task competition may be a slight indicator of efficiency, but the number of tasks completed over a period of time is a much more important piece of information, as is the number of tasks completed in a given time period to meet required quality standard. Time devoid of quality assessment is just not important.

Argument No. 4: “[T]he hour information will help you identify where attorneys and paralegals might be struggling or have gaps in their training.”

This necessarily implies you have an existing baseline you can use tocompare the hourly total. If you have the baseline, you certainly don’t need to hours for pricing.  And do you really think looking at time data is the best way to evaluate productivity?  Businesses around the world regularly evaluate productivity of their professional works and they manage to do so without requiring those professionals to keep time.  And they have been doing so for decades.

Beyond these arguments, the author wholly ignores the costs incurred by firms in recording and tracking time.  Timekeeping also allows firms to default to time as a basis for evaluating and rewarding their lawyers.  Not a good thing.  But most importantly, all of this focuses on cost of production and not on the clients’ interests in buying.  If Ford’s market showed that people did not want to buy F150s and instead wanted a low-priced vehicle, making the cost accounting for the F150 isn’t really worth much. The focus needs to be on the buyer, not the producer.

Lawyers always seem to look to our own profession for reasons to justify the practices we follow.  The horizon for such justifications should be our clients, not our competitors.  If a firm has clients where the law department professionals track their time and are compensated based on how much time they bill, then maybe the law firm can claim to track their clients as a justification for the focus on time.  But if anyone finds a department like that, let me know.  I have not heard of a single one in 10 years of practicing without time sheets.

I just read an article in Law360 discussing Microsoft’s commitment to shift 90% of its work to alternative fee arrangements.  Michael Rynowecer of BTI Consulting is quoted as saying the move is “one of the most aggressive” adoptions of AFAs he knew of. “Ninety percent is on the leading edge. It’s an enormous step; it’s making a bold statement to all the law firms with whom they work, saying this isn’t an effort du jour.” If Microsoft is serious, and if it truly seeks the real value of alternative fee arrangement, the Microsoft law firms are in for a wild ride.

We’ve been a non-hourly fee firm for almost 10 years.  Our practice is complex commercial litigation and related areas of litigation. It was a wild ride for the first several years of our transformation.  When hourly billing is part of your DNA, you need to undergo surgery to alter your DNA. It is hard to overstate how hard it is for billable hour lawyers to make the transformation to being alternative fee lawyers.  There are so many areas where your view of the world needs to change.  Dramatically change.  If the firms want to get the maximum profit out of fixed fee engagements, they will need to change the way they handle matters, account for matters, determine value of lawyers and others, compensate partners and associates, and more. They need to learn how to litigate “skinny.” How to assess outcomes with less than perfect information.  To advise clients when less is more.  These things reduce the path to output. Clients, in turn, need to push firms to make these changes so they get more than billable hour fees using a different name.

It will be interesting to see if firms and clients go to school to learn the changes and create systems to be sure they are making these dramatic changes, or if they adopt a learn as they go approach.  The latter is a path to needless pain and waste. But the payoff can be great. For firms, high profit margins are a great thing.  For clients, the financial benefits and predictability are great, but the real payoff is in results.  As the Law 360 article noted,

“Most large companies are reporting that they’re getting better outcomes,” Rynowecer said. “They’re finding that one of the big benefits of AFAs is that it requires more discipline and planning than [billable hours], and it requires highlighting strategic goals earlier for clients.”

Better outcomes are a wonderful thing.  But the investment in them is a wild ride.  Here’s hoping clients and firms take advantage of the the lessons painfully learned by others who carved the trail.

Really?  I just received an invitation to a seminar that stresses that the average attorney bills 6 minutes per day less than they did two years ago. Six minutes a day! According to this invitation, that costs firms more than “$12,000 in lost billings per lawyer per year.  If you have 200 associates, that’s $2.4 million.

It appears the legal profession’s addiction to the billable hour has so consumed it that now must have seminars and how to recover 6 minutes a day.  I can’t imagine any better use of time.

If clients ever wonder whether their firms are actually becoming as efficient as they claim, the firms’ concern with six minutes a day provides the answer.

When I have the opportunity to speak, I ask participants and co-presenters about their experiences with alternative fees.  Better than half the time, I am told “my clients don’t want alternative fees.”  I always ask whether the firm has developed different work methods or whether the work methods are the same for both hourly and AFA work.  Always–100% of the time–the answer is that the work methods are the same.

The firms just don’t get it.  AFAs are not simply a different form of billing.  They are the billing format for a different way of working.  Without changing the way you work, you are simply putting a different suit of clothes on hourly billing.

Clients should always ask, and firms must be ready to answer, how the firm’s workflows are different for their AFA and hourly work.  And it is not as simple as saying you staff with fewer people or do less work.  Sometimes, if the fee is structured as a success fee, you use a far more senior staff than you otherwise would.  The fee structure should be designed to drive behaviors and outputs, so consideration must be given to objectives to formulate a proper answer.

The moral of the story is this: firms that offer their clients a choice of hourly billing or the same work and fee amount under a different name, are not offering their clients a useful choice.  The clients know this.  AFAs are not for the weak of heart, and they require significant thought to make them work well.

So clients don’t want AFAs?  When done right, they most certainly do.

When lost in the desert or a thick forest terrains devoid of landmarks people tend to walk in circles. Blindfolded people show the same tendency; lacking external reference points, they curve around in loops as tight as 66 feet (20 meters) in diameter, all the while believing they are walking in straight lines.

Livescience.com

This natural tendency appears to apply to law firms as well. Yesterday, Above The Law reported that yet another large law firm has raised the associate hours requirement as a result of salary increases awarded in 2016. So what does this mean?

Law firms do not have the ability to “just create more work,” so the extant work now has to support that many more hours.  Won’t clients just love that.  Now they will have to go on high alert to review invoices with that much more diligence (their favorite thing to do).  Then what happens?  Clients object to portions of the bill and resentment builds while firm realization decreases.  This has been going on, and firms, apparently, are not taking the hint.

Will this vicious circle ever end?

 

Something interesting happened recently.  Jeff Carr, Nicole Auerbach and I consulted with a client about how to improve the law department’s performance and save money.  Shortly afterwards, Nicole and I consulted with a law firm about moving to alternative fee arrangements.  The interesting thing was that we found ourselves enjoying being consultants.  We found, in these two experiences, that we have a lot to offer.

This should not have been a surprise:  Valorem has been a classroom of sorts since we formed the firm in 2008. We learned from trial and error how to do alternative fees when there was no roadmap to guide us. We also figured out how to frame the national discussion about AFAs when no one was talking about anything but the billable hour. We learned how to divorce hours from pricing when most people to this day still use hours as the basis for calculating an alternative fee.  We learned that AFAs are just one of several tools necessary for a successful representation and delivery of exceptional client service.  You learn a lot in 9 years, and believe me, we’ve been drinking through a fire hose.

We are grateful that clients have responded so favorably. In 2016, Valorem was recognized as one of 22 law firms “Best At Delivering Alternative Fee Arrangements,” and has been recognized for the past four years as a member of the BTI Client Service A-Team. For the past two years, we have been recognized as one of the “Most Recommended (by clients) Law Firms.”  And I have been humbled to have been named a BTI Client Service All-Star MVP for the past four years.  We’ve learned a lot, but we also have put what we’ve learned into action.

We haven’t exactly kept most of the lessons we have learned a secret. I have shared my thinking on alternative fees in two books, and shared my thoughts on customer service and the delivery of value in this blog, which I started back in 2004.  And I have written extensively (with my friend Paul Lippe) about what we affectionately refer to as “the New Normal” in a column for the ABA Journal. These columns are soon to be released in book form. Jeff just started a blog, Life at the Speed of Prevention, that focuses on the enormous untapped value of preventing legal problems from occurring. Nicole, Jeff and I also speak regularly at various industry events across the country to share the lessons we’ve learned and our (often outspoken) views of the legal market.

In the past, though we’ve willingly helped others with their AFA programs or customer service initiatives, we drew the line at formal “consulting.”  But as we found ourselves enjoying the consulting experience, and as more people are asking us to devote more time to this aspect, we realized that maybe the line we had drawn in our minds was a bit artificial.  And one of the many good things about being in a small firm is the absence of rigid rules, or objection to changing them. So we’ve erased the line, and have officially launched a consulting practice for both companies and law firms on these broad topics (and anything in between):

 

For Law Departments:

  • Analyzing processes to identify and eliminate waste
  • Analyzing workflow to identify prevention opportunities—reducing work coming into the department at the front end
  • Alternative Fee Arrangements (training and structuring fees, making AFAs profitable)
  • Deploying tools to reduce total fees even if they are billed by the hour
  • After Action Assessments and programs to embed continuous improvement into the Department’s culture
  • Developing RFPs for AFA engagements
  • Deploying an low-cost arbitration program to address small cases that, in the aggregate, can add up
  • Designing prevention programs and helping departments see around the corner to know what’s coming

For Law Firms

  • Alternative Fee Arrangements (training and structuring fees, making AFAs profitable)
  • Firm culture audits to determine if the firm is customer-focused
  • After Action Assessments and programs to embed continuous improvement into the Firm’s culture
  • Responding to RFPs that address AFAs

Our goal is to help others go through the learning curve we experienced, but at an accelerated rate and without having to learn the hard lessons through actual experience.

So as they say in the consulting biz, if you have interest in any of these topics, please give us a call. We will customize the right program for you.

patrick.lamb@valoremlaw.com   nicole.auerbach@valoremlaw.com    jeffrey.carr@valoremnext.com

 

Just read this:

MoFo, which submitted its first monthly fee statement earlier this week, is serving as special renewable energy counsel to the official committee of unsecured creditors. The firm is seeking $641,212 in compensation for work between April 29 and May 31.

MoFo’s attorneys billed more than 683 hours during that time period and charged a blended rate of $889 an hour.

Blended hourly rates of $889?  I couldn’t say that to a client with a straight face.

Last week, BTI Consulting reported that alternative fee arrangements have “soared to an all time high,” noting that AFAs generated savings of nearly 14%, or an average of $2.7 million for law departments.   These savings are significant, but as I have often said, much greater savings are possible if AFAs are deployed with other important tools.

As part of BTI’s research to develop the data on AFAs, BTI identified 22 law firms that are “best at delivering Alternative Fee Arrangements.”  The 22 firms were identified by corporate counsel “in an unprompted manner.” Here is how BTI described the 22:

Clients identify 22 of the 650 law firms serving Fortune 1000 and large clients as absolutely best at developing and implementing alternative fee arrangements. Clients share 6 reasons these firms stand out:

  1. Partners have authority to enter an AFA quickly. These partners do not have to wait for committee meetings or partner reviews of agreements. The negotiating partner also knows the parameters the firm will accept and approval is all but assured, and swift.

  2. Confidence, comfort and enthusiasm in pursuit of the AFA. The firm’s enthusiasm and commitment to AFAs is contagious.

  3. Flexibility. The firms who stand out listen to the objectives and offer to change the approach as the objectives evolve and are agreed upon by all concerned.

  4. Willing to take some risk. The outstanding AFA firms have convinced clients they have skin in the game. Clients love the idea of risk sharing they can see and understand.

  5. Focused and efficient. The firms have learned to make a beeline for the client’s goal. Much of the strategizing and planning has been done as the fee is negotiated—and clients see their law firms operating like an Olympic swimmer—no wasted strokes.

  6. Stick to the agreement and never complain. The law firms don’t go back and ask for changes and live with whatever outcomes occur. Apparently many law firms ask for changes when things don’t go well—the best don’t. And the best have tight project controls to ensure they don’t need to ask.

 

Here are the 22:

Law Firms Best at Delivering Alternative Fee Arrangements:

Armstrong Teasdale
Baker Botts
Bartlit Beck Herman Palenchar & Scott
Blake, Cassels & Graydon
Covington & Burling
Fish & Richardson
Foley & Lardner
Homburger
Husch Blackwell
Kirkland & Ellis
Lee Tran & Liang
Littler Mendelson
McGuireWoods
Morgan Lewis
Orrick, Herrington & Sutcliffe
Quarles & Brady
Schwartz & Ballen
Seyfarth Shaw
Simmons & Simmons
Thompson Hine
Valorem Law Group
Wilson Sonsini Goodrich & Rosati

 

 

We feel pretty good today, thrilled to be in such elite company, one of the 3% of the 650 firms to be recognized by the clients we are so fortunate to partner with. This recognition is particularly satisfying given the incredible leap of faith we took 8 years ago to build a new firm model to deliver AFAs that work for clients while providing unwavering client service in the process. We look forward to continuing the leap.

Michael Rynowecer of BTI Consulting had a great, must-read post today on his Mad Clientist blog. In the post, which I strongly recommend, Michael makes these points:

  • Spending on AFAs is way up—nearly 20% CAGR over 4 years
  • Outside counsel spend under AFAs jumped to over 35%
  • Almost 70% of companies
  • The reported savings from AFAs are 13.9%
  • The savings from AFAs add $2.7 million to the average client’s legal budget.
  • The AFA-of-choice, by a wide margin, is the fixed fee.

I get a picture of Samuel L. Jackson staring out from the TV saying “What’s in your wallet?”  Except he is saying “Why aren’t you using more AFAs?”

I have two points to add to those made in Michael’s post.  First, what has taken so long?  Just kidding, the last 8 years since we launched Valorem and became “the alternative fee firm” have flown by.  Ok, mostly flown by.  But it is gratifying to know the market is moving decisively to where we thought it should be when we started.

Second, there is room for so much more savings.  AFAs are not the end game for delivering value.  They are but one of a serious of tools that combine to deliver the greatest value.  Think about a Swiss Army knife.  If you just use the short blade and none of the other tools, you are not getting the most value from it.  As clients focus on these other tools, some firms will do so too, or at least say they do.  Which leads to the second reason there is significant room for more savings: Most AFAs are still calculated based on estimate hours x hourly rates, so the AFA is really a wolf in sheep’s clothing, or as a friend from Australia prefers, hourly billing in drag.  If firms are not radically reducing their cost structure, basing fees on cost of production rather than the amount they would earn if billing hourly, they are not doing the things that create real savings for clients.

What firms say and what they do remain very different things, and clients must insist that firms do the things that create savings.  Or vote with their wallet.

Great article by Sara Randazzo in today’s Wall Street Journal, Legal Fees Cross New Mark: $1,500 an Hour.  Set aside the wisdom of such rates when firms provide discounts on demand and realization rates average near 80%.  What stands out for me is the utter hubris of this statement by John Altorelli, previously of Dewey fame and now speaking for DLA Piper:

We just raise them every year.

There must be a law somewhere that requires firms to do this.  I missed that day in law school, apparently.  But again, set aside the wisdom of increasing rates every year.

It makes on wonder whether lawyers understand the concept of public relations?  Does DLA understand that many clients don’t like the “we just raise them every year” mantra they hear from outside counsel and instead think they, the client, get to decide whether rates increase or not?

I used to ask why clients didn’t say no to rate increases.  Now, more and more clients are doing so.  I wonder how many more will do so when they see rates like these.