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Alternative Fees: Getting on with the Transition

Ed Wesemann
| General
Alternative Fees: Getting on with the Transition

The push back that law firms are receiving from lawyers in attempting to implement the use of alternative fees has come as a surprise to many managing partners and practice group chairs.  But this is a change that impacts on almost every aspect of the way lawyers practice law and the culture of their law firms, so the transition and its acceptance are slow and painful.  Unfortunately, firms that are waiting for a full consensus to occur on the necessity and desirability of offering pricing based on something other than the billable hour may find themselves left in the competitive dust.  There are, however, some actions that managing partners can take, while their lawyers are getting comfortable with the concept that will help with the implementation process while giving the firm a competitive leg up.

Without discussing the issues surrounding alternative fees, the simple fact is that some movement away from hourly rates is being demanded by a sufficiently large number of clients that most large firms are being forced to demonstrate some level of responsiveness.  And this is a tough pill for many lawyers to swallow.  In part, the criticisms of alternative fees represent the expected response from a conservative profession that abhors change.  But it is also a recognition that, over the past 40 years, the billable hour has become a foundation of the way lawyers work and the culture of their firms.  A change requires the adoption of new skills, new partner compensation systems, different ways of measuring the value of associates and, some contend, an erosion of the incredible prosperity that lawyers have enjoyed.  Worse, in a profession where lawyers pride themselves on their fierce independence and their ability to control their own practices, law firm partners fear the evolution of a system where their decisions will be “managed” and second-guessed by supervisors.

On top of the cultural ramifications, alternative fees don’t lend themselves to partial implementation by simply sticking a toe in the water.  Just performing a couple of matters on a fixed fee basis or accepting a handful of contingent fee cases won’t provide a good measure of alternative fees.  To accurately assess the risks and rewards requires a significant number of cases – the law of large numbers has to permit the experience and variety of circumstances necessary to make alternative fees work.

So, this is the conundrum faced by many law firm leaders.  Their lawyers won’t accept alternative fees without greater knowledge and experience in their successful use, and the firm can’t gain that experience without some acceptance of alternative fees by its lawyers.  There are, however, some actions law firm leaders can take – starting immediately – that will help prepare their firm for alternative fees and begin the process of developing acceptance without a wholesale change in culture.  Here are three ideas:

1. Gather data. Every law firm has a wealth of data in its billing files.  Most matters that are in anyway routine involve a reasonably consistent set of activities.  If a firm can go back and look at all of its corporate transactions, commercial real estate closings, commercial litigation matters…whatever, it will find that there is a consistency of time required and, accordingly, a consistency of price.

The key to this initial analysis is not to spend a lot of money on producing the information.  For a small investment, a couple of college students working at minimum wage can go through computer billing summary reports and produce some interesting statistics.  Then, if the information looks interesting, the firm can hire some more experienced part-timers to dig a little deeper.  This doesn’t require sophisticated computer analysis. The most valuable information is often obtained by just “eyeballing” the data.

By the way, having performed this exercise with a number of firms, there is always a normal curve of distribution in the time required with roughly 80 percent of reasonably similar matters deviating by only a small percentage from each other.  That’s an amazingly convincing first step in raising the interest level of lawyers in alternative fees.

2. Start getting people comfortable with Knowledge Communication. Everyone pretty much agrees that one of the keys to profitably using alternative billing is being able to resell existing knowledge.  That is, when work is performed for clients, two forms of knowledge are created.  The first is Industrial Information.  If a firm handles a product liability defense for a chainsaw manufacturer, the firm’s lawyers learn about how chainsaws function and are manufactured, how they are distributed and marketed, who the major competitors are in the power tool marketplace and similar information.   The second form of knowledge is Legal Process Information, which involves learning the most effective and efficient means of meeting the objectives of clients.  For example, in the chainsaw product liability case, the legal process information may include the best expert witnesses, what arguments were most persuasive to jurors or the tactics used by plaintiffs’ lawyers.

The key to converting knowledge to value is in its communication. But we spend so much time drilling confidentiality into the heads of lawyers that they are uncomfortable talking about cases, even within the firm.  There are two places where a firm can start creating a culture of knowledge communication.  First, start by communicating information about cases when they come into the firm (nothing confidential, just the basics of the matter) through the new matter opening report that most firms circulate to all lawyers for conflicts purposes.  For example, “defense of a chainsaw manufacturer over the alleged malfunction of a safety shut off switch in cold temperatures” provides more knowledge communication than a description like “product liability case.”

Then, start distributing post-mortem write ups of successful matters.  I know of a corporate transactional practice group in one firm that asks each partner to describe one or two things they learned from a completed deal during their weekly meetings.  Although the reports started with mostly humorous anecdotes, the information became more valuable as people became more comfortable with the process.

By the way, all of this knowledge communication is also tremendously valuable for business development purposes.

3. Start teaching project management skills. Lawyers are never trained in the basics of project planning, supervision or client reporting at the level that corporations expect.  On a dollars and cents, return on investment basis, the most valuable training a law firm can provide to its partners is project management training.  Not only does it reduce the effort required to produce an expected result, but also the whole process appears more efficient and professional to the client.  Like any skill, project management is learned through teaching and practice.  But sweeping programs performed as a crash project to satisfy clients can be ineffective and a cultural disaster.  By starting early and breaking training into small segments that are consistently reinforced, a firm can successfully add project management into its partners’ skill base without disrupting the firm.

Law firm managing partners may need time to gain consensus about alternative fees within their firms, but, beginning to move forward while they wait can improve the firm’s eventual competitive position and speed the development of the consensus.

In addition…

Ed Wesemann
Author

Ed Wesemann (1946–2016) was a principal at Edge International and considered one of the leading global experts on law firm strategy and culture. He specialized in assisting law firms with strategic issues involving market dominance, governance, mergers and acquisitions, and the activities necessary for strategy implementation. Ed was the author of several books on law firm management, including Looking Tall by Standing Next to Short People, Creating Dominance: Winning Strategies for Law Firms, and The First Great Myth of Legal Management is That It Exists.