A recent article in the on-line version of the ABA Journal reported that Citigroup's General Counsel, Michael Helfer, has no patience for big firms whose top partners would seek to charge him $1,000/hour. Helfer noted that the economic downturn has forced Citigroup to cut its in-house legal staff by 300 people and to cut the salaries of some of the survivors by as much as 60%.
In the current economic environment, “the amount of sympathy I have for the argument that $1,000 an hour is a reasonable rate ... is nil,” Helfer is reported to have said as a panelist at a recent conference in Washington, D.C., on the future of the billable hour.
The article goes on to note that other panelists at this conference reported that the percentage of revenue derived from alternative billing arrangements at some venerable Wall Street law firms ranged from 10% to as much as 20%. One BigLaw partner, however, noted that they are still not very good at making alternative fees profitable -- or at least as profitable as the traditional billable hour.
UPDATE: Just found an AmLaw Daily article that discusses, in a little greater detail, the same conference. This article notes that Helfer reported that about 30% of Citigroup's legal fees are alternative fee arrangements.
Tuesday, October 6, 2009
Monday, September 14, 2009
Alternative Fees & Case/Project Management
I came across an interesting post from an American lawyer working in Taiwan by the name of Paul Easton. Paul works for a firm that handles high volume document productions in big cases. The first interesting thing about Paul's post was his report that in Taiwan, alternative fees are the norm and hourly billing is not. I did not know that about Taiwan. Is the billable hour simply a function of Anglo-American legal systems?
More importantly, Paul's post makes the point that for alternative fees to work -- for both the lawyer and the client -- both the lawyer and the client need to have systems in place to measure productivity. I've written before that, as pricing guru Ron Baker suggests, the key to alternative fees working is providing "value" to your clients. And to a client, "value = great work/result + good price." But to get to that "good price," the lawyer cannot be wasteful. So, in my view, "productivity" is necessary to providing "value." That's the only way that both the lawyer and the client can "win" under an alternative fee arrangement (i.e., the client gets the good result at a good price and the lawyer makes money on the engagement).
Paul Easton's point in his post is that unless both lawyer and client have project management systems in place to both foster productivity during the project or case and to assess productivity after the project or case is over, the alternative fee arrangement may not very fulfilling for both sides. The lack of such a system may not lead to the kind of productivity necessary to keep costs down. And if neither lawyer nor client can go back after the engagement and analyze whether the arrangement worked for them financially, then the incentive or the enthusiasm to do further alternative fee arrangements may not there.
In the end, Paul recommends that if a law firm does not have a good project management system in place, it probably should not experiment with alternative fee arrangements. I think that's wise advice.
More importantly, Paul's post makes the point that for alternative fees to work -- for both the lawyer and the client -- both the lawyer and the client need to have systems in place to measure productivity. I've written before that, as pricing guru Ron Baker suggests, the key to alternative fees working is providing "value" to your clients. And to a client, "value = great work/result + good price." But to get to that "good price," the lawyer cannot be wasteful. So, in my view, "productivity" is necessary to providing "value." That's the only way that both the lawyer and the client can "win" under an alternative fee arrangement (i.e., the client gets the good result at a good price and the lawyer makes money on the engagement).
Paul Easton's point in his post is that unless both lawyer and client have project management systems in place to both foster productivity during the project or case and to assess productivity after the project or case is over, the alternative fee arrangement may not very fulfilling for both sides. The lack of such a system may not lead to the kind of productivity necessary to keep costs down. And if neither lawyer nor client can go back after the engagement and analyze whether the arrangement worked for them financially, then the incentive or the enthusiasm to do further alternative fee arrangements may not there.
In the end, Paul recommends that if a law firm does not have a good project management system in place, it probably should not experiment with alternative fee arrangements. I think that's wise advice.
Thursday, February 5, 2009
Super Bowl XLIII & Legal Fees
As a long-suffering Cleveland Browns fan, it was somewhat difficult to watch our arch-rival Pittsburgh Steelers win their sixth Super Bowl title. (Yes, the Browns have never been to the game now called the "Super Bowl," but the Browns do have four "NFL championships," and isn't that what the "Super Bowl" is?) But it was a thrilling, back-and-forth contest and certainly one of the most riveting Super Bowl games of the forty-three that have been played.
What does this have to do with legal fees? Well leave it to the very smart folks at the Verasage Institute to use the Super Bowl to perfectly illustrate a point about professional fees. Verasage continually argues that professionals -- lawyers included -- should not bill or price their services based simply on effort (such as billable hours), but on performance. In this post, Ed Kless of Verasage notes that in the recent Super Bowl, if you looked at effort-based metrics like offensive yardage gained, the Cardinals outperformed the Steelers. But, when it came to the ultimate performance-based metric of scoring points, we all know that the Steelers prevailed.
If you're the client, what would you rather hear from your lawyer? "We worked more hours than opposing counsel." OR, "we won the case!" And if you're the client, which result would you rather pay for?
What does this have to do with legal fees? Well leave it to the very smart folks at the Verasage Institute to use the Super Bowl to perfectly illustrate a point about professional fees. Verasage continually argues that professionals -- lawyers included -- should not bill or price their services based simply on effort (such as billable hours), but on performance. In this post, Ed Kless of Verasage notes that in the recent Super Bowl, if you looked at effort-based metrics like offensive yardage gained, the Cardinals outperformed the Steelers. But, when it came to the ultimate performance-based metric of scoring points, we all know that the Steelers prevailed.
If you're the client, what would you rather hear from your lawyer? "We worked more hours than opposing counsel." OR, "we won the case!" And if you're the client, which result would you rather pay for?
Friday, January 30, 2009
The Parable of the Billable Hour
And while I'm at it today, there is a great billable hour parable on Jay Shepherd's terrific new blog, The Client Revolution.
Jay relates the story of the big firm associate who spent dozens of hours researching a possible argument for a summary judgment brief, only to find at the end of her research a recent case that blew away her argument. Then the next morning, while thinking about the case in the shower, the case-winning argument came to her in a flash of inspiration. She bills the client the 0.2 hours she is in the shower developing that winning argument.
Setting aside for the moment the issue of her billing a client for time spent in the shower (though all of us former hourly billers could probably confess to having done something similar), Jay asks the question -- which time was more valuable to the client? The dozens of hours spent researching an argument that a more recent opinion ultimately rejected? Or the 15 minutes in the shower? Or, as Jay puts it, "explain to me why the online-research work was worth 12 times more than the brainstorm in the shower."
Interesting question. Anyone care to play the role of the BigLaw firm and justify that?
Jay relates the story of the big firm associate who spent dozens of hours researching a possible argument for a summary judgment brief, only to find at the end of her research a recent case that blew away her argument. Then the next morning, while thinking about the case in the shower, the case-winning argument came to her in a flash of inspiration. She bills the client the 0.2 hours she is in the shower developing that winning argument.
Setting aside for the moment the issue of her billing a client for time spent in the shower (though all of us former hourly billers could probably confess to having done something similar), Jay asks the question -- which time was more valuable to the client? The dozens of hours spent researching an argument that a more recent opinion ultimately rejected? Or the 15 minutes in the shower? Or, as Jay puts it, "explain to me why the online-research work was worth 12 times more than the brainstorm in the shower."
Interesting question. Anyone care to play the role of the BigLaw firm and justify that?
Jim Hassett's Series on Alternative Fees
I also recommend to everyone today Jim Hassett's excellent four-part series on alternative fees in his Legal Business Development blog. Jim does a great job summarizing the issue to date with links to all the important articles and experts on the subject. I'm honored that he mentioned this blog in part three.
I would also draw your attention to his Guide to Alternative Fees, which includes some great "how to" advice on how to get started.
I would also draw your attention to his Guide to Alternative Fees, which includes some great "how to" advice on how to get started.
The Move to Alternative Fees Makes the New York Times
There is an article in today's New York Times on the issue of whether the down economy will force more firms to offer alternative fees.
The article does not break any new ground. I simply think it is noteworthy because the issue of law firms offering alternative fees made the New York Times.
The article does not break any new ground. I simply think it is noteworthy because the issue of law firms offering alternative fees made the New York Times.
Friday, December 5, 2008
Are Alternative Fees Ethical?
I’ve wanted to post something on this issue for a long time but only recently came across some other blawg observations worth noting.
On David Giacalone’s f/k/a blawg, he recently posted about some Value Billing Issues for Today’s ABA Ethics Teleconference which he hoped would have some discussion about the ethics of “value billing” (for an explanation of value billing, see below.) David is clearly not a fan of value billing and he is correct that not enough has been written yet about the ethical aspects of using fee alternatives to the billable hour.
David’s post is worth reading in and of itself, replete as it is with links to many of his other posts and articles about the ethics of value billing.
I highly recommend reading his “smart clients care about . . . ‘marketplace value’” post, particularly the Comments at the end in which he and value billing advocate Allison Shields (her blog is here) repeatedly go back and forth. It’s very interesting reading. There is also a rebuttal to David on the Legal Ethics Forum.
My take on the David Giacalone v. Allison Shields debate is this – I think David is too hung up on his belief that some value billing proponents have allegedly suggested that value billing is a way to dupe clients into paying higher legal fees than they would ordinarily. Now perhaps David has read more widely on value billing than I have, but I have not seen this suggestion. What I’ve read, particularly on accountant and value billing godfather Ron Baker’s site, is that value billing’s proponents argue that in some situations, simply billing by the hour does not truly compensate the lawyer for what he or she has accomplished for the client.
Consider this hypothetical – a Fortune 500 company is being investigated by the Department of Justice. Assume that if DOJ ends up suing the Company and wins, it will cost the Company hundreds of millions of dollars. The Company can turn to the Acme Law Firm to defend it, which will put a team of 7 lawyers on the case ranging from junior associates to a senior partner, all billing by the hour. They begin gearing up and start billing thousands of hours at a blended rate of $400/hour for what looks like will be a long, protracted battle with DOJ.
Or, alternatively, the Company can retain the Zeus Law Firm who has as a partner John Doe, a former Deputy Attorney General at DOJ. Over many years at DOJ, Doe gained a reputation for integrity and brilliant legal work. He is respected by many at DOJ and has the ability to directly contact the senior decision makers at DOJ who will take his calls and his requests for meetings.
Let’s say that the Zeus firm has pegged Doe’s hourly rate at $750/hour and let’s further assume that after putting in 20 hours on the Company’s matter, he’s able to persuade the DOJ to drop it completely or to end it by allowing the Company to pay a minimal fine or penalty.
Question: what is a “reasonable” fee for Doe under the circumstances?
Hopefully they will correct me if I’m wrong, but I think Ron Baker or Allison Shields would argue that Doe simply billing the Company 20 hours x $750 grossly under-compensates Doe for what he did for the Company. The Company hired Doe precisely for his experience, reputation and contacts. He saved the Company hundreds of millions of dollars and did so very quickly and efficiently, not to mention also saving them millions of dollars in legal fees had they retained the Acme firm instead.
I certainly agree with David that no lawyer should ever use a fee arrangement that is designed to camouflage an undisclosed fee hike or an unreasonable fee.
But that’s not what Ron Baker and Allison Shields are saying. Are they saying that in certain circumstances a lawyer can properly charge a client more than y hours x z rate if that formula does not reflect the true value of the work? Yes, as long the fee arrangement is clearly understood by the client, is agreed to in advance, and reflects the value of the work to the client as evidenced by certain clear and agreed-upon value or performance metrics in the retainer agreement.
If all that is spelled out up front, then I don’t see what the ethical problem is even if the fee ultimately ends up being more than y hours x z rate.
On David Giacalone’s f/k/a blawg, he recently posted about some Value Billing Issues for Today’s ABA Ethics Teleconference which he hoped would have some discussion about the ethics of “value billing” (for an explanation of value billing, see below.) David is clearly not a fan of value billing and he is correct that not enough has been written yet about the ethical aspects of using fee alternatives to the billable hour.
David’s post is worth reading in and of itself, replete as it is with links to many of his other posts and articles about the ethics of value billing.
I highly recommend reading his “smart clients care about . . . ‘marketplace value’” post, particularly the Comments at the end in which he and value billing advocate Allison Shields (her blog is here) repeatedly go back and forth. It’s very interesting reading. There is also a rebuttal to David on the Legal Ethics Forum.
My take on the David Giacalone v. Allison Shields debate is this – I think David is too hung up on his belief that some value billing proponents have allegedly suggested that value billing is a way to dupe clients into paying higher legal fees than they would ordinarily. Now perhaps David has read more widely on value billing than I have, but I have not seen this suggestion. What I’ve read, particularly on accountant and value billing godfather Ron Baker’s site, is that value billing’s proponents argue that in some situations, simply billing by the hour does not truly compensate the lawyer for what he or she has accomplished for the client.
Consider this hypothetical – a Fortune 500 company is being investigated by the Department of Justice. Assume that if DOJ ends up suing the Company and wins, it will cost the Company hundreds of millions of dollars. The Company can turn to the Acme Law Firm to defend it, which will put a team of 7 lawyers on the case ranging from junior associates to a senior partner, all billing by the hour. They begin gearing up and start billing thousands of hours at a blended rate of $400/hour for what looks like will be a long, protracted battle with DOJ.
Or, alternatively, the Company can retain the Zeus Law Firm who has as a partner John Doe, a former Deputy Attorney General at DOJ. Over many years at DOJ, Doe gained a reputation for integrity and brilliant legal work. He is respected by many at DOJ and has the ability to directly contact the senior decision makers at DOJ who will take his calls and his requests for meetings.
Let’s say that the Zeus firm has pegged Doe’s hourly rate at $750/hour and let’s further assume that after putting in 20 hours on the Company’s matter, he’s able to persuade the DOJ to drop it completely or to end it by allowing the Company to pay a minimal fine or penalty.
Question: what is a “reasonable” fee for Doe under the circumstances?
Hopefully they will correct me if I’m wrong, but I think Ron Baker or Allison Shields would argue that Doe simply billing the Company 20 hours x $750 grossly under-compensates Doe for what he did for the Company. The Company hired Doe precisely for his experience, reputation and contacts. He saved the Company hundreds of millions of dollars and did so very quickly and efficiently, not to mention also saving them millions of dollars in legal fees had they retained the Acme firm instead.
I certainly agree with David that no lawyer should ever use a fee arrangement that is designed to camouflage an undisclosed fee hike or an unreasonable fee.
But that’s not what Ron Baker and Allison Shields are saying. Are they saying that in certain circumstances a lawyer can properly charge a client more than y hours x z rate if that formula does not reflect the true value of the work? Yes, as long the fee arrangement is clearly understood by the client, is agreed to in advance, and reflects the value of the work to the client as evidenced by certain clear and agreed-upon value or performance metrics in the retainer agreement.
If all that is spelled out up front, then I don’t see what the ethical problem is even if the fee ultimately ends up being more than y hours x z rate.
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