Boston Legal Rebel

Great new article on Boston alternative fee lawyer Jay Shepherd. I like that Jay said that you can do litigation on an alternative fee basis. The current recession has prompted more discussion about alternative fees, but a lot of what I've read are quotes from lawyers saying that alternatives work well in a number of practice areas, but not litigation because of its inherent unpredictability.

I don't buy that. If you work at a well-established firm that's been around a while, there is a wealth of data that can be mined to provide a reasonable basis for a lawyer devising some alternative fee approach in litigation. That's what Jay did; he analyzed eight years of data from when his firm billed clients by the hour to determine how best to do it.

And as a lawyer who has spent much of his career in litigation, I agree and understand that litigation can be unpredictable. An adversary (or the judge) can do something quite unexpected that results in more (or sometimes less) work on the case. So if the alternative fee agreement is as simple as a flat, fixed fee that did not take into account that the case might take an unexpected and costly turn, then I can see why some lawyers are fearful of alternative fee approaches in litigation.

But as I'm sure Jay would agree, a smart lawyer who has a good relationship with his or her client can still craft a litigation alternative fee agreement that works well for both the lawyer and the client. As mentioned above, mining data from past cases can be used to help set an alternative fee. If the universe of past cases is large enough, the data gleaned from that universe should take into account the "surprise" cost factor in litigation.

Also, the fee agreement need not be as simple as a one sum fixed fee no matter what happens in the case. There are any number of ways that alternative fees can be devised; lump sum, fixed fees are not the only answer. The fee could also be based not on the outside counsel's expected costs, but solely on the value to the client, as Ron Baker would suggest.

Finally, the retainer agreement could contain some sort of emergency re-opener clause in the event that something happens in the case that causes outside counsel to devote substantially more resources to the case than what he or she and the client originally contemplated. (While it is probably a good practice to have such a clause in the agreement, a couple of words of caution. First, the emergency or the "surprise" should truly be a "surprise," i.e., something truly outside the thoughtful contemplation of an experienced litigation counsel. Second, the event that triggers the re-opener should be well defined ahead of time so that if and when the "surprise" happens, the lawyer and client are not fighting about whether the re-opener has been activated. This also requires that the lawyer and the client have a high degree of communication and trust. And third, the re-opener has to be a two-way street, meaning that perhaps fee goes down if the surprise is in your client's favor -- unless you've included some sort of success fee component.)

Kudos to Jay Shepherd for not only being the trailblazer that he is on alternative fees, but for also proclaiming that they can work in litigation.

Citigroup General Counsel Blasts High Hourly Rates

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.

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.

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?

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?

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.

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.