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Value-Based Billing: The Alternative to Alternative Fee Arrangements
It seems as though alternative fee arrangements, or AFAs, suffer more from great expectations than anything else. They were once touted as the great alternative to hourly billing. They were to solve all of the problems associated with rising, enigmatic and unpredictable legal expenses. Every survey in the last couple of years shows that they are prevalent and now account for billions of dollars in legal fees. Still, they do not seem to have caught on like many predicted.
That is because the typical forms of alternative billing can only solve some of the problems with legal expenses and for only certain types of legal work. We have seen a focus more on better understanding the client’s expectations (your expectations), how the client values different services, and the results a law firm can achieve for a client.
So, if we’re seeing more customized, value-based, performance-based fee agreements, that means law firms are working out contracts with clients more like someone who is renovating an old home. The total price may not be simple. It may depend on what you value most, your tastes, your region, who your neighbors are, what’s behind that wall and whether they deliver the results you wanted. Hourly billing, flat fees, blended rates and capped fees are great, but are not one-size-fits all. They are a little too simple given the myriad variables that go into legal work. It makes sense that rates would be as sophisticated or as simple as the legal work itself.
Kris Satkunas, director of Analytic Consulting for LexisNexis® CounselLink®, is an expert on the subject and counsels corporate clients on AFAs and measuring attorney performance.
“For those GCs who haven’t yet moved materially in this direction, it comes down to accepting a degree of risk and determining with whom GCs are comfortable sharing that risk,” Satkunas told The Advisory. “In order to get comfortable with some amount of risk it’s important to start small and initiate discussions about alternative pricing with lawyers and firms that are highly trusted. There is an unfortunate perception that alternative fees are all about getting the lowest fixed price for commodity work, which translates into shopping for the least expensive provider, which likely isn’t going to be somebody you know and trust.”
“But,” she continues, “most legal departments don’t have an enormous portfolio of commodity work, so applying AFAs means breaking down complex matters into pieces with individual value. Take litigation which can be broken down into phases or even to activities to consider pricing differently than hourly. Starting small could mean pricing for depositions. Based on examining a handful of prior large cases, an in-house lawyer responsible for litigation might go his trusted outside counsel and suggest that he will pay $5,000 per deposition including travel expense, and not pay for any more than 10 depositions. The result: predictable deposition expense for in-house counsel and profitability for the law firm provided they manage staffing and travel for depositions.”
Satkunas advises companies on how to get started, and understanding what is involved.
“For both GCs and law firms just getting their feet wet in alternative fees, the key is in the relationship. In this example,” she says, “if the law firm works on multiple complex cases and finds they are routinely needing 20 – 30 depositions, the partner needs to be able to have a discussion with his client to recalibrate. As both parties become more comfortable with alternative pricing for various phases of matters, they will apply what they’ve learned to pricing with other firms, clients, matter types, etc.”
“There is also a misperception that going through a process like the one I described is a lot of effort. The truth is that it doesn’t take that much data to break down what occurs over the lifetime of a matter, and both in-house and outside counsel have information to share. It does require a desire and a certain discipline in order to get started. The end result is actually less effort in tracking time, submitting detailed invoices, and approving those invoices,” Satkunas told us.
[Editor’s Note: Kris Satkunas is moderating an HB InHouse Symposium on March 21, 2013, at the Hyatt Century Plaza in Los Angeles. Titled Measuring & Tracking Your Way to Excellence: Delivering Exceptional Legal Work Without Exceptional Cost, Satkunas will be joined by Courtney Braun, Esq., Corporate Counsel with William Morris Endeavor Entertainment, the world’s largest and oldest global talent agency, and William Mayer, Esq., vice president and general counsel for the West Region of D. R. Horton, the largest homebuilder in the United States. The event is complimentary to a limited number of in-house counsel. For more information and to register, CLICK HERE. The event is being sponsored by LexisNexis® CounselLink®.]
The conversation around billing has also shifted away from just AFAs and more on “value billing.” Antigone Peyton of Cloudigy Law, in a post on AttorneyAtWork.com, says firms cling to traditional compensation practices even in the face of bankruptcy. Rather than giving the client an unrealistic budget with unspoken assumptions―then getting an angry call when they see the bill―she says they need to speak to you about the value you place on particular legal services. “It could be that the potential client [i.e., you] places a low value on contract work . . . and cares more about the price than the quality and the strategic advice of the firm.”
Value-based billing “aligns the lawyers’ incentives with the clients’ interests, so both are focused on achieving the desired results, not how many hours it takes to get there.” Under her tips for establishing value, but re-stating them here from the in-house perspective, you would: 1) articulate to the firm what value you place on the different types of work they perform; 2) determine whether the firm can provide services for a fee consistent with that value; 3) set the fee for the work and discuss the project scope; 4) expect the firm to request a retainer that is either a portion or the full cost of the project; 5) meet with the firm; 6) ensure that the firm is focused on delivering high-quality services.
Peyton says when the firm understands your expectations and clearly defines for you the product they will provide, you and the firm will have fewer conversations about invoices.
Larry Bridgesmith of ERM Legal Solutions echoes this sentiment, sharing a comment from an in-house attorney from a major U.S. company that what she focuses on isn’t alternative fees but alternative service arrangements. Bridgesmith writes that firms should look for ways to earn your business based on results, “not incremental charges for a process which is not designed to effectively and efficiently achieve [your] goals.”
Aileen Leventon, a former M&A lawyer, recommends that attorneys express the economic value of their contribution in terms of your business objectives and the impact on your financial statements. What she and others at her firm, QLex Consulting, Inc., advise firms is that once they understand your business model, they must know how to harness the right data (both theirs and yours); understand the meaning, derivation and application of metrics; understand how data is used to produce measures of profitability and costs; rethink which lawyers are assigned to perform on different aspects of an engagement; set priorities based on a client’s perception of an appetite for risk; and address how their view of risk meshes or conflicts with the firm’s standards of client service.
“Finally and most critically,” she advises firms to “build into the arrangement a serious communications plan so that there is a process for confirming or recalibrating assumptions, experience and actions.”
Leventon suggests that firms look to in-house counsel as models for understanding how to convey the value of legal services -- just as you do with your your CFOs and CEOs, relying upon applying matter management and e-billing systems.
When working with corporate counsel it is important to know what tools they use to gather business intelligence and how they report the data. “Work should be analyzed in a meaningful way―as a portfolio―producing a total return―not just on a matter-by-matter basis. Law firms should also generate data by client, type of matter, and at the matter level. … Lawyers have the ability to learn as much about the way their legal representation may produce profitable business for the firm as the matter management systems that monitor costs have supported clients. It is possible to propose workable fee arrangements that reflect the quantitative measurements used by clients,” Leventon says.
Leventon’s full article can be downloaded at the website of her firm, QLex Consulting: http://qlexconsulting.files.wordpress.com/2012/02/022612vbf-afas.pdf
AFAs Mean More Work for Some
Larry Bodine―now editor in chief of Lawyers.com℠ once reported that U.S. law firms are earning $7 billion from alternative fee arrangements. Firms have reported that the use of AFAs was responsible for bringing in more and more work which makes sense, since a Fulbright & Jaworsky Litigation Trends Survey revealed that more than half of U.S. companies use AFAs.
A survey jointly produced by ALM® Legal Intelligence and LexisNexis CounselLink (http://almlegalintel.com/Surveys/AFAreport) concluded that hourly billing―although unpopular and the subject of scorn―appears pretty bolted down. While not loved, it is familiar and comfortable for firms and in-house counsel alike. “Legal departments agree, but they go on to find lack of experience in defining and managing work and billing matters on a basis other than hourly as a big stumbling block” for law firms and in-house departments alike, said Kevin Iredell of ALM.
The ALM LexisNexis CounselLink survey found that most law firms and half of the companies polled reported an increase in the use of AFAs. Flat fees, blended rates and capped fees were the three most prevalent forms of AFAs.
In-house counsel and law firms alike are making progress with AFAs where appropriate, and focusing more on the value of legal services and a more collaborative approach to how legal services are delivered and priced.