Allocatur

Certainty has a Premium

A front page article in today's Australian Financial Review does not predict the death of the billable hour, but certainly shows its waning in favour.  As Telstra's Will Irving is quoted "Certainty has a premium it didn't have before the global financial crisis".

The clients I advise about alternatives to hourly billing are looking for one of two things:

• The lawyer to have some skin in the game

• Certainty of costs

With the former, there needs to be some value component in the arrangement and agreement about what triggers any value payment.  But the arrangements I see proposed by lawyers tend to be the same old hourly rates with a premium for "success".  Lawyers and clients need to be a bit more creative.  What is the value actually being delivered by the law firm?  For transactional work it may be preparing documents that are approved quickly by a regulator.  For litigation, it may be the accuracy of the initial advice on liability and quantum.  The value payment can be tied to that.

Then there is the true value billing arrangement - not tied in any way to time but solely relating to what the client perceives as the value of the lawyer's work.  The basic question is "how much would you pay me to achieve X?"

This is where there is a real problem for lawyers, as it involves dealing in intangibles - what the client wants and needs, and what their perception of value is, (a complex psychological and sociological question).  Until lawyers can break their thinking of tying value to time spent, they will never develop true value billing arrangements. 

But then we come to certainty of costs.  Generally this is achieved through some form of fixed fee billing, sometimes with a value component.  Fixed fees take work on the part of the lawyer.  The work needs to be clearly scoped.  Project management techniques and costing strategies used by other industries should be utilised to plan the matter and work out fees.  But this work has additional benefits - developing a matter plan enables both lawyer and client to see if the matter is going off track and address this quickly.  Secondly, other options and alternative approaches are often identified during the planning process and these can be explored.

But all alternatives require lawyers to take the leap of faith into the uncertain world of abandoning the hourly rate.  It takes courage, but in these uncertain financial times, clients are looking for lawyers who are prepared to be brave.

$20 Million for Two Weeks Work

I have just begun listening to the audio book of Outliers by Malcolm Gladwell.  The many rave reviews are fully justified - it presents a thought provoking view on what factors make a person successful.

One chapter analyses the optimal time to be born to become a successful Jewish New York lawyer - 1930 is the answer, but you will have to read (or listen) to the book to find out why. 

The founding partners of Watchell,Lipton, Rosen & Katz were all born about this time and created what has become a legend among New York law firms.  Of particular interest to me was the report that it has always refused to bill by the hour, but rather just stating their fee - "value billing".  

 

In one instance, cited by Gladwell, they charged Kmart $20 million for two weeks work in a takeover battle.  They modelled themselves on investment banks.  It's not clear whether there were instances where the outcome was not successful and the firm was out of pocket.  It may that they are so phenomenally good that clients would pay anything to have them on side.

 

It would be interesting to know whether such fees are still sustainable in present economic climes?

For those doubting Thomases

One for all those doubting Thomases who tell me that no large firm will move away from the billable hour, no matter what their clients want.  Law.com reports that the British company ITV has entirely phased out hourly billing for its legal work.  The firms involved are Slaughter and May, Lovells, Addleshaw Goddard, DLA Piper, Olswang, Charles Russell and Goodman Derrick - not exactly lightweights.  Of interest is that Freshfields have not been reappointed to the panel.

The article reports:

Garard told Legal Week: "None of the firms will bill us with reference to a measure of time on any matters. The pledge forms part of the agreement we have with the firms selected. As far as I am aware, we are the U.K.'s first major corporation to have such a panel. Hopefully people will sit up and take notice and other companies will follow suit."

Lovells ITV relationship partner Peter Watts said: "We always work with our clients to find new ways of working and new ways of thinking about our relationship. ITV is a very exciting client to work with and we hope to do much more with them in the future." 

From an earlier report it appears ITV were looking to use fixed fees, caps and floors, with the rate based on deal completion.  

Earlier this year, Freehills were recruiting a pricing analyst.  All the top tier Australian firms offer fixed fees in certain types of work and on particular matters.  But the billable hour remains the most comforting means of billing for law firms - it's what they are familiar with.

My advice to all clients is to ask.  Until you ask you don't know what the answer will be.  But look at how and what you are asking for.  When I am working with client assisting in managing their legal costs, we put suggestions to the law firms about possible alternative billing arrangements, rather than simply asking the open ended question of "what can you do for us?"  The answer to this question is often "we are interested in exploring alternative billing arrangments with you" with no solid proposals being put.

Clearly ITV put a lot of work into their RFP and were proactive in making suggestions about alternatives.  It may well be that they were also proactive in the whole tender process, with feedback about level of work and possible alternatives.  If your proposal has any element of "success fee" you will need to define what "success" means.  You may need to look at how the law firm contributes to that success.

But the payoffs in certainty of fees make the process very worthwhile.

Jim Calloway recommended Allocatur

I am incredibly honoured that Jim Calloway has recommended this blog to readers of his Law PracticeTips Blog.  Jim is co-author of the book Winning Alternatives to the Billable Hour (2nd ed.) (2002 ABA.),  He is the Director of the Oklahoma Bar Association's Management Assistance Program and a member of the Council of the ABA's Law Practice Management Section and chair of its Practice Management Advisors Committee.

In other words, he is a guru on law practice management which is why I a so honoured that he recommends this blog!

Jim's blog is on my list of "must reads" as are his articles in the ABA Law Practice Management Journal, to which I subscribe.  Whilst there are many differences in the practice of law in Australia and the US, including fee arrangement restrictions on Australian lawyers that don't apply to many US lawyers, the trends in the US often eventuate here.  And no matter where you practice, Jim's commonsense approach to client service is relevant. 

For those of you interested in non-billable fee arrangements, Winning Alternatives to the Billable Hour is must and can be purchased from the ABA bookshop or Amazon and through selected sources in Australia (I believe the LIV bookshop has copies).  I have both first and second editions and they are an important resource.

Thanks Jim!

Edward De Bono and Alternative Billing

Many lawyers don't see any need to adopt alternative billing other than in what they see as "commodity" work, such as conveyancing.  However, a post by Tom Kane, which refers to William C Cobb's Cobb-Value Curve to demonstrate that the types of work now considered to be commodity work is increasing, and therefore the total percentage of a lawyer's work likely to attract alternative billing in also increasing.

Part of the problem, certainly for Australian lawyers, is that they equate "alternative billing" with "fixed fees".  Whilst Australian lawyers are far more restricted than many of their American cousins in the range of alternative fee arrangements they can enter into, (by reason of restrictions in the various Legal Profession Acts), there are many options other than fixed fees.  For non-litigious matters, fees can be tied to the value of a transaction, level of success in a transaction, and even for litigious matters, fees can be tied to meetings specified targets, such as time period for settlement, or achieving progress in a matter within a particular time period.

Time for a bit of lateral thinking - so start reading Edward De Bono!

US Courts to Encourage Competitive Bidding to Control Costs?

The National Law Journal reports on US judges using competitive bidding to select lead counsel in securities actions - one of the reasons to justify this position being that there is often little oversight of the conduct of the matter by an actual client.

The practice was introduced in the early 1990s, but the was frowned upon by some courts in 2000 and 2001. However, the judge who introduced the practice has urged Congress to codify such auctions to save investors money.

In 2003, the New York Law Journal reported on the use by GE Commercial Finance of online auctions for legal services and other GE groups followed this with further online auctions in 2005. Any such auction would need to carefully take into account the services and skills on offer from bidders to ensure a comparison of "apples with apples". Lawyers have complained that such auctions are labour and time intensive, and the recommended strategy is that adopted in any auction - set a limit (in this case a bottom line) and stick to it.

As with any negotiations on fees, a law firm must clearly identify:

• What is the cost base?
• What is the scope of the work?
• What are the client expectations?
• What is value to the client?
• How will the firm deliver the work?

This can be more difficult with on-line bidding as the opportunities to identify scope, expectations and value are more limited.