Fees: they're at the crux of every conversation between an in-house counsel and a law firm, whether articulated or unspoken. There's nothing dirty about this conversation that suggests it should be avoided or minimized – for corporations and the firms that represent them, this is a commercial transaction, which means that at its core, it's about the cost of retaining a professional to perform services for the client.
All of the components of this transaction –
– are all important to the determination of the fee.
What makes the billable hour such a millstone around the legal profession's neck is how it facilitates outside counsel to set a fee that directs all of her attention to what she believes her time is worth and how long it will take her to do the work, rather than looking at all of the factors involved that should determine the price of the service. Because the hourly fee model is so prevalent in law, and both law firms and legal departments are so unskilled at using other mechanisms to price our work or structure fee arrangements, very few lawyers ever consider the cost (as opposed to the price) of the service. Also left out the equation is the value of the matter's resolution in marketplace terms, the value of the service to the corporation and legal department, and other critical factors that help determine pricing and value in every other sector of the commercial world.
So when lawyers begin the process of assessing new ways to value their work, they accordingly call every other non-hourly-rate fee an "alternative fee structure," or AFA. And that's what is at issue for me today.
I would like to propose that we begin the reform of legal pricing by giving up the moniker "AFA" for alternative fee arrangement and adopt a different name, and which will hopefully, over time, create a different mindset. I would like AFA to stand for "appropriate fee arrangement" and for this to become the default conversation every corporate counsel and law firm attorney has about fees and pricing. Hourly rates should just be one of many alternative options in the appropriate fee arrangement toolkit.
According to all the major studies, corporate counsel and law firms are adopting some percentage of their work on a non-hourly priced basis. Regardless of whether your legal department has fully embraced non-hourly pricing, all corporate counsel and law firms should embrace business-like improvements to pricing legal work. To this end, the reform of legal pricing can begin even if firms and/or corporate counsel aren't yet skilled in, have had bad experiences with, or are still skeptical of pricing their work on non-hourly bases.
In order to have an appropriate fee arrangement conversation, corporate counsel and legal service provider need to have a deliberate discussion of:
For in the new world of appropriate fee arrangements, an AFA is really nothing more than a sticky budget based on a well-defined project plan.
What do fixed fees, flat fees, holdbacks, incentive payments, collars and cuffs, budget by stage, portfolio pricing, contingency awards (and so on) have in common? All of these arrangements require lawyers to engage in a budgeting and project planning process that includes more thought than the projected hours multiplied by the lawyers' rate. So what goes into the determination of the appropriate price or fee structure?
First, one size fits one. While corporate counsel and firms may find that some kinds of fee structures consistently "fit all" for certain groups or types of matters, the process by which a certain portfolio of work is properly priced by a certain fee structure has to start somewhere, and must be regularly re-visited as new matters arise or critical facts change. One of my good friends (who's also corporate counsel) likes to use the term – since he won't even utter the "alternative fee" phrase – "custom fee arrangement" (Hat Tip: Joe Otterstetter of 3M and the ACC Value Challenge Steering Committee). I feel this really catches the concept. The fee must be customized: deliberately crafted to fit the need. Especially since needs change.
Second, when identifying the need, remember that a good (meaning "successful") fee structure is a two-way street. The "need" is something that must be defined and satisfied for both the corporate legal department and the firm. This is not a zero-sum game, where when one side wins, it's because the other loses. An appropriate or custom fee should be profitable for the firm to propose and offer a better value for the client to accept.
So, third, the trick is working with your firms to find a way to receive services that are both lower cost (in terms of overall savings at the conclusion of the matter) or cost contained (to promote certainty/predictability), and that drive a targeted result that you will value. Often, this is done by changing the firm's focus from delivering large stacks of revenue for the firm via lots of billable hours (at relatively high cost for both parties involved), toward focusing the firm on creating a higher profit by developing a work process by which to produce and deliver the work more efficiently and/or more predictably.
How do firms and clients find this win-win? By talking about it. For too long, the billable hour allowed corporate counsel and lawyers to by-pass meaningful conversations about costs. If they did engage in a discussion about lowering cost, it rarely got beyond a request or an offer that rotates around a discount in hourly or blended rates. Alternatively, by openly discussing the firm's strengths, preferences for staffing, or overall priorities and how the firm and client might collaborate to develop a more streamlined and efficient process, lawyers can begin to think about how to price and structure the fees for their work far more successfully. No one's suggesting that hosting these conversations requires firms to sell "cheap" services – there's a difference between value-based efficiency that creates lower costs to corporate legal departments and services for which the value spirals down to nothing. I don't know of any clients or firms who think that lawyers' services aren't worth good money or should be priced below their value.
So how do you walk in the happy medium? In many larger firms, the law firm has established a position for a pricing director who has received training in the use of data and leading practices to help on the firm side. But even so, too many of these experts are under-used/under-valued, have very small or no exposure to clients (which is a huge mistake on the firm's side) or find their services limited to helping plan the pitch budget based on existing/old, rather than new, strategies to price the work. In many legal departments, the role of legal department operations is developing best practices for department's to retain counsel using appropriate fee conversations. Regardless of whether you have one of these types of professionals on your staff, plenty of professional resources are available for corporate counsel and law firms who need to understand how to drive and reward this kind of deliberate change. But first and foremost, both sides have to agree to change their behaviors, including the doctrinaire and deep-seated presumptions they carry about how lawyers' fees are or should be valued.
While this change process will lead to a number of even more profound conversations about such issues as how lawyers in firms should be compensated in this new world of pricing based on value, maybe a good place to begin is with a name – what we call this process of learning how to (re)value the work that lawyers do. It's no longer about alternatives to the billable hour: instead, it's about what's appropriate for every firm and legal department in all kinds of matters. What's in a name counts; try my advice, and see if it helps you re-shape your value focus.
Susan Hackett is the CEO of Legal Executive Leadership, LLC, a law practice management consulting firm she founded in 2011 after serving as the Senior Vice President and General Counsel of the Association of Corporate Counsel (ACC) for more than two decades. As an insider working with thousands of top corporate practice leaders, Susan has an amazing breadth of experience with the inner workings of in-house practice and the implementation of value-based legal models, as well as an international reputation for innovation, excellence, and success. Comments welcome to firstname.lastname@example.org.