As we approach the fifth anniversary of the filing of the Lehman bankruptcy, also known as “the great reset,” it seems a good time to look at side-by-side photos of then and now to see whether there are noticeable changes. Richard Susskind, the noted legal futurist, provided a useful prism for this review in his description of the various stages of an idea:
Stage 1: “What you’re saying is worthless nonsense.”
Stage 2: “What you’re saying is an interesting but perverted point of view.”
Stage 3: “What you’re saying is true but quite unimportant.”
Stage 4: “I have always said so.”
The next several New Normal articles will look at several areas where change has occurred in the last five years, including the rise of nonlawyer-owned businesses competing for legal services market share, new job opportunities, the health of the traditional law firm model and the increasing role of nonhourly billing. It is this last topic I have been asked to write about as a lead-in to this series of articles about the rise of the new normal.
Once upon a time …
On Jan. 2, 2008, three friends and I launched Valorem Law Group. Our tagline was “results, not hours” and our “thing” was to do complex commercial litigation on a nonhourly basis. We were the flavor of the month for a while and had the chance to speak with many inside-lawyers. While all were at least uncomfortable with the billable hour and the increasing cost of outside legal services, only a small percentage knew anything about alternative fees. Even fewer were committed to material reductions in total legal spend.
The same was true for outside lawyers. My partner Nicole Auerbach often tells the story of many of her friends and colleagues in large firms calling her in early 2008 to ask if she was crazy. None of them thought this “alternative fee idea” had any merit, let alone enough merit to stake her future on it. No one thought you could fix a fee for it. Each of the founding partners got many similar calls. Fortunately, clients and prospective clients warmed quickly to the idea, which gave us just enough confidence to fight through the doubt. And the Association of Corporate Counsel launched its Value Challenge in 2008 (thank you, Fred Krebs and Susan Hackett) which helped give us a platform for a much broader discussion of value-based fees.
The early days were Stage 1 on the Susskind idea-adoption continuum.
Modern day …
Those lawyers who five years ago decried the feasibility of alternative fees now sing a different song. Every law firm now claims they have been offering alternative fees for years, even decades, and that they are “leaders” in such fee arrangements. Firms brag on the portion of the revenue that comes from “alternative fees.”
Have we reached Stage 4? If one relies on law firm rhetoric, it would be hard to conclude anything other than a resounding yes. But if one peels back the layers of onion, the answer may not be so clear.
With each passing year since the great reset, clients have been under pressure to do more with less. The intensity of the pressure may wane a bit, but any change has been on the continuum between acute and unreal. The evidence that clients think law firms have taken unfair advantage of them abounds—year-over-year declines in realization rates; refusal to let younger lawyers be assigned to matters; insistence on using legal process outsourcing or other nonfirm providers to handle specific tasks (document review is the easiest example); the movement of work from larger, higher-priced firms to boutiques or regional firms with their lower cost structures; and so forth.
So what’s the story? If firms have truly embraced alternative fees, why the continued discontent? One could write a book on this (check back at year end), but the short answer is that firms have not embraced alternative fees, and clients have mostly not seen the value that true alternative fees can provide. As a general proposition, clients rightfully see alternative fees as a way to lower costs on their litigation portfolios, save perhaps for bet-the-company matters where cost is no object. Firms, because of growing pressure to produce higher profits per partner and their continued refusal to materially change their cost structure and business model, cannot survive if their revenues decline. If clients are paying less, firms have less revenue. So firms want to look like they are playing the alternative fee game. But with sleight of hand, they actually not do so.
Virtually every firm has now embraced the rhetoric of alternative fees: It is necessary for effective marketing. But peel back the layers and what do you get? Many firms define “alternative fees” as anything other than payment of standard, rack-rate hours. Client asks for a discount? The fee becomes an AFA even though it is based entirely on hours worked? Blended rates? AFA. You get the picture in the Lewis Carroll, Through the Looking Glass way: “When I use a word, it means just what I choose it to mean—neither more, nor less.” If a managing partner says it is an alternative fee, it goes into that column on the spreadsheet.
When firms choose to (or are forced to) quote an alternative fee, generally a fixed fee, they have come up with an ingenious way to make it a perfect surrogate for hourly billing. They estimate (generously, of course!) the number of hours it will take to do an assignment or handle a case, determine who will be doing it and what that person’s hourly rate is and will become, bring out their calculators and do the multiplication and addition. And then round (generously, of course!) upwards. Voila! The total becomes a fixed fee.
One client described this phenomenon and declared: “I would have to be the dumbest businessman on the planet to accept this proposal.” I asked him to explain why, and he said: “All of the risk, and I mean every penny of it, is shifted to me. If the case settles early, I pay everything. Under an hourly model, at least the meter has a chance of shutting down early.” Like so many other weary inside lawyers, this general counsel told me he simply asked his firm for a 15 percent discount on the matter.
So where are we, really?
When one gets into the nitty-gritty, it is certain we have not reached Susskind’s Stage 4. We’re not even close. Are we even at Stage 3? Some firms are, but not that many. Firms have not reached Stage 4 because there is no urgency in how the firms are approaching the changed world. And they are paying for it, some dearly. Go back to the point about declining realization, reported variously to be in somewhere in the vicinity of 85 percent. That’s an average. That means that many firms are lower, some much lower than 85 percent.Some of those firms will not survive.
I believe many firms are still in Stage 2. Firms that haven’t committed to programs like Six Sigma and Lean, firms that do not have pricing partners, firms that haven’t altered the criteria for advancement and compensation, firms like these are destined for the historical scrap heap. Five years is a long time. If a firm has not made major changes by now, it will move too slowly to keep up with the changes clients are demanding now. Now, not at some amorphous point in the future.
How will we know firms have moved to Stage 4? There will be some external signs. You will see major changes to firms’ two biggest cost centers—real estate and personnel. You will see articulated and actual abandonment of the historic business model. Incoming classes will become much smaller, and hiring decisions will be driven by application of models like those developed by Lawyer Metrics. Firms will stop competing with LPOs and other third-party providers (like Novus Law or Practical Law Co.) who now dominate the process and content aspects of practice from a price and quality standpoint. Firms will figure out how to better partner with these nonfirm firms. To be sure, some firms have started nosing around these areas, albeit normally because a client has insisted. Hesitant, forced poking around may lead to some jumping in with both feet, but I haven’t really seen that kind of wholesale commitment anywhere just yet.
Patrick Lamb is a founding member of Valorem Law Group, a litigation firm representing business interests. Valorem helps clients solve their business disputes and cope with pressures to reduce legal spend using nontraditional approaches, including use of nonhourly fee structures, coordination with LPOs or contract lawyers, joint-venturing with other firms and implementation of project management tools to handle lawsuits or portfolios of litigation.
Pat is the author of the the book Alternative Fee Arrangements: Value Fees and the Changing Legal Market. He also blogs at In Search Of Perfect Client Service.