The New Normal
Why clients fear alternative fee arrangements
Posted Feb 27, 2013 9:30 AM CDT
By Patrick J. Lamb
I was catching up on a pile of reading when I was confronted with a piece about the “fear” among general counsel of alternative fee arrangements. Just a few days before, I had highlighted a piece in Richard Susskind’s new book, Tomorrow’s Lawyers, where he observed that “in truth, hourly billing is simply a way of pricing and billing legal work; it is a mindset and a way of life.”
Susskind’s observation goes a long way to explain why GCs and so many others fear alternative fee arrangements. Disagree? Then bear with me through these few questions:
• How hard is it to recite the alphabet?
• How fast can you do it?
For everyone, the answers are “easy” and “really, really fast.” But what if the questions were changed by adding just one word?
• How hard is it to recite the alphabet backwards?
• How fast can you do it backwards?
For virtually all of us, the answers change to “really hard” and “really slow.” Welcome to the world of change, where lawyers are being forced to change work habits from reciting the alphabet to reciting it backwards. The change of a “mindset and a way of life” is much harder than learning to recite the alphabet backwards. Still not sure? Think about changes you have tried to make in your life. For many, dieting and exercise are on the list. How successful were you making permanent changes in your prior behaviors?
When change is hard, many people default to change lite. Lawyers are no different. When the marketplace suggested that clients hated the hourly fee billing system, lawyers began to offer what they called alternatives to the hourly rate. But rather than making the structural changes to their business models needed to extract maximum value for themselves and provide maximum value for their clients, lawyers opted for change lite. What does this mean? Again, Susskind’s book succinctly states the answer:
“Alternative fee arrangements seem to be failing to deliver significant savings for clients for at least two reasons. The first is that most AFAs are derived from hourly billing thinking. For example, the starting point of many law firms is the amount that would have been charged on a conventional hourly basis.”
Susskind describes what is, at its core, surrogate hourly billing. Several years ago, I labeled this a “wolf in sheep’s clothing” approach to value fees. It is common, and it most definitely is change lite. After all, what firms expect to be paid is the same or nearly the same as what they would be paid if billing by the hour. How big a change could that possibly be?
Clients fully know of the difficulty of organizational change, and there is an understandable tendency to look at change from a cost/benefit standpoint. What incentive is there to make the massive effort to change—to learn the alphabet backward—if there is no payoff in savings? If clients were looking at 30 to 50 percent savings, however, the incentive to invest in the change is profound. But clients are not seeing the 30 to 50 percent savings or even the promise to get to that level, so they are understandably unimpressed with what they see and hear from most of their law firms.
So is that the end of the game? I believe not. Much has been written about clients learning that they are in a position of power, that it has become and will remain for the foreseeable future a buyer’s market. Clients must direct outcomes and force their lawyers to engineer solutions. There has always been a bit of engineering required to be a lawyer, but the traits of engineering discipline and creativity make achieving material savings a real possibility for clients.
This requires no sacrifice in work quality or outcomes. Better outcomes are not only possible but likely as you engineer solutions, since many of these solutions will take work out of the hands of inexperienced lawyers and put it into the hands of more experienced lawyers. When clients receive the benefit of experience, they also gain the benefit of efficiency.
Like Schrödinger’s cat, the answer is in the client’s hands.
Patrick Lamb is a founding member of Valorem Law Group, a litigation firm representing business interests. Valorem helps clients solve their business disputes and coping 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.