San Francisco, CA, ALA Golden Gate Chapter Alternative Fee Arrangement Presentation

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  • 1. Golden Gate Chapter Association of Legal Administrators Initiating Alternative Fee Arrangements Due Diligence, Implementation & Communication Presented by: Frederick J. Esposito, Jr., CLM Director of Administration/Chief Financial Officer Meyer, Suozzi, English & Klein, P.C. Nixon Peabody, LLP San Francisco, CA August 8, 2013
  • 2. Legal Profession Economics Introduction -2013 Climate • Roller Coaster Economy • Cautious Optimism • Law Firm Self-Examination • Regrouping and Adapting to Change • Expense Control • Revenue Building –Profits! • Paradigm Shift -New Rules! • Project Management!
  • 3. “Paradigm Shift” Legal Profession • Billable Hour Dead? More Client Resistance! • Client Dissatisfaction Over Outdated Valuing of Legal Services • Global Financial Crisis Acted as Catalyst to Change • ACC Value Challenge – September 2008 –Lives on! • Enormous Pressures to Cut Costs • Do More with Less = Gain Greater Certainty of Costs • Clients are More Assertive in their Fee Discussions • Clients Demand Alternatives to the Billable Hour
  • 4. Legal Profession Economics/Climate Post Recession Changes Source: 2012 Altman Weil Flash Survey
  • 5. Problems for Law Firms Legal Profession • Pricing by alternative arrangement is not in most partners’ comfort zone • Lack of project management skills • Lack of pricing experience • Lack of historical information to refer back to • Inexact science, cant completely reduce risk • Shift in demand curve; leverage is with clients • Increased competition for clients • Rage against the billable hour (?!)
  • 6. What Clients Want • Efficiency • Cost Predictability • Transparency • Targeted Advice • Increased use of Alternative Fee Arrangements • Value!
  • 7. Economic Climate is Somber What Do Clients Want? Alternative Fee Arrangements (AFAs) Perceptions/Pros/Cons •Temporary? •Pricing Evolution? •Seller’s Market? •Billable Hours? •Communication? •Bottom Line?
  • 8. Questions Law Firms Face a. What kind of AFA fee structures are law firms using, and how do you make them work? b. How do you put a face value on a piece of work, and how do you ensure continuing profitability?
  • 9. Tools Alternative Fee Arrangements are the essential tool in the redesign of the delivery of legal services. “Clients have problems that need solutions” Motivation “Nothing so concentrates a person’s mind like the prospect of being hanged in the morning.” -Samuel Johnson
  • 10. Business Models Must Change •Fees must align with the economic interests of the client and the lawyer; •The fee must create a financial incentive for the lawyer to reduce cost, not increase it; and •The fee structure must create incentives to accomplish a specific, identifiable client objective. Non-Hourly Fees = AFAs •Relationship Between Fee Structures and the Behaviors they Encourage Avoiding “AFAs” is not a strategy!
  • 11. Perspective Post Recession Changes Alternative Fee Arrangements in Large Firms Source: Citi 2012 Managing Partner Survey
  • 12. It IS Not All About Price…. Do Clients only care about price? Client Concerns About Pricing • Lack of Predictability • Perceived Value • Overall Price • Simplicity
  • 13. Client Concerns About Pricing Lack of Predictability •Communication Issues/Client Expectations •Surprise Factor •Highly Budgeted Corporate Environments Perceived Value •Increases in Billing Rates and Leverage •Widening Gaps –Rates/Value of Services or Outcome •Widespread Segmentation Overall Price •Magnitude of Total Legal Spend •Repetitive, High Volume Work •Long Running Matters •Intense Scrutiny of Legal Fees Simplicity •AFA Pricing- Highly Complex? •Clients Lose Interest
  • 14. Broad Categories of AFAs Remember! There is NO perfect arrangement. • Flat Fees • Fixed Fees • Risk Sharing • Performance-Based Bonus • Capped Fees • Volume Discounts • Blended Rates •
  • 15. Fee Structures are an Incentive to Behavior Behaviors to Incentivize: • Budget Certainty • Cash-Flow Control • Reduced Cycle Time • Results • Personnel Availability • Save Internal Review Time and Effort • Risk Sharing • Incentives to Lower Costs • Business or Matter Specific Objectives
  • 16. Fee Structures are an Incentive to Behavior Hourly Rate Behaviors AFA Fees Behaviors Larger Teams Smaller Teams More work; not less Less work; not more Settle late; not early Settle as early as possible Keep work in the firm Use cheapest resource
  • 17. “Deliver Legal Services in a Profitable Manner” Understanding YOUR Firm’s Economics How much does it cost the firm to produce a billable hour for: • Each Attorney? • Each Task? Interesting statistic to share!
  • 18. “Where To Start?????” Which Practice Groups Should Be Considered for AFAs? • Identify Practice Groups Where the Firm Has the Most Financial Intelligence. • Efficiency and Cost- Effectiveness – Methods for Producing or Managing the Work to be Performed
  • 19. Practice Groups Prime for AFAs • Litigation • Corporate/Transactional • Trust/Wills/Estates • “Take Your Pick” Best Approach to Pricing? • Maximize Value for the Client – Incentivize Particular Types of Success – Predict Legal Spend – Reduce Overall Level of Fees – Encourage Particular Staffing Models
  • 20. Litigation “AFAs Cannot Work With Litigation Matters?” YES, THEY CAN! • Ingenuity & Creativity • Suits Particular Needs of a Specific Client or Matter • Flexibility/Change Orders –Engagement Letters! • Propose separate fee arrangement for each phase of litigation? “Segmented Flat Fees” • Motion to Dismiss • Discovery • Trial Preparation • Trial
  • 21. Corporate –Transactional • Ingenuity & Creativity • Suits Particular Needs of a Specific Client or Matter • Flexibility/Combination of Pricing Systems • Due Diligence • Drafting Specific Agreements • Negotiating Terms and Amount of Purchase/Sale
  • 22. Trust/Wills/Estates • Ingenuity & Creativity –Common Denominator! • Suits Particular Needs of a Specific Client or Matter • Flexibility/Combination of Pricing Systems • Pricing Standard Estate Plans with Rewrites • Document Generation/Automation • Position for profit!
  • 23. Propose Suitable Alternative Fee Arrangements • Create an arrangement that reflects and supports the long-term, broad scope of the client relationship AND provides a chance to grow the client relationship further or into new areas. –Trust Me! • Clients prefer a mix of Standard Hourly Rates and Alternative Fee Arrangements (Value Fees) depending on their varying goals for individual matters.
  • 24. Suitable Alternative Fee Arrangement ? Standard Hourly Rates & Fixed Fees? Fixed Fees & Retainer Structures? Menu/Portfolio Pricing? Getting to the Price is Right? Litigation Examples……..
  • 25. Example A -Litigation Risk-Sharing • Client retains firm to pursue arbitration against its partner in a $500M development project. Under the arrangement, client paid 50% of standard rates and firm received a percentage of the value the client received upon liquidation or sale of the venture. • Client retains firm to pursue litigation against numerous former officers and directors for fraud. Client requested firm pay all expenses including expert costs. In return, firm received full reimbursement of expenses, from “first dollar out” and a percentage of the recoveries from the litigation. • Several clients retained a firm to handle individual or groups of commonly litigated claims on a fixed or flat fee basis.
  • 26. Example B - Litigation Risk-Sharing • Client and firm negotiated an agreement, whereby firm handled a fixed group of defense cases for a 30% reduction in its normal fees in exchange for the right of first refusal for all plaintiff contingent fee cases the client has for a three year period. • Several clients asked one firm to “hold back” 20% to 30% of its normal fees in return for payment of the “hold back” and multiples thereof depending on the outcome of the litigation.
  • 27. Example C – Litigation Risk-Sharing • Client retained firm on a tiered contingency fee basis to handle an insurance recovery action, paying an upfront multi-million dollar fee. The firm then took on all additional fee risk and received a percentage of the recoveries from litigation.
  • 28. Know Your Goals! • What is the client looking for? • What are you willing to accept regarding the profitability of this work? • Is this core to our business? • Learn to say “No!” • Play to win! • Are the clients’ expectations realistic? • Look at historical matters with common characteristics • What is the cost of delivering the service? • What will the volume be?
  • 29. How Many Other Law Firms are Using AFAs and Achieving Profitability? • Some Law Firms are Generating Profit • Some Law Firms Continue to Make the Same Mistakes! – Learning from the mistakes?
  • 30. ALTERNATIVE FEE ARRANGEMENT SUCCESS STORIES • Bartlit Beck – “Bet The Company Litigation” – “Pure Value Shop –Hold Backs” – “Refused Hourly Clients” • Seyfarth Shaw – “Six Sigma Concept” – “Lean Principles” • Exemplar Law Group – “Value Billing” – “26 Non-Attorney Professionals” – “Fuselage Pricing Model” – “Just Good Enough” • Valorem Law Group – “Billable Hour is Dead!” – “Value Adjustment Line” – “Customer Satisfaction”
  • 31. Profitability Metrics “Success & Mistakes” “Make or Break” •Fee Collections! •Accounts Receivable Fee Write Offs •Attorney Time Write Downs/Write Offs •Contemporaneous Timekeeping
  • 32. Important! Keeping Contemporaneous Time Importance of Timekeeping •Firm Productivity •Powerful Planning Tool •Critical Role in Profitability Better Timekeeping Practices •Improved Estimates for Legal Spend •Better Handle on Firm Investment •Generating Profit
  • 33. Marketing Alternative Fee Arrangements 2013 Altman Weil Survey/Law Firms in Transition •AFAs are used by 96% of all large and mid-sized firms •69% Reactive to Client Requests •31% Proactive/Competitive Advantage Marketing Strategy –Planning and Implementation •Efficiency and appropriate allocation of resources •Alignment with client risk •Cost of legal services relative to matter results •Go To Your Best Clients First –”Cherry Pick”
  • 34. Framing the Marketing Message •Message v. Method “Fee Options that Provide Value to Clients” •What Works for your firm and your Practice Areas? •Can matters be broken down within practice groups into distinct parts that systems can be developed around? •Are documents or pleadings standard or capable of being customized through automation? •Are there reasons for fee variances for roughly the same type of work? •Are these types of matters rare or frequent and how do our competitors charge for the same services?
  • 35. Framing the Marketing Message Basic Action/Communication Game Plan •Start small and decide what type of fee arrangement works for the matter –Conservative or Aggressive? •Once a matter has been identified as suitable for an AFA, market it! • Web-based and Print-based mediums mentioning that AFAs are offered by the firm • Clients that have used your firm for AFAs should be encouraged to refer others •Internally educate and market AFAs within the firm • Premise - “Strategic Decision Not a Sales Gimmick” • Comprehend Business Implications of AFAs for the Client and Firm.
  • 36. Strategic Marketing Advantage: Frame the Message Law Firms with AFA Pages on their Websites 1. Wilmerhale 2. Kirkland & Ellis 3. Haynes Boone
  • 37. Strategic Marketing Advantage/Frame the Message •CMS Cameron McKenna – 13th largest UK firm with 800+ lawyers – Launched a marketing campaign around its unique fee structure. – Invited 3500 clients to consider AFAs – Introduced a “Pay what you think it’s worth” option – Provided discounts for clients placing majority of work with the firm – Monthly retainers – Fixed Fee agreements •Law Firm Brochure “The Future of Fees”
  • 38. Strategic Marketing Advantage/Frame the Message Summit Law Group rejected the traditional law firm model and started from scratch to design a modern law firm founded on a single principle: customer service. – Client are called “Customers” – AFAs -Introduced a Pay What You Think it’s Worth Option • Value Adjustment Line • VERY Successful!
  • 39. What AFA Firms Need to Be Successful? The Tools of Change •Project Management – Budget Certainty is Critical – Pricing Change Orders – Schedule outline: • Track Progress • Identify Delays – Weekly Meetings • Discuss Progress and Problems • Forthcoming Issues • Are we on schedule? Maintaining Progress? • Accountability
  • 40. What AFA Firms Need to Be Successful? The Tools of Change •Project Management – Critical to the pricing process – Critical to the management process • Lawyers need to operate WITHIN the cost structure required! – Create the right mindset • Change Management – Very difficult for lawyers! • Embrace Change –Cornerstone of success! – Intersection to Knowledge Management
  • 41. What is Knowledge Management • New Big Movement! • Data  Information Knowledge • Systematic “Information” Process that Improves Performance • Creates, Captures, Shares, Analyzes • Identify, Create, Store, Share, Use
  • 42. Legal Knowledge Management Tools In Action • Procure, Produce and Manage Legal Work Areas of Legal Knowledge Management Application • Conflict and Records Management • Document Management and Assembly • Case Management • Delivery of Online Legal Services • Value Added Systems –AFAs, Project Management
  • 43. Goal of Legal Knowledge Management Competitive Advantage • Improve Disseminate  Exploit “Get the right info to the right people at the right time at the right place!” • Focus on Organizational Objectives • Management of Knowledge as a Strategic Asset! • Improved Performance • Innovation, Sharing of Lessons Learned (AFA, Project Mgt) • Competitive Advantage • Continuous Improvement
  • 44. What AFA Firms Need To Be Successful? •System Tools •Training •Resources •Personnel Management
  • 45. PREDICTIONS & TRENDS Billable Hour Will NOT Disappear •Valuable Pricing Mechanism •Productivity Tracking/Profitability Segmented Legal Market Will Continue to Produce a Variety of Pricing Mechanisms The Dominant Emerging Pricing Mechanism will be Fixed or Project Pricing Best Compromise Price Value Predictability
  • 46. PREDICTIONS & TRENDS AFAs Will Change the Legal Profession •AFAs will Replace Billable Hour as the Billing Standard •Handled Properly, Potential Revenues are Compelling – 2013 AmLaw 100 Projection • Law Firms will Generate $13 Billion in AFA Fees New Law Firm Roles/Tasks Will Emerge •Ascertaining Economic Feasibility of Fixed Fees and AFAs •Managing Teams Doing Work Under AFA Structures/Pricing •Monitoring Internal and External Resources •Monitoring Cost-Efficient Strategies •Ensuring Profitability
  • 47. PREDICTIONS & TRENDS Shift in the Marketplace •Law Firms That See Opportunity Rather Than Hardship Will Reap the Benefits •Law Firms That Recognize AFAs as a Means to Differentiate itself will Outdistance the Competition
  • 48. ”There Are Three Kinds of Baseball Players: Those Who Make It Happen, Those Who Watch It Happen and Those Who Wonder What Happened.” -Tommy Lasorda Which Are You????? Next Steps?
  • 50. Questions
  • 51. Special Thanks To Our Luncheon Sponsor!
  • 52. Thank you!
  • 53. Contact Information Frederick J. Esposito, Jr., CLM Director of Administration/CFO Meyer, Suozzi, English & Klein, P.C. 990 Stewart Avenue, Suite 300 Garden City, NY 11530 Email Address: Phone Number: 516-741-6565 LinkedIn: Twitter: Lawmgtguru