Richmond, VA ALA Chapter Presentation on Alternative Fee Arrangements
Richmond ChapterAssociation of Legal AdministratorsInitiating Alternative Fee ArrangementsDue Diligence, Implementation & CommunicationPresented by:Frederick J. Esposito, Jr., CLMDirector of Administration/Chief Financial OfficerMeyer, Suozzi, English & Klein, P.C.The Boathouse, Rocketts LandingMay 22, 2013
Legal Profession Economics/Climate2013 Predictions?• 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!
“Paradigm Shift”Legal Profession Climate• Billable Hour Dead? More Client Resistance!• Client Dissatisfaction Over Outdated Valuing of LegalServices• Global Financial Crisis Acted as Catalyst to Change• ACC Value Challenge – September 2008!• Enormous Pressures to Cut Costs• Do More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
Legal Profession Economics/ClimatePost Recession ChangesSource: Altman Weil Flash Survey
Problems for Law FirmsLegal Profession Climate• Pricing by alternative arrangement is not in mostpartners’ 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 (?!)
Economic Climate is SomberClient Response?Clients are Pushing Back More on FeesClients Want More PredictabilityClients Want Creative PricingAlternative Fee Arrangements (AFAs)Perceptions/Pros/Cons• Temporary?• Pricing Evolution?• Seller’s Market?• Billable Hours?• Communication?• Bottom Line?
Questions Law Firms Facea. 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?
Paradigm ShiftLaw Firms Need To Change Business ModelsNeed to Move Away from the Idea that More TimeSpent on a Matter Means More Money for the FirmEfficiency!Value Fees; Relationship Between Fee Structures andthe Behaviors They EncourageAvoiding AFAs is not a strategy!
What Clients Want• Efficiency• Cost Predictability• Transparency• Targeted Advice• Increased use of Alternative Fee Arrangements• Value!
PerspectivePost Recession ChangesAlternative Fee Arrangements in Large FirmsSource: Citi 2011 Managing Partner Survey
It IS Not All About Price….Do Clients only care about price?Client Concerns About Pricing• Lack of Predictability• Perceived Value• Overall Price• Simplicity
Client Concerns About PricingLack of Predictability• Communication Issues/Client Expectations• Surprise Factor• Highly Budgeted Corporate EnvironmentsPerceived Value• Increases in Billing Rates and Leverage• Widening Gaps –Rates/Value of Services or Outcome• Widespread SegmentationOverall Price• Magnitude of Total Legal Spend• Repetitive, High Volume Work• Long Running Matters• Intense Scrutiny of Legal FeesSimplicity• AFA Pricing- Highly Complex?• Clients Lose Interest
Broad Categories of Pricing SystemsRemember! There is NO perfect arrangement.• Blended Hourly Rates• Volume Discounts• Fixed or Flat Fees• Fixed Fee /Pre-Agreed Budget with “Collar”• Retainers/Fee Caps• Fee Hold Backs• Success Fees• Phase-Based Fees/Hybrids• Contingency Fees• “Frequent Flyer” Credits
“Deliver Legal Services in a Profitable Manner”Understanding YOUR Firm’s EconomicsHow much does it cost the firm to produce a billablehour for:• Each Attorney?• Each Task?Interesting statistic to share!
“Where To Start?????”Which Practice Groups Should Be Consideredfor Alternative Fee Arrangements???• Identify Practice Groups Where the Firm Has the MostFinancial Intelligence.• Efficiency and Cost- Effectiveness– Methods for Producing or Managing the Work to bePerformed
Practice Groups Prime for Alternative Fee Arrangements?• 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
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 oflitigation?• Motion to Dismiss• Discovery• Trial Preparation• Trial
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
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!
Propose Suitable Alternative Fee Arrangements• Create an arrangement that reflects and supports thelong-term, broad scope of the client relationship ANDprovides a chance to grow the client relationship furtheror into new areas. –Trust Me!• Clients prefer a mix of Standard Hourly Rates andAlternative Fee Arrangements depending on their varyinggoals for individual matters.
Suitable Alternative Fee Arrangement ?Standard Hourly Rates & Fixed Fees?Fixed Fees & Retainer Structures?Menu/Portfolio Pricing?Getting to the Price is Right?Litigation Examples……..
Examples of Risk-SharingAlternative Fee Arrangements• Client retains firm to pursue arbitration against its partner in a$500M development project. Under the arrangement, clientpaid 50% of standard rates and firm received a percentage ofthe value the client received upon liquidation or sale of theventure.• Client retains firm to pursue litigation against numerousformer officers and directors for fraud. Client requested firmpay all expenses including expert costs. In return, firmreceived full reimbursement of expenses, from “first dollarout” and a percentage of the recoveries from the litigation.• Several clients retained a firm to handle individual or groupsof commonly litigated claims on a fixed or flat fee basis.
Examples of Risk-SharingAlternative Fee Arrangements• Client and firm negotiated an agreement, whereby firmhandled a fixed group of defense cases for a 30% reductionin its normal fees in exchange for the right of first refusal forall plaintiff contingent fee cases the client has for a three yearperiod.• Several clients asked one firm to “hold back” 20% to 30% ofits normal fees in return for payment of the “hold back” andmultiples thereof depending on the outcome of the litigation.
Examples of Risk-SharingAlternative Fee Arrangements• Client retained firm on a tiered contingency fee basis tohandle an insurance recovery action, paying an upfrontmulti-million dollar fee. The firm then took on all additionalfee risk and received a percentage of the recoveries fromlitigation.
Know Your Goals!• What is the client looking for?• What are you willing to accept regarding the profitability ofthis 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?
How Many Other Law Firms are Using AFAsANDAchieving Profitability?
How Many Other Law Firms are Using AFAsandAchieving Profitability?• Some Law Firms are Generating Profit• Some Law Firms Continue to Make the Same Mistakes!– Learning from the mistakes?
Profitability 101 – The Basics• How Much Can We Charge?• How Much Does it Cost Us?• How Can We Maximize the Spread?Profitability 101 – AFA World• Estimation, Efficiency, and Project Management• Risk Model has changed• Control the drivers that CAN be controlled– Limit risk where you can– Learn from previous experience– Learn to say no….quickly!
ALTERNATIVE FEE ARRANGEMENTSUCCESS STORIES• Bartlit Beck– “Bet The Company Litigation”– “Pure Value Shop –Hold Backs”– “Refused Hourly Clients”• Seyfarth Shaw– “Six Sigma Concept”• Exemplar Law Group– “Value Billing”– “26 Non-Attorney Professionals”– “Fuselage Pricing Model”• Valorem Law Group– “Billable Hour is Dead!”– “Value Adjustment Line”– “Customer Satisfaction”
Important!Keeping Contemporaneous TimeImportance of Timekeeping•Firm Productivity•Powerful Planning Tool•Critical Role in ProfitabilityBetter Timekeeping Practices•Improved Estimates for Legal Spend•Better Handle on Firm Investment•Generating Profit
Marketing Alternative Fee Arrangements2012 Altman Weil Survey/Law Firms in Transition• AFAs are used by 95% of all large and mid-sized firms• 81% of large firms reported an increase in AFA since 2010• 66% Reactive to Client Requests• 33% Proactive/Competitive AdvantageMarketing 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”
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 intodistinct parts that systems can be developed around?• Are documents or pleadings standard or capable of beingcustomized through automation?• Are there reasons for fee variances for roughly the sametype of work?• Are these types of matters rare or frequent and how do ourcompetitors charge for the same services?
Framing the Marketing MessageBasic Action/Communication Game Plan• Start small and decide what type of fee arrangement worksfor the matter –Conservative or Aggressive?• Once a matter has been identified as suitable for an AFA,market it!• Web-based and Print-based mediums mentioningthat AFAs are offered by the firm• Clients that have used your firm for AFAs should beencouraged 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 Clientand Firm.
Strategic Marketing AdvantageFrame the MessageLaw Firms with AFA Pages on their Websites1. Wilmerhalewww.wilmerhale.com2. Kirkland & Elliswww.kirkland.com3. Haynes Boonewww.haynesboone.com
Strategic Marketing Advantage/Frame the Message• CMS Cameron McKenna– 13th largest UK firm with 800+ lawyers– Launched a marketing campaign around its uniquefee structure.– Invited 3500 clients to consider AFAs– Introduced a Pay what you think it’s worth option– Provided discounts for clients placing majority ofwork with the firm– Monthly retainers– Fixed Fee agreements• Law Firm Brochure “The Future of Fees”
Strategic Marketing Advantage/Frame the Messagewww.summitlaw.comSummit Law Group rejected the traditional law firm model andstarted from scratch to design a modern law firm founded on asingle principle: customer service.– Client are called “Customers”– AFAs -Introduced a Pay What You Think it’s Worth Option• Value Adjustment Line• VERY Successful!
What AFA Firms Need To Be Successful?• System Tools• Training• Resources• Personnel Management
What AFA Firms Need To Be Successful?System Tools• Historical Time Investment Analysis• Matter Budgeting• Monitor and Manage• Measure What Can Be Measured• Gauge Performance• Initiate Corrective Action
What AFA Firms Need To Be Successful?Training• Attorneys• Budgeting Tools• Pricing Negotiations• Renegotiations• Manage Matter Budgets and Staffing
What AFA Firms Need To Be Successful?Resources• Non-Lawyer Management Professionals• Marketing & Business DevelopmentProfessionals/Teams• Project Managers• Senior Attorneys/Paralegals
What AFA Firms Need To Be Successful?Personnel ManagementUtilizing the Different Ways To Approaching LegalWork• Improve Communication• Adopt/Enhance Team Initiatives• Ensure Clear Ongoing Oversight of Matters• Establish Accountability• Continue Learning About AFAs
PREDICTIONS & TRENDSBillable Hour Will NOT Disappear• Valuable Pricing Mechanism• Productivity Tracking/ProfitabilitySegmented Legal Market Will Continue to Produce a Varietyof Pricing MechanismsThe Dominant Emerging Pricing Mechanism will be Fixed orProject PricingBest CompromisePriceValuePredictability
PREDICTIONS & TRENDSAFAs Will Change the Legal Profession• AFAs will Replace Billable Hour as the Billing Standard• Handled Properly, Potential Revenues are Compelling– AFAs Brought in a Reported $16.1 Billion in 2011New Law Firm Roles/Tasks Will Emerge• Ascertaining Economic Feasibility of Fixed Fees andAFAs• Managing Teams Doing Work Under AFAStructures/Pricing• Monitoring Internal and External Resources• Monitoring Cost-Efficient Strategies• Ensuring Profitability
PREDICTIONS & TRENDSShift in the Marketplace• Law Firms That See Opportunity Rather Than HardshipWill Reap the Benefits• Law Firms That Recognize AFAs as a Means toDifferentiate itself will Outdistance the Competition
”There Are Three Kinds of Baseball Players:Those Who Make It Happen, Those Who Watch It Happenand Those Who Wonder What Happened.”-Tommy LasordaWhich Are You?????Next Steps?
Contact InformationFrederick J. Esposito, Jr., CLMDirector of Administration/CFOMeyer, Suozzi, English & Klein, P.C.990 Stewart Avenue, Suite 300Garden City, NY 11530Email Address: FJE@msek.comPhone Number: 516-741-6565www.msek.comLinkedIn: www.linkedin.com/in/fjespositoTwitter: Lawmgtguru