The document discusses alternative billing arrangements in the legal industry, emphasizing the drawbacks of traditional hourly billing and the increasing demand for predictability and cost management from clients. It outlines various alternative billing structures such as fixed fees, capped fees, and success fees, and notes how these can improve client relationships and efficiency. The author, Nick Dougan, provides insights into understanding costs, targeting markets, and drafting new fee structures to better align law firm services with client needs.

1. Alternative Billing ArrangementsBased on a presentation to FICPI Open Seminar on Best Business Practice On 24 February 2011Nick DouganNick Dougan Consulting

2. When my attorney told his clients that he had a sliding fee schedule…what he meant was that after he billed you, it was hard to get back on your feet financially.

3. Alternative Billing ArrangementsA bit about meWhat’s it all aboutEmbracing “Alternative Billing”How to resist itDiscussion

4. An Alternative to What?Time –based BillingHourly ratestarted as late as early 1980s!was an alternative to...Plus “creative” recovery of costs?e.g. EquitracSo “Time & Service Charge” is already an “alternative” to mainstream legal thinking!

5. What are the Alternatives?Variations on a themeBlended rateCapped feeConditional and Contingency FeesFixed Fees+/- Value AdjustmentPlus a Success FeeRetainerEquityAnd thousands of permutations?

6. Why do clients want “Alternatives”?Legal fees –a growing costA noticeable % of profit 2009: BT’s Legal Fees 16% of profit, Novartis’ 3%*Better cost management spreading to legalHow General Counsel make their nameMore predictable budgetingDistrust of time-based billing* Jomati Consultants LLP, 2010

7. Problems with Always Using Hourly Billing for Legal ServicesWe look at fee structures differently than most law firms. The industry standard for the pricing of legal services in business law firms is hourly billing—number of hours incurred multiplied by the hourly rate. While such a system does have its place, its predominance and overuse create a number of issues, both internal to the law firm and external to the law firm's clients. Below are some of these issues:It does not link law firm success/failure to client success/failure Without direction from the client, it does not encourage project or transaction planning and management by the law firmIt penalizes the efficient law firmIt encourages (or at least does not discourage) excessive "lawyering," attorney layering, and duplication of effortIt does not reward the law firm for productive use of technology (in fact…productive use of technology can reduce the firm’s revenues)http://alphatechcounsel.com/fee-structures.html

8. Budget Predictability - Fixed feesWe reject the premise that the best way to arrive at prices for our services is to use a time-based billing model (time x hourly rate = price). Billing by the hour tends to emphasize time spent, not the value provided. Nowhere is this more true than patent preparation and prosecution. Further, this misplaced emphasis discourages innovation, efficiency, and communication. http://www.mekiplaw.com/how_we_bill.html

9. Why do clients want “Alternatives”?Legal fee – overall – a growing costA noticeable % of profit Better cost management spreading to legalHow General Counsel make their nameMore predictable budgetingDistrust of time-based billingIncentivise legal providers Reduce their risksWhat are clients saying – see www.acc.com

10. From Firms’ PerspectiveDisadvantages:Uncertainty – Firm sharing the riskResets the price – at a lower levelMay be squeezed out in consolidation processAdvantages:Closer relationship to a client & client peopleHigher “wallet share” Greater predictabilityEncourages clarity around systems, costs, efficiencyEvery threat an opportunity to some

11. An Approach to “Alternative Billing”Understand your costsUnderstand fee incomeTarget Markets: what do they want?Draft & offer alternative billing structure(s)Monitor delivery and variancesApply knowledge and revise

12. Understand your costsHow long does it take?How great is the variability?What’s the standard deviation?What causes the variability?What are the principal cost drivers?So, what is the cost of a work type?

13. Take a Case TypeMy own biggest exampleLet’s use a hypothetical case typeService Charge of £5005 Hours of attorney time @ £300 per hourSo bills around £500 + £1,500 = £2,000Estimates normally given at £2,000But what do time records say?Ask me if you’d like the spreadsheet

14. Variation in Time TakenWhy were these cases so efficient?What factors contributed to these cases taking so long?

15. What would your data tell you?Note:This data is not real data – it’s based on the formula with some assumption and partial randomisationWhat patterns would your actual data reveal?

16. Understanding the VariationLower time recorded associated with:Experienced client/attorney relationshipClear initial instructionRealistic expectationsAttorney busy?Higher time recorded associated with:First time patentee/first time working togetherClient changing mindInvention developing as draft writtenLess busy attorney?

17. Cost Rates

18. Understand actual fee incomeWhat is the current charging structure?What do you actually charge?Use regression analysis?What is the difference?What causes the variability?

19. Cost = £300/hr

20. Think about your target marketsHow profitable/potentially profitable?What value are you delivering?How happy are they with current billing?Benefits of alternative billing to them?What would WIN:WIN look like?

21. Draft a new fee structureAre you going to base the fees you charge onYour current charges, orGo back to your cost analysis andWork out an appropriate mark upRebase target fees on that cost plus mark up?

22. Draft a new fee structureTime Billing with a CapFixed FeesFixed Fee (lower?) plus a Success FeeFixed Fee +/- Value AdjustmentModerate fixed fee with limitations/exclusionsHigh fixed fee, all includedRetainerEquityPlus Define specification“partnering” agreementSophisticated analysis, simple fee structure

23. Fixed Fees for our ExampleBig Client – Partnering ArrangementTake rough with the smoothBase charges around mean – say £2,100?Review quarterly, renegotiate annuallyDiscuss cost drivers; improve mutual efficiencyOne-off WorkCharge moreBase charges around mean plus 1 s.d. – say £2,400?Emphasise value of predictabilityOffer fee reduction if certain criteria met?Review regularly – retain flexibility to change

24. Monitor delivery and variancesIs the service being delivered to specification?What are the time/cost variances?

25. Variance Analysis – A Standard Model

26. Variance Analysis – A Standard Model

27. Variance Analysis - Standard Model “–”

28. Variance Analysis For Attorneys

29. Apply knowledge and reviseNow that we’re no longer paid for our time... what can we do to use less?

30. Find Learning CurvesTime Taken per Activity, tNumber of Times Activity Repeated

31. SummaryUnderstand costsUnderstand cost driversWork out a fixed fee propositionMonitor variancesLearn from the experienceGet more efficient

32. Resisting Fixed Fee ArrangementsBe transparent, be trustedDefine the value you’re delivering, deliver itBecome the “trusted advisor”And find a way to charge for itMisalignment of value proposition and charging model(look up Merrill Lynch “Integrated Choice” case, HBS)Be the psychotherapist or brain surgeon

33. Where is client least price-sensitive?© David Maister, True Professionalism, 1997

34. Resisting Fixed Fee ArrangementsBe transparent, be trustedDefine the value you’re delivering, deliver itBecome the “trusted advisor”And find a way to charge for itMisalignment of value proposition and charging model(look up Merrill Lynch “Integrated Choice” case, HBS)Be the psychotherapist or brain surgeonBe thankful you are a patent attorney!

35. Any Questions?

36. Nick DouganNick Dougan Consulting17 Stanhope WaySevenoaksKentTN13 2DZTel: 01732 668984Mob: 07712 898024Fax: 01732 448103Email: nick@nickdougan.com