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The Disruptive But Inevitable Move to Alternative Fees


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This is a four-part series of articles written on alternative fee arrangements and co-authored by a Fortune 500 GC (Jeffrey Carr of FMC Technologies), a Managing Partner (Edwin Reeser), a leading practitioner in alternative fee arrangements (Pat Lamb), and a management consultant (yours truly).

Part 1 of 4 (The remaining three parts may be accessed at www.patrickmckenna.com)


TIME FOR ALTERNATIVE FEE ARRANGEMENTS

BigFirm partners are anxious about their firm’s futures, and their individual status, ranging from preserving income shares, to remaining partners, to keeping a job. Anything that suggests reduced delivery of revenue to the firm by shortfalls to partners’ expected quota of billable hours or targeted hourly rates is toxic. The rule of survival branded on partners today is simple: deliver hours and rates, or suffer the consequences of reduced income, de-equitization, or forced departure.

In general, even equity partners have no independent authority in BigLaw firms to create their own alternative fee arrangements. Typically, select partners in a BigLaw firm are empowered to review and make decisions regarding alternative fee arrangements. The process has been centrally reviewed and scripted. Everything other than standard rates and hours arrangements must go through them for approval. Alternative fee arrangements have previously been limited to situations where a firm may otherwise lose a client, pursues business it strategically wants, or presented so little risk that there was significant likelihood of a windfall to the firm. In the salad days of BigLaw, that was infrequent and clients faced a “take it or leave it” proposition, with little opportunity for a materially better deal across the street. Hourly rates among “peer” firms were comparable. If the client was not perceived by management as essential to the present and future law firm, the partner may very well be denied the request to establish an alternative fee arrangement because there was neither the time available nor inclination within firm management to spend the effort to retain the client. “If they don’t want to pay, they can go elsewhere.”

Raising the issue of alternative fee arrangements was often perceived as a weakness in the ability of the relationship partner to deliver the type of client and work that the firm sought to define itself as serving; “as many hours as it takes and at whatever rates we can command.” This is not defensible, but it is the way it has been. In-house and outside counsel must together to break through this barrier to establish a new value delivery model for legal services.

Recognize that when approaching the firm for an alternative fee arrangements discussion, the General Counsel does it through the relationship partner. There are consequences to the relationship partner once the process begins, so how does the GC get started working with the relationship partner to embrace a redesign of the economics of the delivery of legal services to provide the client better value?

The client has to make the starting proposal. If the GC goes to the partner for assistance in crafting it, the client may get some help. Indeed, the relationship partner may enthusiastically see the wisdom and mutual benefit of doing something together. However, this has been perceived by BigFirm management as being asked to negotiate against themselves. They have an arrangement they are satisfied with, and therefore, do not see the benefit of using a different approach unless it is guaranteed to be even better than what they already have. That kind of income guarantee to the law firm is not what has brought the client to the negotiation table.

Thoughtfully determine what the client wants, bring it to the relationship partner, do some groundwork to shape it (as she should know what the managing partner, who controls the intake of alternative fee arrangement matters, is willing to do), and then make the proposal formally, meeting with both the relationship partner and the alternative fee arrangements "intake" partner.

Support the firm and the relationship partner. But to get what the client wants, be prepared to do more than speak words. Be prepared to take action. The power to make the deal desired by the client derives from the power to walk away from the deal offered to but not wanted by the client. If the client cannot get what it wants from the firm, take it to a firm with well-qualified lawyers who “get it” and who will do it. If the client has not worked that option through in advance, you could be wasting your time.

The client may need to be prepared to empower its relationship partner to move to a firm that "gets it" and will support your alternative fee arrangement service/value proposition. It reminds one of the movie Casablanca, where Humphrey Bogart has two gentlemen on the couch and announces that he is going to pistol whip both of them until he gets what he wants, which means that one of them is going to take a beating for nothing!

That may sound tough, but without it, you are only working with words and so far, for clients, that just has not delivered results from BigLaw firms. As GC you know the client’s business and the legal service needs better than anyone. Your relationship partner has his professional survival intimately tied to the client. Calculate that for every $100,000 of fee payments you channel through them, or redirect else where. The relationship partner is personally impacted by at least $35,000. Relationship partners want to help the client. But they need some help from the GC to get it done. Work together to succeed. Sit down, off the meter, for a frank discussion around how the client might measure the value proposition. How does the GC determine “value?” What is the outcome of the effort worth for a transactional or litigation matter? What is the relationship partner’s direct contribution to the outcome and what is that worth? (You need to reflect on that one before the meeting!) What are the law firm’s costs in obtaining and completing the matter; do they have the right cost structure to be able to afford to deliver a meaningful alternative fee arrangement for the client? If not, what can be done to change that? What value added does the client bring to the firm by simple virtue of being a client?

An annual spend of $2,000,000 or more should command the attention to get what the client wants without moving to another firm in this market. An annual spend of $1 million should be enough for an alternative fee arrangement, though perhaps not entirely to your desire, it almost certainly would command a move of the relationship partner to a different firm that would accommodate the client’s needs; firms where that is a quarter to a third of what an equity partner is expected to deliver annually to meet the expectations of the firm to retain their partner status. A partner who loses that size of a business will be materially impacted with the loss of the account. Just be aware of that consequence, because it is real and immediate. People lose their jobs in law firms when such business is relocated. A spend of $250,000 to $500,000 may command some change, but may not be enough to cause the relationship partner to relocate, unless she has other strong client loyalties that will follow a move. Be prepared for a BigLaw firm to reject the alternative fee arrangement when spending less than $250,000, which also places the relationship partner at risk of a pay cut. Presently, this is often not enough business to "move the needle" for the firm to keep you as a client, though it can result in significant harm to the relationship partner.

Before you get too concerned about the relationship partner, do consider that part of the gambit played by BigLaw firms over the past 15 years in their annual raise of rates and hours has been to force their relationship partners to push increases down the throats of clients to generate higher revenues. Relationship partners who delivered the rates were rewarded. Relationship partners who could not deliver took pay cuts (Whether the client remained a client at lower rates, or moved to firms that were priced more attractively). Some partners were confronted deliberately by BigLaw management with the choice of watching their client base erode under pressure of higher rates, until their ability to retain their partnership status was lost, or leave the firm while they still had client relationships of value to obtain a position in a new law firm that appreciated the business and provided alternative arrangements/lower rates that the client needed.

The situation is difficult all around. Everybody is hurting. Opportunity exists now to seize initiative and address your needs. Efficient delivery of legal services by highly qualified professionals is available. IF the firm you are working with does not give you what you need, there are firms and lawyers that will, and you just need to get one that does. Once that catches on as the new paradigm, change may come to you from law firms where superior client service at a better value becomes as much a part of the law as it has been a part of business.




Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.

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