A Matter of Time: Law Firms Move Away From the Billable Hour

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To learn about how AFAs go hand in hand with sharp project management skills, read the online exclusive here.

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If you think your biggest hurdle to using value-based billing arrangements is getting your law firm to agree, there's good news. It's still a buyer's market, and firms know their clients may be interested in alternative fee arrangements (AFAs). And they're more than willing to play ball--many of them are just waiting for you to throw the first pitch.

Over and over again, law firms InsideCounsel interviewed for this story lamented that it's still rare for their clients to step up and request such arrangements. After all, that's how things happen--it was a single client request in 2001 that first led Aronberg Goldgehn down the path of AFAs, and today value-based billing is part of the firm's culture. Maybe your law department is still working things out internally, or you don't think you have the purchasing power of Microsoft, or you're simply satisfied with the billable hour. But if AFAs are something you just haven't gotten around to pursuing, your law firms are waiting to hear from you.

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Case study: Aronberg Goldgehn

Power of a Request

Don't be afraid to ask your firms what they can do for you. Chicago-based Aronberg Goldgehn was more or less forced into the alternative fee arena in 2001 when a major client sent a letter that was in essence an open-ended RFP (request for proposal). The client's instructions were simple: It wanted to move away from the billable hour and to achieve that, it wanted law firms to make their best offer. Of the 35 firms that received the letter, only 15 responded, and Aronberg Goldgehn was the only one to dig deeper into the client's goals and history.

Eventually, co-managing member John Riccione and the firm's litigation chair, Bill Serritella, proposed an arrangement based on flat fees with a success-based bonus and no volume requirements. One of the client's main goals was quick resolution, so the firm came up with a stage-based deal. The first stage was pleading, the second discovery, the third post-discovery and the fourth, trial. At each stage the case reached, the bonus the law firm received would diminish.

In one complex case they handled for the client--which was preceded by months of due diligence before they would take it on an AFA basis--this arrangement resulted in a recovery that exceeded the client's expectations, and that the law firm team finalized way ahead of schedule, resulting in a sizeable bonus for the firm.

"We were nervous about how the client would react, because we got a pretty good fee," Riccione says. "The client called us up that night and said they were ecstatic, but they were worried about whether we thought we did OK. It's one example of being on the same page with your client and partnering and succeeding with your client."

Aronberg Goldgehn's Takeaways

  • Give smaller and midsized firms a chance. "The challenge for us is in-house counsel's comfort level with not using the megafirms," Serritella says. "The economy has relieved this to some extent."
  • Look at law firms' compensation structures. Most big law firms, with their armies of associates and partners, rely heavily on compensating their employees based on the billable hours. "Until the culture of law firms changes to something other than, 'I'm going to be paid X dollars if I'm working Y hours,' I don't see how things will change," Riccione says. Aronberg Goldgehn uses a more subjective, merit-based employee assessment system to determine compensation, allowing the firm more flexibility in billing.
  • The incentives really do change when outside counsel has skin in the game. "We think differently to a certain extent, we may even work differently when we're working on an alternative fee basis and the goals are aligned," Serritella says. "It's intangible, it won't show up on the hourly budget or AFA proposal. But it's there, it's real."

Case study: Bartlit Beck

Masters of the Game

"We've been doing this for 17 years," says Fred Bartlit, a founding partner of Bartlit Beck Herman Palenchar & Scott. "As far as I can tell, we're the only firm that does billion-dollar litigation for Fortune 20 companies--and never by the hour. We don't keep track of hours."

Andrew Schaeffer at DuPont cites Bartlit Beck as an excellent firm with a stellar track record, and Valorem Law Group cites the firm as a model.

"They make boatloads of money, but other people have not really copied them, and they've never really understood why," says Pat Lamb, a partner and founder of Valorem Law, a Chicago-based commercial litigation firm that focuses on alternative billing.

Bartlit's not holding his breath for a paradigm shift. "Say you're head of a big hourly firm, making a nice $4 million a year," Bartlit says. "You're going to be head for five or six years, then retire. Are you going to tear the firm apart, change the entire business model?" He compares law firms' unwillingness to change with the American auto industry's.

At Bartlit Beck, the first step is negotiating a monthly fixed fee based on past similar cases with the client. Then they negotiate a discount to that fee that the client holds back. At the end of the case, the client decides whether and how much of the holdback Bartlit Beck receives.

Since it's such a drastic departure from the law firm status quo, Bartlit helps clients wade in. "Sometimes, a brand new client will negotiate benchmarks--if we recover X or hold a judgment to X, we get one part of the holdback. But after we deal with them for a while, we tend to rely more on client discretion," Bartlit explains.

The result is assurance for the client that they are getting value in harmony with what they're paying. "If you're an in-house lawyer it's nice to have an arrangement where you're certain the fees you're paying are consistent with the results achieved," Bartlit says. "The hourly rate doesn't
do that."

Bartlit Beck's Takeaways

  • Firm structure is important. Where big firms see turnover rates that can approach 85 percent, Bartlit Beck aims to cultivate talent and keep lawyers around for a long time. That saves money on turnover and recruitment, and provides depth of experience. "My model works best if you have highly experienced people and small numbers of them," Bartlit says.
  • Historical data analysis helps. "We have a big database on what we do, and a guy who can now tell us, 'This can be done with three experienced partners and one associate,'" Bartlit says. "So figuring out the cost is simpler now."
  • Results count. "It's not just processing things," Bartlit says. When law firms take on risk through AFAs, their financial future hangs on getting good results, "so we try."

Case study: 84 Lumber and Buchanan Ingersoll & Rooney

True Partnership

As the sole lawyer and general counsel at 84 Lumber, an $84 billion private company, Bob Bosilovic is used to relying heavily on strong relationships with outside counsel. So when increased commercial litigation stemming from the housing market crash forced him to cut spending, he cultivated one of those pre-existing relationships to form a true partnership in crafting creative billing arrangements.

"I decided, why not centralize it?" Bosilovic says. "I'll take business to one local firm I have a relationship with and ask them if they can handle this commercial litigation for us nationwide, and in doing so we can work out an alternative fee arrangement."

He thought it might take a few tries before he'd find an outside lawyer to come along for the ride, but it didn't. The first time he pitched the idea, he found a partner in Manoj Jegasothy, a Buchanan Ingersoll & Rooney shareholder who has worked with Bosilovic for almost five years. That history, with its foundation of friendship, trust and knowledge, has made their collaboration particularly effective.

With an eye on cutting costs, they sat down together to structure a billing arrangement that incorporates flat rates, straight contingencies and blended rates, depending on different types of cases or aspects of the cases. Jegasothy's team also handles counterclaims and appeals flowing out of that work.

"It's really a lot of different things that are centralized," Jegasothy says. "Bob's seen a lot of savings, partly from the fee arrangement and partly from the centralization. Honestly, I think a lot of firms, including Buchanan, may not have approved these ideas several years ago, but in 2009 the firm management was great about encouraging a partnership that could benefit us both."

Bosilovic and Jegasothy's Takeaways

  • Underlying efficiency matters. Since Bosilovic came on as 84's sole lawyer in 1986, he's been working to establish procedures and systems to streamline the department, centralize billing and track spending. That made going back to analyze his litigation costs and draft a contract with Jegasothy easy. Four years ago 84's legal department went paperless, so Jegasothy's team had easy electronic access to the company's agreements, contracts and systems (see "Looking for Efficiency").
  • Even small departments can benefit from such nontraditional arrangements. "Being a one-lawyer legal department for a good-sized national retailer, having this type of arrangement really helps me in terms of saving time," Bosilovic adds. "You don't have to recreate the wheel in every matter. Manoj's team understands how we work, and that makes us more streamlined, more efficient.
  • Give each other some outs. "When we were negotiating, we did say, 'Well, if this doesn't work for you--if Buchanan doesn't feel it's generating the fees to support its work--we don't want that,'" Bosilovic says. "And certainly Manoj didn't want us to be unhappy."

What Should In-House Counsel Know About AFAs?

Appreciate the partnership dynamic. In-house counsel always think they'll be gouged, and outside counsel think in-house counsel don't understand the realities of practice from the other side--that it's expensive and time-consuming. [So] clients are not typically willing to invest all their eggs in the basket of alternative billing. We need to get beyond that, to sit down and have genuine, honest conversations with existing clients. -- Donald Prophete, former in-house counsel and a director at Ogletree Deakins

AFAs don't have to be intimidating, they can be very simple. A simple budget--I'm still surprised how many in-house counsel don't require a budget. Once you have one you can shop it among firms for the best deal. Another simple thing is to work on a contingency fee basis. The holdback--where law firms work at a reduced rate and get the holdback if they succeed--can also be simple. If you want to get creative, you can come up with all kinds of structures--but it's not necessary. -- Tom Ajamie, founder of Houston firm Ajamie LLP

What's most important is being open to the ideas and being willing to think outside the box. Sit down and share with your firms the concerns you have so they can address them. Oftentimes some of those misperceptions or concerns--say, about total cost or staffing--can be worked out if you bring issues to the table and work through them. -- Peter Devlin, president of Fish & Richardson

AFAs work best when clients are both invested in the relationship in the long term and are viewing value in the broadest sense--not just a specific bill. If the sole motivation is lowering your costs, in the long term they're much less likely to be successful for both the client and law firm. It's a better fit if they measure the cost of legal services in terms of what they pay outside counsel, losses the company bears that are avoidable and the cost of in-house counsel's time and effort. If you're thinking about cost certainty, aligned interests, the value of risk avoidance and the value of having outside counsel who thoroughly understand your business--AFAs are fabulous. -- David Fries, chief client service officer at Orrick, Herrington & Sutcliffe

Reality Check

Confusing the alternative fee arrangement (AFA) landscape even more is the fact that what some law firms present as AFAs aren't alternatives to the billable hour at all, or don't present much added value or increased risk-sharing for clients. A "real" alternative is more likely to be a pure contingency fee or a fixed fee with success-based bonus.

"Clients should always ask their law firms, 'If you're quoting me an alternative fee, how did you get to it?'" advises Pat Lamb, a partner and founder of Valorem Law Group, which focuses on AFAs. "If the answer is something like, 'I figured out it would be this many hours, and then I started multiplying...' What you're hearing is 'hours x rate = revenue.'"

The most common "fake" alternative rate is simply a discounted hourly rate, which does nothing to shift risk. "It's like going to an expensive hotel and seeing that their rate is $600 and negotiating a $580 rate," says Mike Roster, chairman of the ACC Value Challenge steering committee. "Negotiating the 5 to 10 percent discount is nibbling at an already inflated price. Better yet, pick the hotel that's giving you service you want."

Lamb reveals another "tell" of a valueless AFA: built-in trial components in alternative fees--a waste because 99 percent of cases settle. It's better to handle the possibility of trial separately, writing in that the client will pay extra or on an hourly basis for trial work, or that the client and firm will re-evaluate.

Get references. "Like any major purchase," Lamb says, "if your supplier is good at what they're doing they should have lots of happy customers."

If your arrangement truly is a win-win, you should be happy with outcomes. "Our goal is always the second or third case, the next one," Lamb says.

Lamb claims that if your fee agreement truly aligns interests, "you may never have to review another legal bill again."

Associate Editor

Melissa Maleske

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