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Alternative billing: Its time has come

Bob Seng

Bob Seng (Staff photo: Bill Klotz)

When the dust had cleared after the market crash in 2008, one thing was painfully clear to lawyers: Their clients had less money to spend on legal fees and even if they didn’t, they felt as if they did.

The economic fallout from that financial crisis meant a huge change to some lawyers: no more blank checks from clients. No more open-ended litigation budgets. No more annoyed clients when the bills went out.

Most lawyers were unsurprised when clients started scrutinizing bills more carefully. Not wasting a good crisis, many lawyers started taking a look at their billing practices, and some things have changed. Not entirely, and it’s not even clear how much, but markedly.

For instance, in 2008 the American Association of Corporate Counsel threw down its Value Challenge to change the way fees are calculated. (For the text of the challenge, see sidebar.) The ACC defines value-based fees as fees defined by results, not time spent. The fee could be a fixed amount or capped.

Last month, the ACC included two Minnesota companies among its 2015 value champions — 3M, which deployed its litigation technology services team to bring maximum efficiency and effectiveness to document review and Xcel Energy, which reduced its outside legal spending by 7.5 percent over two years, due in part to moving more than a quarter of its outside counsel spending to value-based fees.

Another company committed to the value challenge is the Mayo Clinic. Chief Legal Officer Jonathan Oviatt told Minnesota Lawyer in an earlier interview that “Our aim is to provide networks, tools, and dialog for both in-house and outside counsel to help us all better manage our clients’ legal affairs. For me it always comes back to value,” he said.

But the value challenge is more than alternative fee arrangements, Oviatt said. “The real change was [emphasis on] relationship and common understanding of how to do work.” The focus on value forces in-house counsel and outside counsel to plan and strategize together, he said.

Other lawyers have come to see that the attorney-client relationship can make the alternative fee arrangements possible and workable, and the fee arrangements can make the relationship better. Bob Seng, a partner in Dorsey & Whitney’s benefits & compensation group, has recently returned to the firm after being assistant general counsel at Target for 12 years. In his first term at Dorsey, he had a client he knew was reluctant to call him for budget reasons. Seng decided to give the client one hour a week of free talking time and found that the calls were not only productive but delightful, and sometimes resulted in billable work.

So that seed was planted when he went to Target, Seng said. There, as a “W-2 employee,” he said, he had to make decisions on what to do and what not to do. He thought his outside lawyers should also be able to decide when to stop. “To some degree the billable hour encourages working until it’s all done,” he said. So he tried a fixed fee at Target and it worked very well. “I looked at historical billing data over a five to 10 year average, I landed on some numbers, I shaved something off and I said let’s do fixed fees for three years.” Ethic rules prohibit the attorney and client to be bound for a period of time like that but there was enough trust to try it for three years, he said.

In private practice, in the world of benefits and compensation there are two types of alternative fee agreements, Seng said. One would be a flat fee for annual advice on a certain topic. A less open-ended, project specific arrangement would be something like a certain amount for all Affordable Care Act reporting for two years.

The first type of arrangement works for clients who have a steady stream of questions all year long, Seng said. “It succeeds to the extent there is trust between both parties and to the extent the [client] wants some participation from the law firm in deciding where the biggest risk lies and how to address it.”

Dorsey’s openness to alternative ideas was one reason Seng came back to the firm, he said. “There is a very strong client focus and to the extent that alternative fee arrangements don’t work for the client they don’t make sense. This is not me wanting to push it just because I want to push it.”

Birth of a new profession

One indication that an idea is gaining traction is that it has borne a group of consultants. ALM Legal Intelligence says, “With the billable hour slowly making way for increased discounting and alternative fee arrangements, firms have recognized the need for professionals who can help determine costs and recommend pricing structures that satisfy the client while allowing the firm to make a profit. On the blog, Patrick on Pricing, author Patrick Johansen, a certified pricing professional, reports the results of the ALM 2015 report, Pricing Officers: Some Firms Still Want to Make the Jump. He reports:

  • 98 percent of law firms reported hiring a pricing professional because of alternative fee arrangements , followed by cost pressure from clients (77 percent).
  • 82 percent of law firms with more than 1,000 attorneys reported having at least one dedicated pricing professional, 77 percent of law firms with more than 500 attorneys, and 39 percent with fewer than 500 attorneys.
  • 69 percent of law firms reported that pricing professionals improved firm profitability.
  • 52 percent of law firms reported having at least one dedicated pricing professional (significantly higher than last year’s 38 percent).
  • 53 percent of law firms anticipate growing their pricing teams.

ACC Value Challenge

The ACC Value Challenge, launched in 2008, has provided resources and training for in-house counsel and law firm lawyers to help effect change within the legal industry. By realigning relationships and promoting value-based fee arrangements and other management tactics, such as project management, process improvement, efficient use of technology and knowledge management tools, the market for the delivery of legal services benefits from the same insights and wisdom upon which every other service industry relies to provide world-class value to their clients. Go here for more information.

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