I recently heard the managing partner of a regional law firm say that alternative fee arrangements are like teenage sex: “More of it is being talked about than is actually being done, and the little that’s being done is being done poorly.”
My corporation now uses alternative fee agreements for a large percentage of its work. All of those arrangements have worked out acceptably, and one (which I’ll discuss after the jump) has played out spectacularly. The harder question is this: How does one convince tens of thousands of readers to click through the jump (and “continue reading”) a column about alternative fee arrangements (because clicks through the jump are, after all, the relevant metric to the Above the Law gang)?
I’ve got it! Gin up a riddle, and put the question before the jump and the punch line after. What reader could resist?
So — riddle me this:
What’s the similarity between discussions about alternative fee agreements and elephantine mating?
Both take place on a high level, involve much trumpeting, . . .
. . . and ultimately accomplish little.
(It worked like a charm, didn’t it? My riddle may not have been very funny, but it drew you through the jump like a vulture to carrion.)
Where was I?
Oh, yeah: An alternative fee agreement that worked out well, for both the outside law firm and the client.
Here’s what we did:
We identified a particular set of our cases that could be handled more efficiently if a single firm were at the helm. We defined the set: “All cases of type X with a reasonable exposure of less than $Y filed in the United States.” We gathered the relevant information for each of the past several years, including number of cases filed, in what locations, number of hours billed to each case by outside counsel, total outside legal expense for each case and in the aggregate, and so on. We then asked eight or ten firms (all of which we’d worked with before and trusted) to submit proposals to handle this set of cases for a flat fee for each of the next three years. We asked that the flat fee be all-inclusive, covering all fees, costs, and expenses of any kind, including any fees paid to local counsel. (We of course said that, if the arrangement proved grossly unfair to either client or firm, the party that did too well would make an appropriate adjustment at year-end to equalize things.)
Some firms refused to bid, saying they weren’t interested in either the work or the implied fees. Some firms bid, but hedged around the edges: Those firms excluded the cost of local counsel; offered to handle cases for a flat fee through summary judgment, but then to begin charging hourly as the case moved toward trial; and so on.
We ultimately selected from among the firms that offered what we’d requested: an absolutely fixed fee for all defense fees and costs for a specified subset of our litigation.
We’re now 18 months into one of those arrangements, and it’s worked out spectacularly well.
From our (the client’s) perspective, we’ve made our defense costs completely predictable. We know in advance how much we’ll pay each month to defend our routine cases.
We’ve also dramatically reduced those monthly bills: The winning flat-fee bid was slightly less than 60 percent of what we’d paid in past years to defend these cases.
Predictability and lower cost — that’s not a bad result.
But the law firm also made out well. At the end of the first year, we asked the law firm whether it, too, was profiting from the flat-fee arrangement. And it was: The law firm’s realization rate for work performed under our flat-fee deal was substantially above the firm’s average realization rate for other work. Thus, we saved money, and the law firm realized more than it did on an average case. (I suppose the firm also benefited by knowing that it had a steady stream of work that would be arriving over the next three years. That surely eases the hiring and staffing issues that can arise in volatile economic times.)
How did the firm turn a profit on a relatively low-cost, flat-fee deal? The law firm assigned a core group of lawyers to work on our cases. Those lawyers quickly devised a way to defend the cases efficiently: They created master discovery forms, which they then simply tailored around the edges for specific cases, made relevant legal research and briefs easily available to the team, and asked lawyers on the core team to devote a fair percentage of their time to our cases, so that most work would be performed by lawyers immersed in the recurring legal and factual issues. (That specialization arguably hurts the firm somewhat, because many firms want their lawyers to remain generalists to ensure that they can work on varied matters in the future. On the other hand, the firm certainly benefits from being able to tell other clients that the firm had entered an alternative fee deal that benefited both its client and the firm.)
In the end, perhaps I was wrong: Our discussions about alternative fees took place on a high level, involved much trumpeting, but ultimately accomplished a great deal.
Mark Herrmann is the Chief Counsel – Litigation and Global Chief Compliance Officer at Aon, the world’s leading provider of risk management services, insurance and reinsurance brokerage, and human capital and management consulting. He is the author of The Curmudgeon’s Guide to Practicing Law and Inside Straight: Advice About Lawyering, In-House And Out, That Only The Internet Could Provide (affiliate links). You can reach him by email at firstname.lastname@example.org.