Biglaw, In-House Counsel

The Alternative Fee Arrangement That Will Force Big Firms To Innovate Or Die

For high-stakes stuff, we may be stuck with the billable hour, but for everything else, the billable hour is doomed.

By  
on

dartboard pen inside straightPeople insist that law firms are incapable of change. The big firms have prospered in the past; leaders care only about the next five or ten years (which will see them into retirement); firms therefore won’t implement new models for law firm pricing.

Here’s the contrarian view: Firms will have no choice. We’ve seen the future of pricing, and firms will adapt or die.

I struggle with alternative fee deals as much as the next guy. We’ll align the law firm’s interest with ours! We’ll get a discount for failure, but pay a premium for success!

It doesn’t work: From the defense perspective, we don’t know what “success” looks like until well into discovery. Should we win? Settle for $10? Settle for $1 million? By the time we know the answer, the case has advanced too far to enter an alternative fee deal.

“Phased” alternative fee deals aren’t worth much, either: “We’ll pay you $X through summary judgment.” What’s that? An estimate of the hourly fees that are anticipated. Maybe it imposes a cap, but it doesn’t prompt innovation. And once we’ve used the firm through summary judgment, we’re pretty unlikely to swap them out because of price and use someone else for trial. This is an alternative, but not a very good one.

The thing that will force change, however, is the thing that’s already happening: A defined collection of cases are — or should be — bundled together and sold off to the lowest-cost bidder that the client trusts.

Thus: We’ve spent $1 million per year defending all of our single-plaintiff employment cases (combined) for each of the past five years. Those cases were filed against us in the following cities: [wherever]. We’d like six firms (all of whom we’ve worked with in the past and trust to do good work) to bid to do all of that work for the next three years.

Sponsored

The bids come in at prices ranging between $600,000 per year and $1.3 million per year. (Okay, okay: One clever firms starts at $700,000 and then goes up by five percent each year.) We trust all the firms, so $600K does it.

And here’s the beauty of it: The firm that bid $600K doesn’t lose money on this work! That firm does precisely what big firms are seemingly incapable of doing — it innovates — to find a way to make money at the lower price.

As for the losing bidders, they go the way of the Dodo bird.

Good riddance: Creative destruction, and all that rot.

Perhaps employment cases are a bad example, because so much of that work is already commoditized. But there’s no reason why you can’t do this for all of your work of a specific type: Bankruptcy preference actions; product liability cases; malpractice cases; whatever plagues your industry.

Sponsored

Figure out where the cases are located and how much you’ve been spending. Share that information with a few firms that you trust. Ask them to bid for the work. (Be careful of how you start the deal and how you end it, because fixed-fee deals pose issues there. Think, too, about how you’ll spread the defense costs across cases, because your insurance carrier will want to know how much you’ve paid to defend individual cases, not how much you’ll spend in the aggregate. And spot your own issues, too! I’m not on your payroll, you know.)

Is this unfair?

Yes.

If you’re roping together multiple cases, firms must be of a sufficient size to handle the number of cases and their geographic reach.

The small, minority-owned firm in Denver can’t realistically bid to handle your 2000 cases per year that will be distributed throughout the United States.

Perhaps you can figure out a way to include that firm in some larger firm’s proposal. (You could include a diversity element in your request for a bid, if you like.) Perhaps several smaller firms can figure out a way to make a collective bid. (This is hard: I might well trust Firm A to handle my cases in Denver. But when Firm A says it will use Firm B in Houston and Firm C in L.A., I start to twitch. I’ve never used Firms B and C before, and I know nothing about their quality. I’m a suspicious guy, so I’m pretty unlikely to accept this deal.)

But these fixed-fee packages will force big firms to change.

They must bid for this work or lose it.

Although big firms insist that they don’t do commodity work, most of them are lying. Most big firms can’t survive without doing some fairly routine work, so they’ll have to get in the game.

Moreover, some of the work that I’m talking about selling off isn’t commodity: This can be fairly sophisticated work that’s simply being sold off wholesale. The work is being auctioned off because of its volume, not its complexity. Firms can’t afford to lose that work, or they’ve lost an awful lot of business.

For the rest of the work — high-stakes stuff that is truly unique and requires specialized counsel — we may be stuck for a while with the billable hour.

But for everything else, the billable hour is doomed.

And now you know both how and why.

(You’re welcome.)

Mark Herrmann spent 17 years as a partner at a leading international law firm and is now responsible for litigation and employment matters at a large international company. 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 inhouse@abovethelaw.com.

Topics

, , , , , , , , , , , ,