Whither the dearth of AFAs?

Despite the plethora of articles and presentations over the years, and the expressed interest (as evidenced by numerous surveys over the years) of in-house attorneys in abandoning (or, at least, reducing the prevalence of) the hourly rate, it persists. What causes this disconnect or imbalance between demand for alternative fee arrangements (AKA AFAs) and the supply of such arrangements?

A primary cause must lie in the absence of an approach that enables in-house and outside attorneys to design effective AFAs. Since the term AFA defines itself in an exclusionary fashion (i.e., an arrangements dependent on something other than time-based effort to determine fees), it leaves a very wide range of operation for the development of such an arrangement. Without a consistent approach, though, the attorneys involved will be untethered in their efforts. Moreover, the need to account for a wide variety of effects of any particular arrangement, some of which will be desirable and some of which may not, makes the effort fraught with danger. Failure to anticipate all such effects may lead to a very undesirable result for one side or the other (or perhaps both). As a result, their attempts to devise AFAs often amount to “catch as catch can” with only happenstance to determine their success.

How to develop an approach to devising AFAs will be the subject of future posts.

Flexibility – The Key to Client Service

Not all law firms are created equal. Not all lawyers are created equal. Even within a single firm, clients experience different levels of service, capability and quality. At the same time, legal matters have become more complex and the risks attendant to unwanted results in those matters have increased. This confluence increases the pressure on in-house attorneys to manage those matters more assiduously and, ultimately, more successfully.

In-house lawyers should, therefore, focus on the capabilities of the individuals among external legal service providers rather than on the capabilities of the firms in which they practice. This concept underlies the “appropriate counsel” concept that I have advocated for years in books, articles and presentations.

A recent article highlighted the need for law firms to collaborate more in order to prosper. According to the panelists in that roundtable discussion, “flexible legal resourcing is not only here to stay but will become much more aligned with client interests in the future.” See the article at http://www.managingpartner.com/news/business-strategy/exclusive-collaboration-between-law-firms-key-future-competitive-advantage.

As law departments explore and implement ad hoc teams for significant matter, drawing from the talent available in multiple organizations, law firms’ ability and willingness to work across organizational boundaries will become a greater differentiating factor among law departments’ selection criteria.

With growth comes opportunities – perhaps even for others

Law firms often seem bent on growth for the sake of growth. Regional firms dream of becoming national firms, while national firms wish to ascend (if that’s the right term for the change) to the ranks of “global” firms.

The question that begs to be asked, though, is “what do the clients want?” Growth often presents challenges to the growing firm that it did not anticipate when it was smaller. that growth might even undermine qualities that the clients of the firm (at its smaller size) valued.

For example, global firms often tout their geographic breadth as an attractive characteristic and they point to the wide range of substantive specialties that they offer within the international offices that carry the single “brand.” Do the clients that avail themselves of that geographic breadth, though, encounter widely divergent client experiences? Does the firm’s service delivery provide the consistency that clients often treasure? If a client that has used the firm since its early growth stage finds its matters attended to less diligently or with a different client-service “mindset” when attorneys in another, previously unused office provide the service, what will that client’s reaction be?

Offering more substantive areas of expertise may be important for a firm that wants to position itself as serving every client’s needs throughout the world. Doing so in a manner that changes from office to office or country to country due to a lack of internal attention to the service standards might undermine the firm’s appeal to clients and might provide the firm’s competitors (even smaller ones) an unexpected opening that they can exploit.

Value – The more it changes, the more it remains the same

The legal profession has commenced a long-overdue discussion of “value” in respect of the legal service provided to corporate clients. To a degree, that conversation began with (or, at least, was enlivened by) the initiation by the Association of Corporate Counsel of its ACC Value Challenge in 2008.

Even after much debate and numerous articles on the subject, misconceptions regarding the term “value” abound. Many law firms and outside lawyers believe that the discussion of “value” actually masks the intent of in-house attorneys to reduce firms’ billing rates (or, at a minimum, their billings). Many believe that they need to divine a single, all-purpose definition of “value” for use in all contexts.

Neither view reflects reality. Many in-house attorneys admit that they would approve higher fees for outside counsel if they believed that their companies received “value” commensurate with a higher amount. The experience of some law firms, which allow clients to reduce the amount of fees on an invoice (even to zero dollars) or to increase the amount billed, reflects this since those firms have reported receiving unexpected bonuses from clients that increased the amount billed by the firm.

How does a firm know what definition of “value” its clients apply? First, it must recognize that no single definition will work for all clients. Indeed, a single client may apply different definitions of value in different situations. The idea that a single definition of “value” is held by the in-house community and is evolving in some orderly (or messy) fashion, as suggested by some recently, does not withstand scrutiny. A single corporate client may elevate cost containment much higher in its constellation of “value-related qualities” for certain matters than it does for other matters or even for most matters.

In short, “value” reflects a very fluid concept. Ultimately, however, it means the degree to which the legal service leads to a measurable, positive impact on the client’s business affairs for which that service was required. Understanding the business goal, appreciating the client’s needs and its preferences in that regard and exploring how the lawyers (in-house and outside) can and will assist the client to achieve its business goals constitute the most effective means of learning that client’s definition of “value” for that specific engagement and of assuring that the client will be a satisfied and continuing client.

Consistency – The hobgoblin of big firms

In the “new normal” (as it’s called) environment in which the legal profession finds itself, client attachment to law firms cannot be assumed. Even longtime clients might seek new counsel over an issues as “insignificant” as a desire to realize greater value (however defined) from the legal service.

How might a law firm increase its client retention? A book entitled Human Sigma: Managing the Employee-Customer Encounter by John Fleming and Jim Asplund (©2007 Gallup Inc.) provides some useful suggestions. (Even though the book focuses on consumer-oriented interactions, many of its learnings will apply to the relationship between outside counsel and corporate clients, though perhaps with some “tweaking.”) Of particular relevance is the authors’ discussions about the need for consistency in service. While law firms (and outside lawyers generally) like to think of their work as very specific to the matter at hand, they are correct only so far. While the substance of each matter will vary (and, of course, the facts of each matter likely will vary, sometimes considerably), the clients’ need and desire for consistency as to how it is served cannot be denied. It arises in virtually every survey of in-house counsel and often identifies the most-frequent complaint of those survey responders.

Developing consistency of service delivery while allowing for individualized substantive work requires that law firms rethink the independence that their lawyers have been allowed. As law firms grow larger and establish more and more offices (particularly when those offices exist in different jurisdictions and often arise through mergers, acquisitions and other means of non-organic growth), inconsistency of service tends to increase. Thus, management of the service delivery so as to reduce the inconsistency experienced (or endured, to apply a more pejorative term as it’s viewed by the client) by the client becomes a greater and greater task. Nonetheless, consistency of service can increase client retention.

Can every law firm be client-focused

Virtually every law firm claims to be client-focused. (Perhaps every one does, but I try to avoid categorical statements.) Can that be true?

Can a firm whose revenues rely to a considerable extent on the hourly rate make that claim honestly in light of the considerable disdain in which many in-house attorneys hold the hourly rate? If firms measure the productivity of their associates by the number of hours that those associates bill to clients, do they really value their clients’ interests above their own? When partners in firms divide the firms’ profits according to the amount of fees that each lawyer claims, do those clients’ interests predominate the firms’ thinking?

It’s time that firms really integrate their clients’ interests, including the clients’ interests in high-value legal service, into their entire operation. Client focus should not be relegated to the firms’ marketing efforts. It should permeate the firm’s entire range of activities, both internal and external.

Litigation – destroyer of value

Ensuring that you receive the greatest value for what you spend on legal service requires that you maximize your control of the effort. Project management represents a powerful tool that you can deploy in that effort. Both in-house and outside counsel can apply it and it holds great promise in efforts to rein in costs.

Disputes and litigation, on the other hand, decrease a party’s control over its legal exertions. Not only does a dispute or litigation involve (by definition) at least one other party whose ultimate interests are diametrically opposed to those of the first party, but other factors contribute to the reduction of control. Uncovering information and evidence relevant to the matter, whether for purposes of establishing one’s own argument or in order to respond to the other party’s demands, often is an open-ended effort. In litigation, the presiding judge holds ultimate control of the pace and direction of the case.

To maximize your control over your fate – and the cost of legal service in that regard – you should put more effort into avoiding disputes and litigation. While maxim may seem self-evident to in-house attorneys, its implications merits increased attention, for the costs of not doing so can be hard to ignore. Resources devoted to preventing disputes and litigation (many if not all such efforts would come within the scope of what is called “compliance”) yield much more value than efforts devoted to defending the company’s position in a dispute.

Internalization is the key to sustainable, high-value fee arrangements

The hourly rate does not create any incentive for the billing professional to perform the legal service efficiently. Indeed, the natural effect yields the opposite result, since the lawyer who takes more time to complete a task or assignment will bill more time, yielding more revenue.

In light of that dynamic of the hourly rate, to ensure that the value of the legal service is sufficient, in-house counsel typically review counsel’s invoices closely. The reviewer hopes thereby to identify questionable time entries (e.g., too much time for a task, duplicative entries, arithmetic errors, etc.). Unfortunately, such a post hoc review may fail to achieve high accuracy (i.e., failing to identify problematic fee-causing entries) and it diverts the reviewer from more-forward-looking, beneficial activities.

Can fee arrangements based on something other than the amount of time expended by lawyers and their representatives replace the hourly rate? While the hourly rate probably will occupy a place in the firmament of fee arrangements for a long time (and a prominent one at that), that place could be much less significant than it is now. For that to occur, however, we must see fee arrangements that are self-actualizing. By that I mean that the fee arrangement must contain internal mechanisms that conduce toward greater value. For example, were a fee arrangement to reward outside counsel for being more efficient and completing work in less time, we would find work being completed more expeditiously. If lawyers were compensates more generously when they prepare and adhere to budgets more rigorously, budgets would more ably survive the vicissitudes of the matters entrusted to those lawyers. Reward behavior that you value (rather than behavior that you dislike) and that behavior will become more prevalent. Such fee arrangements would be self-supporting and internally consistent with the client’s objectives.

Fee arrangements require support to work

The ongoing debate regarding fee arrangements that eschew the hourly rate has led to an increase in such arrangements (known to many as AFAs). Nonetheless, the hourly rate predominates client billings despite the pressure for and interest in alternatives.

The adoption of AFAs can lead to the recognition of another, perhaps unpleasant truth: not only does the hourly rate serve as the basis for most fees paid by corporate clients; it also undergirds many aspects of law firm operation and existence and it underlies many processes within corporate law departments. From lawyer-evaluation mechanisms to partner-compensation decisions, the amount of time billed to clients and the time-based fees thereby realized motivate or impact many decisions made by private practitioners on a day-to-day basis. Many law departments review invoices based on the hourly rate with technology and other mechanisms. Even a cottage industry – legal invoice auditing – has developed because of the hourly rate.

To loosen the stranglehold that the hourly rate has exercised on fees for over fifty years, lawyers will need to unlink it from many aspects of their professional existences. Unless they do, efforts to broaden the use of AFAs – and their success – will be imperiled.

To delegate or not to delegate?

In order to realize the greatest value in legal service, the work should be performed at the most appropriate level by the most appropriate individual. Does this general rule require that all work be “downstreamed” or delegated to the most junior level? How does it square with the trend (one that has pervaded law firms and other organizations for decades) of reducing the number of support staff and thereby increasing the ratio of professionals to support staff, as by providing one secretary/executive assistant to three attorneys rather than to two?

The general rule does not mandate either more or fewer support personnel per a number of lawyers. It also does not lead to automatic delegation of professional work to the lowest feasible level (such as to junior associates rather than more-senior lawyers). Sometimes, work performed by more senior members of a firm represents the higher-value work. See, e.g., the case study described on pages 153-155 of The Value-Able Law Department.