Embracing Alternative Fee Arrangements – Tips from Legal Week

If you follow my blog, you know I am a fan of disrupting traditional methods of practicing law, which includes the billing method, a.k.a the infamous billable hour. I am a proponent of using data to provide transparency from both the client and attorney side in how much each matter will cost.

While this is easier said than done, there are methods and measures that can be put in place to provide such transparency, which can be beneficial for both parties. I attended the “Embracing Alternative Fee Arrangements: Applying Data Analytics to Move Beyond the Billable Hour” panel at LegalWeek in New York, and the panelists weighed in on the pros and cons of alternative fee arrangements (“AFAs”) and why and how “lawyers should embrace AFAs” and stop “running away from them.”

The panelists included:

  • Haley Altman –  CEO, Doxly @haley_altman – Moderator
  • Eric Lieber – Director of Legal Operations & Litigation Support. Toyota Legal One c/o Toyota Motor Sales, USA, Inc.
  • Adrian White – Chief Information Officer, Wilmer Hale
  • Julie Taylor  – Shareholder, Keesal, Young & Logan

Using Data

According to Adrain, law firms should focus on the Legal Project Management institute certification programs for legal project managers (LPMs). LPMs work with attorneys to set expectations and decompose the work of the practice into its constituent parts, breaking it down into more and more tasks and activity codes. They become the basis of data to which the firm can look back on to create models and make estimates, manage those estimates, and delivery the work they say they’ll deliver.

Eric, the Director of Legal Operations at Toyota, uses a matter management system and e-billing to crunch numbers, and track fees by location, title (partner v. staff attorney) to see where the value is. Clients, like Toyota, are asking more of law firms these days. They want fixed fees, risk sharing, award sharing, etc. The key is setting expectations, and at the same time tracking the law firms you are working with to ensure the expectations are met.

Share the Risk and the Success

Eric also believes in sharing risk. Clients want their business partners (i.e. law firms) to make their money, survive and prosper so they can provide solutions for the company. If the firm is successful, the client can be successful as well. Clients want firms to sharpen their pencils and come up with different pricing models that include risk sharing. For instance, if the settlement value is 250,000, the client wants a deal that if the firm settles for $100,000, then the firm will take a bigger share. They will split the difference so both parties benefit in the end.

Julie echoed this sentiment from a law firm’s perspective: “There’s this misconception that we don’t care about whether or not the firm is successful, but that’s not true. We want efficiency and we rely on data on how much partner versus associate time is spent on a matter. We also assign an e-discovery specialist to every matter so we can assess those costs because that’s the one place where costs can get out of control. Keeping control of costs, means a happy client.”

Lessons Learned

According to Eric, “after every project we do a ‘lessons learned,'” and “look at them before we start a new project.” The goal is to avoid making the same mistakes and ensure that you “don’t have the same ‘lessons learned’ 5 matters in a row.

According to Julie, “lessons learned” means looking at efficiency and where you can do a better job. That includes looking at what similar cases have cost a firm and after every matter, analyze it. Currently, her firm is saving that information in Excel, which is a problem because it’s not accessible and it’s difficult to analyze, but they are looking at different tools to aggregate that data so they can use it at a later point in time.

Combine the Art with the Science

According to Adrian, one of the challenges in working with lawyers is that they see the practice of law as an art, not a science. When you commodify that in any way, that’s a demeaning exercise for some people. They’re successful because their own idiosyncratic approaches have made them successful. When you move away from that, the art is scrutinized.

However, there are ways to work with lawyers who see the practice of law as an art form. The key is to build on the collective knowledge and try to divide that information. The panelists suggested the following:

  1. Tag activities and decompose them down to individual tasks. Also, use text analysis tools to see where you don’t have something that’s tagged with a  tasks or activity and determine whether they can reduce that to a task or activity based on keywords. When you tag each activity as a specific task, you can see where most of your time is spent and how much you billed for it.
  2. Build a rich text of subjective data on the opposing counsel, judge, and on the overwhelming data on fees, hours, and costs. The key is wedding those things. Find tools that can marry this data for you and create a dashboard that has an enormous amount of information.

Implement Change Strategically

It is difficult to change behavior around billing. The key is to proceed carefully. However, the change must be made because corporate clients are forcing law firms to change. So, make suggestions and see what happens. Start taking people who have project management and knowledge management expertise, and think about how to bring them into the case.

Also, think about who you’re communicating with: partner v. associate, and what their needs are. Lastly, continue building your database. Implement project management training, and identify and reward successful practice management when someone does a good job in the firm.

Embrace the Loss of the Billable Hour

According to Julie, “attorneys were shocked and sad about the loss of the billable hour, but they finally accepted it.” Most firms are acknowledging the loss of it, but we have to get past the stage of accepting it, and we have to embrace it.

Her suggestion is that if your CIOs can give you info data in a digestible form that shows how you can be successful under an AFA, that shows how you can be successful with it, and how you can be creative with it, then it’s easier to accept.

Track Change in Real Time

According to Adrain, you should understand your data and information in real time and make it digestible. When you start with an assumption that “every matter should have a budget” that’s a leap forward. Historically that was unacceptable because it’s so hard to predict.

However, when you start with a budget, even if you’re right and or wrong, over time, as you apply budgets and start tracking performance so you know how much runway you have left, and providing that information in an easy-to-understand way, it becomes easier to get comfortable with the notion.

Also, giving quick overviews is better than dashboards to show how people are doing. If you think of it like a FICO score, there are a few elements that make up a number that one can keep in one’s head. The goal is to come up with something that’s easy to keep in your head that shows how you’re doing on your matters and if you’re hitting targets.

Haley also suggested that lawyers need to be encouraged to bill in real time on a matter so you can track it in real time instead of entering time later and messing up the budget and data. Get a mobile tool so your lawyers can keep track of time wherever they are and they can capture things in real time. Provide tools that encourage behavior to get those bills in every day.

From a litigation perspective, Julie also agrees that prompt time entry is key. You want to make sure you are using right billing codes and you’re doing them on time to ensure it works against the budget. You need to be able to drill down where are you spending your time, and things like whether discovery is out of control? Is someone spending too much time drafting a motion and how can you mitigate this?

Set Expectations Up Front

Eric suggested that attorneys share “Welcome Packets” with outside counsel. The parties can have a kickoff and share a packet from one attorney to another that lays out roles and responsibilities, certain constraints (i.e. can you send us emails with X megabyte). By setting expectations up front it decreases costs in the back end.

Also, from a corporate client perspective,  you want your firms and vendors to rethink their past practices and identify risks ahead of time, and propose a mitigation plan. To do this, you need to bring them in to learn about the business so they understand how the corporation is thinking.

Also, think about how you can access each other’s systems. Sending redlined documents through email is not efficient. Is there a way to avoid that and ensure that at the end of a matter, you have signed documents and know where the repository is for that? Also, you should not be asking for bills at the end of a matter. This should be done up front, and both corporations and firms should both hold themselves accountable.

Summary

The key takeaways from the session are:

  1. Set expectations up front, and this will minimize costs at the end.
  2. Track all data in real time
  3. Use data as “lessons learned” and make sure you don’t repeat the same mistakes again
  4. Embrace the loss of the billable hour, and start thinking about how you can use your data to set alternative fee arrangements
  5. Transparency and communication are key in setting budget expectations and sticking to them;
  6. Firms and clients should work like partners and hold themselves accountable
  7. Provide tools to attorneys that can encourage good behavior, like real-time billing, and tracking and sticking to budgets

Stay tuned for another Legal Week session summary on “Collecting Winning Data.”