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A billing discussion worth its time

A billing discussion worth its time

Having recently returned from an Alternative Fee Arrangement Forum in San Francisco, John Chisholm shares the US perspective on alternative billing and finds that even litigators were open to…

Having recently returned from an Alternative Fee Arrangement Forum in San Francisco, John Chisholm shares the US perspective on alternative billing and finds that even litigators were open to such discussions

I am old enough to remember BTC ("Before Time Costing") - that is before consultants & accountants came to private law firms in Australia in the 1970s showing us US-based Alternative Fee Arrangements #1 ( "AFA's #1).They called it Time Costing. It was going to revolutionise the way we worked as lawyers; clients would love it and law firms would love it because it is easy to administer, and we would be more profitable as we would be able to make a profit every six minutes.

Most law firms, after much trepidation, embraced time-based billing with enthusiasm. First we trained ourselves and then our lawyers to record time by filling out timesheets, then we set about purchasing expensive practice management systems that allowed time to be entered directly on a client's file and finally we went out to the market selling time-based billing to our clients.("you only pay for time spent by us on your matter" the patter went).

And we did a great job selling time to all our stakeholders - including our clients - because during the last 30 years time-based billing has became the accepted norm for the legal profession - at least in the western world.

Fast forward 30 years and some consultants - including yours truly - are now peddling Alternative Fee Arrangements #2 ("AFA's #2") primarily because time-based billing did not provide all the benefits it promised - especially to our clients and younger lawyers.

By 2009 nearly every law firm in Australia had in their kit of client service offerings some type of AFA's #2. These included anything from blended rates, capped fees, fixed prices, value pricing, staged costing, event costing, success fees, etc. While all firms market their AFA's #2 offerings as "innovative" and in their clients' best interest (which they may well be), most firms are merely responding to their clients' demands for more certainty and control of their legal spend.

In reality, with a few notable exceptions, if given a choice most law firm leaders would still prefer their clients' accepted time-based billing -notwithstanding all the problems and opposition to it. To truly embrace AFA's #2 not only requires some billing and pricing changes but a huge mindset and business model change in the way we practise law and deal with our clients.

Only a few law firms at the current time genuinely offer AFA's #2 as a real point of differentiation and an even smaller number offer onlyAFA's #2 and no time-based billing options at all to their clients.

So what is really happening out there with AFA's #2?

While few lawyers and commentators will publicly support time-based billing, many law firm partners, many consultants and even some corporate counsel in Australia will tell you that while AFA's #2 are on the increase the majority of legal work is still being billed out by time and that this is likely to continue for some time - if not forever. Notwithstanding the widespread criticism of time-based billing from all quarters, the story goes that because no-one has come up with a better billing model, until they do law firms will continue to use time-based billing and the leverage model as the cornerstone of their practices.

This is not to say there is not some innovation happening in law firms' pricing and business models in Australia. There is, but, regrettably, the examples of innovation to date are far and few between. Compared with other industries that search far and wide outside their own industries for new ideas and to come up with genuine innovative offerings, consistent with a risk-averse profession primarily built around precedents, we tend to only look and see what competitors in our own industry are doing, and simply try to do it a little better or more efficiently.

Law firms that genuinely have their clients' interests at heart should not be so much looking at what their competitors are doing with their pricing and business models, but at what law firms should be doing.

Just as we looked at the US for the introduction of AFA's #1, it is to the US that many still look for ideas and examples of what is happening now, but, more especially, what may happen in the future, in respect of AFA's #2.

Last November I attended an Alternative Fee Arrangement Forum (subtitled: Strengthening the firm/client relationship by softening the shortcomings of the billable hour in an economically challenged environment) put on by the Ark Group in San Francisco. The line-up of speakers was all lawyers and corporate counsel that in various ways have moved away - either fully or in part - from time-based billing.

The audience mainly comprised a mixture of lawyers in private practice and general counsel who were either already practising, at least in part, non-time-based pricing and wanted to increase their percentage of non-time-based billing, or those that were still mired in time-based billing but wanted to learn more about alternative fee arrangements. This mix, together with the quality of the speakers, made for open, full and at times vigorous discussion about law firms' pricing and business models, and, importantly, what clients increasingly expect.

The mix

Fred Bartlit Jr, senior partner at Bartlit Beck Herman Palenchar & Scott LLP - one of the doyens of big scale commercial litigation in the US - has never charged by time since starting Bartlit Beck in 1993.

Patrick Lamb and Nicole Auerbach founded Valorem Law Group in Chicago in 2008 using a value adjustment line, among other tools, as part of their value-based pricing model for their clients.

Polly McNeill, visionary CEO of Seattle-based law firm Summit Law Group, has a unique and innovative client service practice model that has led this 12-year-old Law firm to be seen as the leading light for many other "new age" law firms in the US.

Last, but no means least, in the private practice arena, is a pocket dynamo and newly crowned "legal rebel", 33-year-old Christopher Marston, founder of one of the US's most innovative law firm Exemplar Law. Chris's model is different to even the other firms practising AFA's #2, not least because he is mainly corporate-based rather than litigation-based and exclusively and uncompromisingly practices value pricing.

The various corporate counsel on the panels included amongst others Paul Porrini, Deputy General Counsel of Hewlett Packard, William Mayer, General Counsel Western Region of D R Horton America's Builder and Paul Lippe, CEO of Legal OnRamp. The corporate counsel in the audience included a mixture of corporates who now accept nothing else other than fixed priced fees to those that still use a mix of alternative pricing arrangements with their panel firms. Most talked of the "difficulties" they initially experienced with their law firms and in both parties feeling "confident" in alternative pricing models. Several conceded they were still in a "transition" and learning phase. Not unexpectedly, certainty of knowing what the legal costs would be - rather than how the legal costs are calculated - were high on counsel's list as the reason for moving away from hourly rates.

True to their philosophy as innovators, the speakers were not so much interested in "dumbing themselves down" by looking at what their traditional law firms' competitors were doing, but rather what else innovative firms and their clients can come up with to ensure a mutually rewarding long-term relationship.

Variations on a theme

The AFA's #2 models used were all different, although the one consistent thread appeared to be that both parties got better value when their law firm had some "skin in the game". This did not necessarily equate to a contingency fee (although it did with some - still a no no here in Australia) but included myriad other incentives (and sometimes disincentives), claw-back provisions and discretionary value-adjustment amounts.

It would seem that the challenges and opportunities facing US law firms and their clients are pretty much the same as we face here in Australia. Perhaps the deeper impact of the GFC in the US has enabled some clients to wield more weight in their pricing negotiations with their law firms. In some cases the more innovative corporates have insisted on alternative fee arrangements such as fixed pricing and their law firms having "some skin in the game", whereas others are simply screwing their firms on rates ("the clients' revenge" as termed by one speaker).

Granted, some of the law firms such as those at this US forum are further advanced than most firms here in Australia, but these firms are still the exception rather than the rule - even in the US. Having said that, the tide is certainly turning and alternative fee initiatives are on the increase everywhere. The smarter corporates and their law firms are definitely working more closely together for mutual long-term benefits (seeking better value) rather than simply short-term gain (cheaper legal fees).

In any worthwhile relationship the foundation should be built on mutual trust and this is especially so in a lawyer-client relationship - whatever pricing or business model is used.

As with any declining and mature business model it will be those that have traditionally gained the most out of it that will be the last to change and will, therefore, cling onto making as many "efficiency improvements" to the old model before jumping into any new model. Innovators, on the other hand, recognise the benefits to them and their clients of a new business model and will be quick to implement and gain first mover advantage before the rest of the pack catches up.

* John Chisholm is the principal of Chisholm Consulting - a firm that assists law firms and their clients to move to more value-based business and pricing models. He can be contacted at www.chisconsult.com or 0419 763 391

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