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Alternative Fees (Part 23): Examples from the AmLaw 100

By Jim Hassett

According to Bryan Ives, a partner at AmLaw 100 firm Alston & Bird, "Law firms our size have no choice but to aggressively talk to clients about alternative fees.  These days, almost every new engagement begins with an active discussion of the topic.?

He made the comment near the beginning of a recent discussion of ?Alternative fees: How to implement sustainable programs for the long run? which I moderated for West LegalEdcenter.  The panel consisted of four senior partners from AmLaw 100 firms that are among the leaders in this area.  While these experts did not always agree on what the future holds, they did provide numerous examples of how their firms are building new business and strengthening client relationships with alternative fees.

Ives described one situation where Alston & Bird agreed to handle all routine litigation (through summary judgment) for a large national client for a fixed fee per case.  An enormous amount of research and discussion was required before the two sides were able to agree on what that fixed fee should be.  Alston & Bird spent months studying the client?s history of past cases, including how many cases went to trial vs. how many were settled, and where they were located.

That arrangement is now underway.  When Alston & Bird compares the results to what they would have earned on an hourly basis, ?sometimes we win, sometimes we lose.?  But they believe that when they get to the end of the project they will ?come close to the standard hourly rate.?  And in this economy, that?s a very good thing.  In the future, after the economy improves, they expect to use the same approach to make more profitable deals.

According to Steve Jenkins, at Haynes & Boone so far the transition from hourly billing to alternative fees has been ?episodic, not transformational.?  However, there is ?potential for a paradigm shift,? and the firm is ?operating under the assumption that change is likely to occur.?

They are therefore encouraging lawyers to experiment with alternative fees in most practice areas, to prepare for the future.  In particular, they are experimenting with risk sharing and risk collars ?in areas that are not usually thought of as fixed fee.?  Typically, they establish a budget at the beginning of each matter, and bill on an hourly basis.  If they go a little over budget, the firm takes all the risk and does not bill for the excess hours.  If it goes beyond that, the responsibility and the risk must be shared.  The details vary from case to case.  In one instance, the firm agreed to bill nothing for hours that were up to 20% over budget, but after that the costs were split 50/50.  If the matter came in under budget, savings would be shared 50/50.

Next, Kerry Notestine described Littler Mendelson?s work for FMC Technologies under their widely publicized ACES risk-reward system.  Since I outlined this approach in Part 19 of this series, I won?t go into the details here.  But I was interested to hear Notestine say that while there was initially ?some hesitation? on the firm?s part to accept this type of arrangement, it?s been going on for seven years now, and Littler is very happy with the results. 

When they compared the cost recovery with FMC to what they would have recovered with hourly rates, they are almost even on their retainer work (they recover 97% of what they would have billed hourly) and are a bit ahead of hourly costs on projects and litigation.  Littler recently started a large class action suit on an alternative fee basis.  It has much greater potential for profit or loss, and the firm is watching closely to see how that one turns out.

The final speaker was Lisa Damon of Seyfarth Shaw, whose approach has also been described previously in this series.  (See Part 3 and Part 10.)  About three years ago, Seyfarth was hearing a lot of clients talk about their interest in alternative fees.  They decided to make a significant investment in getting ahead of the curve, so they could ?do it right, deliver high value, and maintain margins.?  The firm made a significant investment in Six Sigma training to help lawyers deliver services much more efficiently, by eliminating re-work, using knowledge management, and creating process maps.  This helps them craft flat fees that lower costs for the client while still maintaining profitability for the firm.

Although ?it?s been a learning curve,? Seyfarth now offers alternative fees in every practice area.  ?We like flat fees the best,? Damon said, ?because the risk sharing does so many things to help the client/firm relationship.  They produce a very interesting mind shift.  Suddenly you change from being a vendor to being a business partner.  It?s wonderful.?

For a summary of this series, download our free LegalBizDev Guide to Alternative Fees.

Full post as published by Legal Business Development on September 02, 2009 (boomark / email).