Legal Commentary

BigLaw and Alternative Fees: With Friends Like This, I Can File Chapter 11!

By Patrick J. Lamb

In February, I posted about The Problem With Most Fixed Fee Proposals.  Here was my point:

Let's start with the "what it would cost on an hourly basis" part of the calculus.  Hours times hourly rate.  See any problem?  To start with, hourly rates include a very hefty profit margin.  The lawyers also have no incentive in calculating the fee to be skinny on the hours.  The problem is then compounded by "adding a safety margin" (the proper translation of this is "more profit").  So law firms typically come up with a fixed fee that guarantees them more profit under the fixed fee approach than they would get under the traditional hourly system.

Today, Altman Weil's Tim Corcoran posted Navigating The Acorn Minefield and illustrated the point wonderfully:

I recently met with a BigLaw partner who proudly described his role as the primary arbiter of fixed fee engagements at his 500+ lawyer firm.  Apparently any engagement that required, or that the firm believed would benefit from, a fixed fee rate structure had to pass through this partner.  His approach was to study the client's prior year billings for the same type of work, or find similar billings from another client, add a cushion equivalent to 15-25% of these billables, and quote the result as the fixed fee rate.  There was no evident involvement by the Finance team, no cost accounting data available to benchmark relative costs of legal service delivery or whether the prior work was profitable.  And there was no guidance to the timekeepers on how to operate more efficiently lest the new fixed fee engagement become non-economic.  The partner seemed proud of his role, until I made the mistake of questioning whether this sort of formula couldn't be automated, since it didn't appear to be a data-driven exercise.  Not knowing my place, I then questioned whether the clients wouldn't eventually notice that fixed fee engagements were merely prior year billings plus 20%.  I was shown the door.  

Tim goes on to discuss "acorn pricing" in a most thoughtful manner.  Acorn pricing is described by one BigLaw partner this way:

'We'll practically give away some early work, but we hope to make it up with more profitable work later on.'

This post is not about acorn pricing--Tim's post addresses that issue better than I could hope to.  For me, and hopefully for clients, the point is the manner in which BigLaw divorces fixed fees from risk sharing and looks to exchange budget certainty for the client for the firm's profits.  That is a poor bargain for the clients and any who accept BigLaw fixed fee arrangements (indeed, any fixed fee arrangements) without understanding whether the firm is taking on any risk are at risk of being taken to the cleaners.

Full post as published by In Search of Perfect Client Service on June 15, 2009 (boomark / email).