Is your firm ready for alternative fee structures?

Since I’ve been involved in the legal profession — fifteen years now — firms and general counsel have been talking about alternative fee structures. The failings of the billable hour system as well as the reasons for its persistence in the face of its demise in most other professional services businesses, e.g., medicine, consulting, have been explored numerous times.Two recent pieces have caught our eye. First, this articleon the California Bar Ass’n website again raises the spectre of alternative fee structures, but the people quoted unfortunately prescribe more of the same! One professor suggests “lowering rates” to be more competitive, and the discount dance (keep rates high but discount to get to a viable number) is described. They generally agree that associate salaries aren’t going down either. Interestingly, one firm describes its low leverage as a benefit to avoiding current pressures, but most partners instinctively understand that increasing leverage is one way of increasing top-line revenue. But that’s not all of the story.Here is one fact that, even if unknown by many, matches the perceptions of GC’s:

A survey by the Corporate Executive Board found that large-company spending on law firms grew by 49 percent between 2002 and 2005. And while non-law firm costs increased by 20 percent over the past 10 years, large law firms’ prices jumped almost 75 percent in the same period.

Some GC’s have identified two major issues in what constitutes “reasonable fees” as viewed by a GC: first, internal law firm calculations of “overhead” often include partner compensation (even if just the salary/draw component) and second, partners simply make “too much money.” There is likely a disconnect between what GC’s believe (see above) and the law firm/partner perception of these same issues.

Bruce MacEwen recently covered much of this ground. He does well at describing and discussing the components of law firm reveneue, in terms that probably provide comfort to partners who have understood these elements for years. His prescription (moving back to a “for services rendered” bill) eliminates the unwanted attention that can be focused on detailed itemized bills simply because they exist, but it doesn’t really address the GC side of the problem, which, after all, is the source of the pressure on lawyers. Firms have to figure out how they can meet the needs of their GC clients by providing increasing value over time. The implication, however silent or unstated, is that if you’re communicating in terms of (value = hours x rate), then you have inherently fated yourself for unhappiness.

ThoughtStorm’s approach to finding alternative fee structures to resolve this partner/law firm conundrum is to treat law initially like we treat any other industry: apply our three-stage technique of data-driven analysis, informed decision-making, and intentions-based guidance. We make changes based on the unique nature of law as a business in the actual prescriptions for the practice’s problems and in the methods and processes we develop for lawyers and law-firm workers to follow to improve results.

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  1. […] recently wrote about alternative fee structures for large law firms and their clients. A post from the WSJ law blog on Kirkland & Ellis’s […]

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