Alternative Fees and Quality of Work
Week 6. Each week via the In-house ACCess blog, follow the promise and pitfalls of forming a new value-based client-firm relationship. This blog pairing explores how to improve the value returned using a different approach to managing litigation work. As General Counsel of Kayak, Karen Klein provides legal counsel to senior management and oversight of all legal matters. Karen’s co-blogger is Nicole Nehama Auerbach, a co-founder the Valorem Law Group, The voice, views and stories expressed by the authors below are their own and not ACC’s. To catch up on the story so far, click here.
The client view
In our previous posts, we have written about my transition to using alternative fee arrangements for certain matters. We have also written in depth about the various issues that come up in the context of pricing. From an in-house perspective, there are a number of other issues that I grappled with (or continue to grapple with), most of which are not worthy of a full post on their own.
Collectively, though, I think the issues bear mentioning. Nicole will respond to them from the firm’s perspective in her post, but I will set them out here:
1. How do I ensure that with a fixed fee, the firm I am using won’t come to the end of a busy month and cease doing work? This was particularly worrisome for me because the matters being handled on an alternative fee basis are litigation matters. That means that large influxes of work may occur within the same month, and there is little flexibility to push it off.
2. Along the same lines, how do I ensure that my matter isn’t being pushed down to the most inexperienced attorney at the firm since that person is the least expensive in terms of time expended? Again, because litigation, even routine litigation, carries risk, it is important to know that matters are being staffed appropriately.
3. Because I know a firm working on an alternative fee basis must be more efficient to have a higher profit margin, how do I know that it won’t employ a litigation strategy that is so lean that it hurts us in the end?
These are related questions that all go to the fundamental issue of whether using alternative fee arrangements can result in a difference in the work product you have come to expect.
I will leave it to Nicole to respond to the issues directly. Suffice it to say that my experience has allowed me to become comfortable with both the issues and the solutions to avoid the issues. All in all, while I do not like to resort to clichés to make a point, in this instance it may be warranted — sometimes you have to simply try it for yourself to see.
The firm view
Many of the issues that Karen has raised are ones that my partners and I hear repeatedly from clients or prospects. In 2007, before we started the firm, I spoke with a number of in-house lawyers to get a sense of their previous experiences with alternative fees. Then, the number of in-house lawyers who had seriously considered an alternative fee arrangement, let alone had used one, was small. Still, for those who had or those who contended that they would consider it, the biggest issue was ensuring the quality of work did not diminish.
For us, that was why it was so important that we include a value adjustment line on all of our bills and why we almost always propose that a portion of our fee be held back until the end of the engagement. We wanted to let clients know that they have the ultimate control over the bill even if we are setting that bill based on an agreed upon fee arrangement. For us, these measures always seem to satisfy the concern.
Having a fee arrangement that includes some "skin in the game" as we like to call it, provides the safeguards the client needs. In most of our arrangements, we have some element (usually a large element) of a bonus or contingency based on the results we achieve. In other words, if we have done more work than we expected in any given month or two because that’s how litigation goes, that bonus, holdback bucket or success contingency is a powerful incentive to do that which is necessary to achieve the client’s goals. For the same reason, firms using this approach do not have an incentive to push the work down to the most inexperienced member of the team. With inexperience comes inefficiencies – something that firms doing alternative fees should abhor. In fact, we find that our best results occur when the senior partners sit and discuss a client’s case. Collaboration at the highest level brings the highest rewards.
Karen’s last concern about running a case so leanly that it might hurt the client’s position if the case goes to trial is also one we have grappled with. It is important for clients to know that with a fixed fee, it is impossible for the firm to do all the same things that a different firm would do if billing by the hour—isn’t that precisely the point though? Any firm that does that will likely go out of business quickly — unless their fixed fee arrangements are so high that they are merely surrogates for what the firm would have been paid had it billed by the hour. My partner Pat Lamb refers to this as the “wolf in sheep’s clothing syndrome.” But the items being cutout of the usual arrangement are not key strategic items that runaway high risk of dooming the client at trial. To do that would be akin to cutting off your nose to spite your face. Instead, the trim should be of non-essential items that are routinely done in the billable world but have no great relation to achieving the end result the client wants. For example, filing motion to dismiss after motion dismiss when there is no chance that the entire case can or will be ultimately dismissed with prejudice may not be a reasonable expenditure of time or effort. Same with taking the deposition of every witness who may have some remote knowledge of the case simply to box him or her out on the likely cumulative evidence that already has been established by key witnesses.
Lawyers who try cases tend to prepare cases differently than those who don’t. The prism of “will this make a difference at trial” tends to create a greater focus help differentiate the needed and essential from the fluff that so much of litigation seems to be. Alternative fee arrangements use that same prism. And we know from looking at scores of great plaintiff lawyers that one does not need an army to secure great results.
Do some of these decisions bear risk? Every decision carries risk. Sometimes the risk is simply that the fee will be unacceptably high (which is why clients railed against the billable hour to begin with), but most business executives operate in a world where risk is a routine factor to evaluate. Having as much as 60 or 70% certainty is a rare thing for them, and something they are comfortable with. It is typically the lawyers who are risk-adverse and who think that engaging in tactics to minimize the risk is an economically reasonable thing to do. With an alternative fee arrangement, the 98% most lawyers strive to achieve certainty must fall by the wayside so that only that which is truly necessary to achieve the outcome is left. In the end, it is the client’s call as to what gets left out and whether it is worth the risk. Most clients savvy enough to be using alternative fees appreciate that this risk evaluation is part of their job.
Kayak pick of the week: Chicago to New Orleans. Just love the beignets!