Why Alternative Fee Arrangements Aren't the Answer

By Cheryl A. Solomon

Cheryl Solomon was the global General Counsel of the Gucci Group, based in London, England, from 2004 to 2011. She relocated to the San Francisco Bay Area in 2011 and is currently acting as General Counsel to Kidlandia Inc., a technology start-up with its own cartoon characters (called Kreechurs) focused on providing deeply personalized games and social media experiences for kids.

The voice, views and stories expressed in this posting are of the author and do not necessarily reflect the positions, strategies or opinions of the author’s employer or ACC.

For some time now, I’ve been reading and listening to in-house lawyers, law firms and the media discuss how alternative fee arrangements are the answer to escalating outside legal fees. By “alternative” fee arrangements, people are referring to just about anything — except the billable hour. The idea is that by discussing alternative fee arrangements, in-house and outside lawyers will be discussing the value of the legal work in a way that better meets a company’s budget and need for certainty. In addition, there is much discussion and debate about choosing preferred law firm panels and negotiating deeper discounts.

This debate misses the mark for one fundamental reason. When a new matter arises, the most important decision you must make as an in-house lawyer happens before you ever begin discussing fees. Your most important decision is selecting the correct lawyer: This is the holy grail of getting value for money. If you choose the right lawyer, the fees take care of themselves. If you choose the wrong one, you will be unhappy for the entire duration of the matter.

So, it strikes me that the most important question is not how to negotiate fees that represent value for money, but rather how to choose the right lawyer. That sounds as though it should be easy — you just hire a technical expert in the area — but it is much more difficult than it sounds. Why, you might ask? Here are a few reasons we might choose the wrong lawyer:

Flight to safety, or risk aversion — If we have an existing relationship with an outside lawyer, we are likely to go ask them for advice, even if it is not their area of practice or jurisdiction.
Large law firm syndrome — We go to a large law firm just because they have a department that relates to the matter.
Saving money – We are so focused on saving money that we go to the cheapest lawyer.

Now, as a preface, let me say that I often work with lawyers that I have an existing relationship with, that I use plenty of large law firms, and that I use firms with lots of offices in lots of cities. I am not suggesting that you should stop using any or all of these lawyers. What I am saying is that you need to spend time up front thinking about whether those lawyers are the right choice for the particular matter at hand.

For instance, if you have a small acquisition, do you really need one of the biggest law firms in the world? You might decide that you do. I suggest that you take the time to think it through beforehand. It may be that if you go to a regional or local law firm with a good reputation, you will get exactly the advice you need at exactly the price that is reasonable to pay for that particular acquisition.

Similarly, if you have a small employment matter in Italy that relates to terminating an employee there, do you really need to have one of the largest law firms in the world handling that? Are you better off finding an employment law specialist in Italy who deals with more routine matters, or does the large law firm you are considering happen to have someone with the particular expertise you require?

There will be times when you need the legal specialty, reputation or geographic coverage of a big firm. In those circumstances, you should use them, because if you don’t, you will end up paying for it (literally or figuratively) by having to coordinate a bunch of firms yourself, or by not getting the quality of advice you need from lawyers who routinely handle matters in a particularly complex area.

Not only is the choice of outside counsel important to get the most efficient advice, but it also gives in-house lawyers an opportunity to demonstrate their value to the company. Part Two of this post will explain this in more detail and will also provide a checklist of considerations that should go into selecting outside counsel.

http://bpjolaw.com Eric Jacobs

While I agree that choosing the right counsel takes precedence over the fee structure, I think the concepts are related but separate. Even with the “right” counsel, the “right” fee structure should focus more on the value of the work to the client than process (or the time) the counsel pursued getting there. Still, I am gratified to here a GC making reference to the use of firms other than “Big-Law” though unfortunately, I find that in practice, this is the exception more than the rule. The real “flight to safety” is where, to my mind, the real problem is with a lack of value in the delivery of legal services. Most GCs are from Big Law. That’s just the way is. There is a natural bias there that encourages inflated, at times absurd billing practices by outside counsel. Beyond that, if a case goes “south” and the GC selected a Big Law firm, others scrutinizing the result will figure it must have been the matter. On the other hand if the matter goes “south” and the GC selected the small firm, the natural tendency is to think that maybe it was the firm. Both perceptions are wrong ofcourse but the perception seems to prevail. In our practice, we have been fortunate to represent some huge multi-national companies. The only way we get them though is when our relationships with Big-Law lead them to refer us due to conflict or for other reasons. This large companies would never have come to us otherwise though our qualifications (lawyer for lawyer) are every bit as good, our results at times better, our value shockingly so and our responsiveness, incomparable (because we feel really luck to you have you). Its true that the choice of outside counsel by GC can really demonstrate the value of that GC for going outside the “easy” choice. To do that, you’ll need a bold GC and, well, maybe its easier said than done, I wouldn’t know. I’ve never worked in Big Law and never been a GC.
http://vabizlawyers.com Tom Bowden

Cheryl makes some good points but I tend to agree with Eric. Most advocates of Value Pricing do not say that it is the answer to the question “How do I choose counsel” – rather, it is the answer to the question “How do we price our work?” That is certainly a relevant factor in the selection process, but it is not necessarily the key factor. Competence, confidence, flexibility, familiarity and responsiveness are just a few of the factors involved. But, between two choices whose scores are comparable, I would suggest that you would be better to opt to go with a firm that understands that their value is not measured by their timesheets, but by their performance with respect to all the aforementioned criteria. Again, assuming equally meritorious firms, there is clearly value in the certainty of one who says “We will charge you $X” vs “We will let you know when we are finished – just trust us.” If as you say, the fees will work themselves out, aren’t you in effect saying that you are comfortable you’ll be able to get whatever adjustment you feel is warranted, and if you are, then what is the point of the whole hourly billing exercise? Of course, depending on the relative size of the firm and the client, and their relative bargaining positions, the client may be able to simply dictate what they think the bill should have been after the fact, in much the say a powerful firm may try to do that to a smaller or more troublesome client. In either case, both would be better off knowing in advance how the fee will be set or calculated, other than just by saying – we’ll just have to wait and see. Frankly, to take this attitude about fees, saying, “they will work themselves out” is a bit cavalier, if not naive.
http://www.bcglegal.com Mike Brown

Cheryl, I think your comments are right on the money. The headline is provocative, but I think your points are easily integrated into the philosophy we have developed while embracing the flexibility we associate with Alternative Fee Arrangements. For my firm, we see the discussion of AFAs, and our willingness to work collaboratively with legal departments and business executives to develop the right approach to a given matter, as an opportunity to demonstrate and deliver our true value proposition – which is the value of right sizing the staffing, right-typing the strategy to achieve the goal, focusing on the “client win” which leads the client to hire us again. It is a whole lot more than discounting or fixed fees, and the biggest impact on client satisfaction is a true “fit” among client, attorney & law firm, and the project.
I appreciate your making this point – one that I think needs to be made!