Tag Archives: alternative fees

Monday Clicks: Billable Hours Endure, While AFAs Gain Ground

Posted on April 29, 2013 by | Leave a comment

In the aftermath of the whole DLA Piper “churn that bill” debacle, billing practices are a hot topic. It seems that the billable hour endures, while alternative fee arrangements are gaining ground—as are nontraditional firms that offer unbundled legal services. Also: Is bill transparency for you?

  • When it comes to bill padding, hourly billing is only part of the problem, according to Axiom CEO Mark Harris. The No. 1 contributor is an environment that rewards the status quo and offers little incentive to those at the top to change.
  • Alternative fee arrangements were cited by 50 percent of respondents to a recent Legal Week (sub. req.) survey as their preferred way to reduce legal spend, with only 11 percent favoring traditional hourly billing. “Hourly rates are fundamentally and philosophically flawed,” one respondent said.
  • Speaking of alternatives, so-called “unbundlers” offer legal services traditionally done by the big law firms. A Strategic Legal Technology post explores the implications that unbundling might have on the future of the legal market, asking “Will Unbundling Undo BigLaw?”
  • A new startup wants to make law firm billing more transparent, believing that clients are more likely to pay when they understand how their bill is calculated. Viewabill co-founders have signed up nearly 80 law firms so far.

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East vs. West: Client Satisfaction Higher in the East

Posted on March 26, 2013 by | Leave a comment

Client satisfaction is a global issue, yet it looks like Eastern law firms are better at it than those in the West. A new report finds that general counsels (GCs) in Asian firms rated their external firms higher for billing practices and service delivery than GCs in Western firms did.

The Client Satisfaction Report (CSR) Asia, the first of its kind from Legal Week, is culled from Asia-specific data in the Legal Week Intelligence Client Satisfaction Survey 2012. Of 1,204 respondents, 214 offered data about Asia in six categories: cost/billing practice; service delivery; use of IT/knowledge management; personal/partner relationships; quality of legal advice; and quality of commercial advice.

The biggest difference in the East vs. West client satisfaction scores were in the area of cost/billing practices. On a 10-point scale measuring satisfaction, Asian GCs rated their firms at 7.37, higher than the global score of 7.22. Asian firms also came in higher for service delivery and responsiveness and use of IT and knowledge management.

At 8.9, overall satisfaction was highest for firms in mainland China. It was the highest-rated of the five jurisdictions examined closely in the report. The others are, by rank: India, Singapore, Hong Kong and Japan.

Data was also collected about preferred billing methods. The survey found that 45 percent of Asian companies preferred fixed fees, 31 percent like capped hourly rates and 10 percent prefer chargeable hours.

Read the full rundown and discussion of the results on Legal Week (sub. req).

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Efficiency Key to Cost-Effective In-House Legal Departments

Posted on February 20, 2013 by | Leave a comment

An efficient in-house legal department is a cost-effective one. That’s the finding of a recent analysis by CEB, a member-based advisory company that took a look at the budgets of 180 legal departments to understand “trends across industry, revenue band, and complexity.” They discovered nine efficiency trends that may help you streamline your own department.

1. Perform more legal work in-house. As CEB states, “it’s just simply more cost-effective to have in-house staff do the work that we often ask outside counsel to manage.”

2. Use non-lawyer professionals more often. An efficient, streamlined workload means you’re able to delegate routine tasks to paralegals or non-lawyer professionals. The CEB report therefore urges you to have enough support staff for your lawyers.

3. Invest in legal operations capabilities. Do you have a legal operations manager? You may need one. They manage “budgeting, technology selection, vendor management, and career development—all vital activities to manage costs and drive to greater outcomes,” the CEB report states.

4. Invest selectively in legal technologies. Technology is a beautiful thing, but only if your department can use it to its full capabilities. The CEB advises that you “push forward with technology initiatives, but demand more from providers and don’t underestimate the workflow and change management requirements.”

5. Unbundle legal services. Administrative and information-intensive activities can often be outsourced to non-law firms, leaving your department better able to handle the rest of the workload.

6. Focus on litigation matter budgeting and oversight. If you don’t budget for it, you can’t truly manage it. “There is huge variation in even basic litigation management techniques,” the CEB found. “The average company does not budget for roughly a third of its matters; and while a quarter of legal departments budget for all or almost all matters, just as many almost never create budgets.”

7. Use smaller law firms more often. In general, smaller firms charge lower rates while providing the same expertise, experience and coverage of their larger brethren. The CEB found that many companies are “reducing their reliance on large law firms in favor of midsized law firms … that permit them to consolidate their legal spending.”

8. Reduce the number of law firms. CEB members that consolidate legal work to a smaller number of firms have lower outside counsel costs. The CEB analysis states that “companies that concentrate 98% of their costs in their top-10 suppliers are most effective in reducing costs.”

9. Be judicious with alternative fee arrangements. “Although our research suggests that alternative fee arrangements are useful in reducing costs,” the CEB writes, “the way in which legal departments administer and monitor fee arrangements is far more important than simply having them.”

Read the CEB’s full analysis here.

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Insider Offers View of Biglaw-Client Relations

Posted on February 5, 2013 by | 1 Comment

What do clients really think about and need from their outside counsel? Above the Law’s Anonymous Partner found out. In a four-part interview with an in-house insider, they discussed the state of Biglaw-client relations and “what is both right and wrong with the ‘current law firm service delivery model.’”

In Part 1, the focus was on how firms rates have outstripped inflation and the use of high-rate junior associates.

The insider warns that clients are interested in the most cost-effective solution. To that end, they are “looking for alternative vendors (small firms or Axiom) that can deliver equivalent service for less cost for labor-intensive tasks…, keeping more work inside and alternative fee arrangements … [and] stressing efficient handling and staffing of matters through a holdback earned by performance measurement.”

As for the junior associates, due to the high cost and no real gain in services, clients often feel like they’re paying for a firm to train these associates.

“There are some things that junior associates can do effectively and efficiently,” the insider wrote in Part 2. “But the value proposition must be there for us as your clients.”

In Part 3,  Anonymous Partner asks how, from a billing perspective, the insider determines if his company is receiving the appropriate level of service. The insider states that “when I choose firms for assignments and analyze bills, my focus is on value (which is a package) rather than price.”

Further exploring the use of associates in Biglaw, Anonymous Partner asked “Why have clients drawn such a line in the sand when it comes to paying for associate time?” The insider answered:

“From my perspective, firms do not recognize basic market dynamics. I work for a company whose product’s prices fluctuate based on many factors. You work for a firm that sells legal services for which demand fluctuates. Yet rates always go up, and firms pay compensation to junior lawyers that does not seem to reflect market reality for the client demand for their services…. If we saw value in paying several hundred dollars per hour for a junior lawyer to work on our matters we would…. Firms must justify the cost of junior associates relative to the value they deliver and invest in training associates better through boot camps, shadowing senior lawyers, mentoring, etc.; firms talk about this stuff, but I don’t think most take associate development seriously.”

In Part 4, the final installment, the continued struggle over associate development and the importance of knowing your firm’s business on a granular level are discussed.

The insider recommends the following key areas for improvement:

“If you want your clients to pay the rates you charge for junior lawyers, you need to invest in developing them to the point where they are worth it…. So in response we look at our legal tasks, unbundle them, and allocate the parts to the most cost effective provider….”

To read the entire series in whole, go to Above the Law.

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Top Law Firms Still Tops in Rates, Billable Hours

Posted on January 10, 2013 by | 3 Comments

The top firms continue to charge the highest rates, bill the most hours and otherwise control the billing conversation—though a rise in alternative fee arrangements (AFAs) and the need for improved practice efficiency is likely, or so say several surveys.

Rates are on the rise. A survey from The National Law Journal (NLJ) (registration required) found that median partner rates were up 4.5 percent from 2011 to $517 an hour in 2012, and the median associate rate rose 3.5 percent to $323, with hourly rates ranging from $130 to $1,285 and a median hourly rate of $432. This gibes with the findings of the Major Lindsey & Africa (MLA) “Partner Compensation Survey 2012,” which recorded an hourly rate range from $115 to $1,265 and an average partner billing rate of $584 (up from $555 in 2010).

Billable hours also increased, but non-billable hours decreased, according to the MLA survey. The average billable hours were up from 1,657 hours in 2010 to 1,687 hours last year. Yet non-billable time decreased in 2012 to 530 hours, down from 563 in 2010. The MLA survey notes that the increase in billable hours plus the decrease in non-billed time meant that the total number of hours worked remained about the same (2,220 hours in 2010 vs. 2,217 hours in 2012).

Both surveys found that the largest law firms remained able to not only bill for the most hours, but also at the highest rates. “Generally speaking,” the MLA survey states, “the larger the firm, the higher the billing rate, and the higher the number of billable and non-billable hours.” In fact, an article about the NLJ survey suggests that law firms may inflate their rates in order to create “haggle room” with clients who are less and less shy about asking for discounts and AFAs. Yet an Altman Weil survey indicates that the use of alternative fee arrangements remains reactive and less profitable, with only 14 percent of surveyed firms saying that their non-hourly projects bring in more money than their hourly projects.

The Altman Weil “Law Firms in Transition 2012” survey also revealed that “strong majorities of law firm leaders believe the practice of law will be permanently characterized by pricing pressures, further commoditization of legal work, new forms of competition and, thus, a need for improved practice efficiency.” Since the first transitions survey in 2009, there have been significant changes in “how law firm leaders view the competitive environment and the appropriate organizational responses.” The top issues leaders now deem to be a permanent trend are: more price competition (92 percent now vs. 42 percent in 2009), more commoditized legal work (84 percent vs. 26 percent) and more non-hourly billing (80 percent vs. 28 percent).

In fact, many of the survey’s findings were of the “good news/bad news” variety, including:

  • For most firms, revenue was up—but so were expenses—and they believe that the pace of profit increases will be slower from now on.
  • Even though firms have raised their rates, many do not expect to realize the full increase.
  • And while law firm leaders have moderate-to-high confidence in their own abilities to navigate the changed market, they are less sure that their partners are paying adequate attention.

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Cautious Optimism Prevails: AmLaw’s Law Firm Leaders Forecast for 2013

Posted on December 12, 2012 by | Leave a comment

Despite weakening demand in a law firm market that continues to struggle, 75 percent of surveyed AmLaw 200 leaders are either somewhat (64%) or very optimistic (11%) with respect to their firms when looking ahead to 2013.  This finding (barely changed from last year’s 73 percent) and additional results are reported in The American Lawyer’s 10th annual Law Firm Leaders survey, which counted 113 managing partners and chairs as participants.

In terms of predicting how the U.S. economy will perform in 2013, law firm leaders are a fairly optimistic group – while 59 percent of respondents believe that the pace of the recovery will remain the same, a healthy 29 percent believe that recovery efforts will speed up.  Only 15 percent believe that it will slow down.

Europe, however, is another story. Firm leaders are far more bearish when asked to predict how the European economy will perform next year. There is an almost even split between those that foresee a decline (43%) or no change (47%), with only 10 percent expecting the European economy to improve.  Even so, only 1 percent of respondents indicated that they plan to close any European offices.  As Ralph Baxter, chair of Orrick, Herrington & Sutcliffe, summed it up, “The European economy is foundering, and so it’s a less productive setting.  But it’s mission-critical to be able to service clients in Europe and do cross-border transactions.”

Other topics that were explored in this wide-ranging survey include practice areas, hiring, firm finances, clients and billing.

Practices

As the global M&A market continues to be plagued by lackluster performance, it is no surprise that 40 percent of firm leaders expect their corporate practices to be the most financially challenged in 2013, a 12 percent increase from a year ago.  Second-most challenging was real estate (22%), followed by bankruptcy/restructuring (19%) and litigation (15%).

Despite the challenges ahead in at least some of these areas, practices* that expect to add lateral partners in 2013 include litigation (80%), corporate (68%), intellectual property (57%) and real estate (16%).

Intellectual property has been one of the few bright spots for firms over the past year, as reported by Thomson Reuters’ Peer Monitor Index (PMI).  However, even IP litigation – a strong performer of late – saw a decline in growth for the first time in nearly two years in the third quarter of 2012, according to the most recent PMI.

Nonetheless, John Murphy, chair of Shook, Hardy & Bacon reports that “Intellectual property litigation is booming.  There’s uncertainty out there, but our clients, particularly those in software, are as committed as ever to protecting their intellectual property.”

Firm Finances

Most respondents expect their firm’s profits to increase next year.  The majority of firms (44%) expect profits per partner to grow 5 percent or less next year, while 32 percent expect more than 5 percent growth.  The remainder are looking at flat growth (20%) or a decrease by 5 percent or less (4%).  And nearly half of firms plan to use de-equitization, one tactic to boost profits per partner next year.  Fifty-four percent of firms have no plans to de-equitize partners, but 46 percent plan to do so, an 8 percent increase from a year ago.

Not surprisingly, given the collapse of Dewey & LeBoeuf earlier this year, firms are concerned about maintaining fiscal discipline and healthy balance sheets.  Most firms have managed to keep their debt load low.  When asked about each firm’s current bank and other third-party debt as a percentage of its total assets, 78 percent of respondents said that it represented no more than 5 percent.  When queried about capital calls, only 23 percent indicated that their firms were likely to make a call in 2013.

Clients and Billing

Because the industry has seen clients demand more value for their legal spend over the past few years, firm leaders were asked about what changes they were currently seeing in client behavior.  Seventy-five percent responded* that more clients are requesting discounts, 68 percent said that more clients are asking for alternative fee arrangements and 49 percent said that clients are seeking deeper discounts.  In addition, 48 percent said that clients are paying bills later than they have in the past.

Finally, to cope with weak demand in some practices, a wide variety of alternative staffing arrangements* were used over the past year.  Secondments were the most popular (77%), followed by contract lawyers employed at the firm or onsite at the client’s legal department (67%).  Less well utilized was outsourcing, either to a third party and handled by lawyers (23%) or to a third party and handled by non-lawyers (16%).

For more survey results, please click here.

Posted by Marianne Purzycki

*Multiple responses were allowed.

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Celebrating HIB’s First Anniversary

Posted on September 7, 2012 by | Leave a comment

This week marks the one year anniversary of the Hildebrandt Institute Blog.  In the past year, we’ve learned a lot and we hope you have, too.  Thank you for reading.

We are proud of the content on the blog and appreciate the opportunity to share it with all of you.  Some highlights from the year include:

We have also been fortunate to welcome several important contributors.  Earlier this summer, guest author Mike Lowe (of HardingLowe) discussed what the legal industry can learn from the experience of management consulting firms in a two-part series.  And general counsels Sarah Feingold (of Etsy) and Dan Goldman (of Mayo Clinic) were kind enough to sit down with us to offer their insights.  Our thanks to them for sharing their time and their knowledge.

Data is a big part of what makes the Hildebrandt Institute, and particularly Peer Monitor, tick.  We are grateful to the Peer Monitor team for sharing their quarterly Peer Monitor Index reports with the blog.  I would also like to recognize the hard work of Marianne Purzycki on our quarterly MergerWatch posts, which help put legal industry consolidation into perspective.

We look forward to continuing to offer smart, insightful commentary in our second year.  We also have big plans for the coming months, and hope you’ll join us as we continue to evolve and grow.  Thanks again for your time and attention – we promise to keep working to earn it.

Posted by Emily Fisher

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Alternative Fee Arrangements: Taste Great, Less Filling?

Posted on April 19, 2012 by | 2 Comments

After conducting a new survey on alternative fees, Pepper Hamilton has found that while general counsels expect to see the use of alternative fees rise in the future, their real concerns when it comes to billing are efficiency, predictability, and allocation of risk.  The survey included general counsels from 54 companies across multiple industries; two-thirds of respondents spend at least $1 million on outside legal fees each year.  Although Pepper conducted the survey to improve its use of alternative fees, respondents included companies that were not firm clients.

According to a report this week in the Philadelphia Business Journal, seventy percent of survey respondents expect the use of alternative fees to increase in the future.  Ninety percent of those surveyed already use some form of non-standard billing arrangement.  Of those, alternative fees make up between 6 and 20 percent of their outside legal spend.

But according to Robert L. Hickok, co-chairman of Pepper’s litigation department, simply offering these arrangements is not enough:

Clients are telling law firms that they want alternative fee arrangements, but that the AFAs need to truly control costs, provide greater accuracy in estimating fees, promote greater efficiency in lawyer time utilization and better allocate risk.

The survey revealed that the majority of companies using AFAs report only moderate satisfaction with their experience.  Law firms may share the sentiment – as we discussed last month, some firms struggle with AFAs because they don’t yet have the infrastructure to implement them efficiently.  Another common complaint is that for firms accustomed to hourly billing, it can be challenging to determine whether an alternative arrangement actually made money for the firm.

The good news is that the underlying concerns are shared by both firms and general counsels.  Transitioning to alternative fees will necessarily involve some amount of friction, but ultimately, firms and their clients stand to benefit from this process of evaluation.  Even for engagements that retain standard hourly billing, this debate over value for fees may help firms improve by increasing the focus on efficiency, predictability and risk.

Posted by Emily Fisher

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Modest Rate Increases Predicted For 2012

Posted on December 21, 2011 by | Leave a comment

The National Law Journal released its annual billing rate survey this week and for the third year in a row, billing rates showed modest increases.  For the 62 firms in the NLJ 250 ranking that provided billing rate data, the average firm-wide hourly billing rate, which combines partner and associate rates, increased by 4.4% during 2011 from $390 to $407. That increase followed on a 2.7% increase in 2010 and a 2.5% increase in 2009, all much lower than the routine six to eight percent increases seen in the pre-recession years when a seller’s market was being driven by high demand for law firm services.

While firms may have been reluctant to increase rates too much in the early years of the economic downturn, as clients’ prospects have improved somewhat this past year, firms have felt freer to boost rates.  However, in today’s buyer’s market, clients are still pressing for more control over pricing and staffing decisions, which continues to put a ceiling on rate hikes.

The Hildebrandt Institute’s Peer Monitor Index (PMI) tells a similar story, indicating that rates firmed up slightly for the third quarter of 2011, rising 3.5% compared with the same period a year ago.  “The story hasn’t changed a whole lot in the past year,” Peer Monitor director Mark Medice told the NLJ.  “And I suspect that we’ll see a similar story in 2012, which is that rates will increase about 3 or 3.5 percent.”

The PMI report also points out that for the overall market, 2011 third quarter rate growth is the strongest rate performance in over a year.   However, one size does not fit all.  Peer data also suggests that while many firms are achieving better‐than‐average rate growth this year, other firms are not faring as well and are seeing flat or even slightly negative rate growth.  Some firms are being more strategic and are targeting key practice areas and attorneys that will bear rate increases, while leaving others alone, says Medice.

 Medice also believes that the rate increases reflect some shifting of work to more senior attorneys in response to the “first-year dilemma,” a topic that we’ve written about before.  “We’re starting to get some information that firms are taking a harder look at associates,” Medice said. “The use of first- and second-year associates has declined, and there’s a stronger mix of senior associates in the pool.”

 Under increasing client pressure for greater value and lower costs as well as fiercer competition for legal market share, according to Medice, “[the] question now becomes, ‘How do we grow revenue?’”  He added, “I think we’re on a relatively steady path to change in the pricing and relationship model, even though alternative fee arrangements are still only about 10 to 12 percent of business. I think we’ll see a lot of law firm mergers as well.”

 Posted by Marianne Purzycki

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2012: Law Firm Leaders Cautiously Optimistic

Posted on December 2, 2011 by | 2 Comments

The American Lawyer released the results of its ninth annual survey of law firm leaders this week and it is clear that while 2011 started out looking good for firms, the last few months indicate that firm management cannot count on a robust economy heading into next year.  Despite the economy, 73% of law firm leaders are optimistic about their firm’s future in 2012.  So firms are fine-tuning their strategies like never before to differentiate themselves from their competitors and looking for greater efficiencies in their internal operations.

Only 20% of respondents expect to see revenue growth in their corporate practices next year, compared to more than one-third of respondents last year.  And clients are taking longer to pay their bills, according to 43% of the respondents.  Billing rates are continuing to rise, with 93% of firms expecting to increase rates by 5% or less.

Cautiously optimistic, firms are holding steady on the size of their first-year associate classes, with 58% keeping their class size the same as in 2011.  More than one-third of respondents expect to reduce their equity partnership ranks and 49% of firms have made efforts to align partner compensation with a willingness to cooperate in new initiatives such as project management.

Leaders are not as optimistic about profits per partner as they were last year.  The majority (58%) of survey respondents expects PPP to grow 5% or less, which is higher than the 41% who responded last year.  A healthy 26%, however, expect profits to increase by more than 5%, although this is down considerably from last year’s 38%.

Strong client relationships are critical and “firms are building closer ties with key clients—89 percent of survey respondents said they’ve accomplished this in the past year.”  More than half of all respondents have a formal client feedback program in place.

In fact, relationship-building has become so important that it is now an essential skill for partners. “The old model had room for the entrepreneurial partner and also the partner who did a good job maintaining a relationship with a client,” says John Murphy, chair of Shook, Hardy & Bacon. “Now there is more emphasis on growing business, so the partner who is maintaining the status quo is falling behind.”

Clients continue to be assertive, with 81% of respondents reporting that more clients are requesting discounts and 55% reporting that clients are requesting deeper discounts.  When asked if clients have refused to pay for work by first- or second-year associates, 54% responded in the affirmative.  Almost all of the respondents had some alternative fee arrangements in place in 2011.  Most common was the flat fee for an entire matter (92%); 82% used capped fees; and 74% used contingency fees.  However, in terms of the actual amount of work (percentage of matters) that utilized AFAs in 2011, the average was only 16%.

Big gains are being seen in alternative staffing arrangements. The use of contract lawyers is more popular, with three-quarters of respondents using this arrangement in the past year, up from 55% in 2010.  Thirty-seven percent of respondents outsourced work to lawyers managed by third parties (up from 25% last year), while 28% outsourced work to non-lawyers managed by third parties, almost double the percentage from last year.

Posted by Marianne Purzycki

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