The LegalBizDev Survey of Alternative Fees, by Jim Hassett, Ph.D. (Boston: LegalBizDev, 2009)

Okay, strictly speaking, it’s a report rather than a book. But I’m so interested in talking about this publication and its importance to the developing field of alternative fee arrangements (AFAs, a topic we’re focused on these days at Edge) that I’m willing to blur genres — and in any event, at 150 pages, it’s not like this is a pamphlet. The LegalBizDev Survey of Alternative Fees is written by consultant Jim Hassett, Ph.D., and is based on interviews with managing partners, senior lawyers and AFA managers at 37 of the largest 100 law firms in the United States. To a critic who objected that a self-selected 37% isn’t a statistically sound sample, Jim replied that while his results may not be scientifically “good,” they’re the best available resource on the subject. That is unquestionably true — but this report is also good, and is worth your time.

The Survey takes an start-to-finish look at AFAs: how they’re defined, how they developed, what drives clients to push for them, bidding strategies for lawyers who want to use them, nine common examples of AFAs, recommendations to both lawyers and clients for maximizing their effectiveness, and what the future holds. Although the author delivers content throughout, especially at the start and finish, the bulk of the Survey is drawn from the respondents themselves, in their own words. That last point is not insignificant: because Jim guaranteed anonymity to his interviewees (the 37 firms are named, but no comment is matched with a firm and all comments are anonymous), he received some wonderfully blunt opinions. Here’s one of my favourites, a quote from a law firm chairman that would never be made for attribution:

“I think it hurts lawyers’ egos to suggest that all of the work that they do is not brain surgery. And when you suggest that they might be able to get away with using people who are not junior brain surgeons, almost everyone will say, ‘Oh, no, no, no. To do my stuff, you really need to be a brain surgeon like me.’ And it’s just ridiculous. I think that there’s an odd and irrational pride in wasting money. It’s gratifying for people to brag to their friends about how much they have to pay summer associates, and how much they pay starting associates, like, ‘Isn’t this a crime? We’re paying young associates more than judges, but hey, they’re brilliant. And they work for me.’ It’s an odd situation. But I think we’ve been able to do that because the market has paid to deal with it. And that may all be over.”

This candour (which, by the way, speaks highly of the trust these lawyers place in Jim Hassett) pays great dividends in the form of unalloyed honesty from these law firm leaders, allowing us to see how they approach AFAs, what systems they set up to deal with them, and the successes (and sometimes failures) that resulted. It’s a pretty safe bet that these folks didn’t share everything they knew on the subject, and at least some of their reports and comments must have been a little self-serving or trumped up. But even if you apply that discount, the insights here are remarkable. I don’t want you to forgo the chance to read them all for yourselves, so here are two good ones:

“In the past, where we have proposed unilaterally various fixed-fee arrangements, the clients have turned them down, because they think that if we proposed them, there must be something wrong with them. We have proposed ten alternative fee arrangements for every one that is accepted. Maybe in-house counsel are afraid that outside counsel will sandbag them by building inefficiencies and excess margins into the fixed-fee quotes. … The larger problem with RFPs and alternative fees in general is really the trust issue.”

“One of our problems is that our partners seem to think they have a better product than the people we’re competing with. And so when the client compares our fixed fee with other firms’, they ask how come we can’t do the work for less. [The partners typically reply that competitors are] not offering the same product that we are, so I ask [the partners], ‘Why are we offering a product that the client won’t pay for?’ It’s a whole mindset that will require a long time to change.”

Much of the value in the Survey is derived from these first-person accounts, but Jim also does a service by rounding up, explaining and giving examples of nine common types of AFAs, along with their pros and cons, from fee caps (“the dumbest deal ever,” according to one law firm respondent) all the way up to portfolio fixed fees, limited contingencies, and holdback arrangements. And his recommendations for success in alternative fee arrangements — both to firms and to clients — are especially valuable. I won’t list them all, but it’s noteworthy that his dual sets of recommendations have two in common for lawyers and clients: improve management and focus on value.

Two things struck me when reading through this report. The first is the perhaps surprisingly high level of savvy displayed by these interviewees: contrary to the popular impression of large law firms in general when it comes to AFAs (an impression often reflected in this blog’s entries, it must be said), there are dozens of smart, informed and motivated lawyers in leadership positions within the AmLaw 100 who not only get the need for AFAs, but who are assessing the challenges, exploring options, and developing systems to implement them. If I were running a large law firm that competes with some of these firms, and I hadn’t done any serious work on AFAs within my organization, this Survey would make a chilling read. Most encouraging is the fact that these lawyers have identified the fundamental stumbling blocks to AFA implementation — cultural, financial, infrastructural — and are doing what they can to address them. That recognition doesn’t make these obstacles any less daunting, though.

The other thing that emerges from this Survey is that large corporate clients aren’t doing nearly enough to promote AFA relationships with their outside counsel. The number of times private-practice lawyers express frustration with in-house departments’ reluctance or intransigence to engage in serious AFA discussions is noteworthy: all too often, law firm AFA proposals to corporate counsel are greeted with polite statements of preference for a discount on hourly rates. Nor are corporate departments any better equipped to project-manage or otherwise administer an AFA system than their outside counterparts: more than one respondent cited the difficulty of trying to tell a general counsel that the lawyers in her department are as much the problem as the solution.

Overall, this is a powerful and important contribution to our collective understanding of alternative fee arrangements in law, a subject that Jim notes really is still in its infancy. For all that, the picture does feel incomplete: all the contributions and opinions come from law firms, and the absence of the in-house lawyer perspective leaves you wondering if general counsel might have a different view of the “reluctance and intransigence” problem about which their outside counsel complain. Perhaps a follow-up survey could speak with GCs of Fortune 500 companies, or be coordinated with the Association of Corporate Counsel as part of its Value Challenge, in order to provide another perspective, or perhaps be merged with the law firm survey to give a holistic view of this evolving area.

But on its own terms, The LegalBizDev Survey of Alternative Fees is a significant and very useful guide to understanding not just what AFAs are and how they work, but also the ongoing challenges and roadblocks to their implementation. Every law firm that seriously intends to tackle alternative fee arrangements would clearly benefit from reviewing this work.