Time out: Removing time from pricing and compensation

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Posted in: Billing, Clients

In honour of Star Trek‘s 46th anniversary, let’s write a little sci-fi story.

Suppose you woke up one day and found that for some reason — maybe a tear in the fabric of the space-time continuum, who knows — it had become impossible to docket time at your firm anymore. No device for tracking time would function, from the latest time and billing software down to wristwatches or sundials. No invoice could be generated based on hours devoted to the client’s tasks. No salary or bonus could be issued that was based on time spent on a project.

 Simply put, you could no longer price using time or compensate using time.

What would happen? Well, once the panic attacks had subsided and the screaming had died down, you’d still be faced with a real and pressing need to issue bills to clients and to pay your lawyers. You’d have to figure out how much you should charge your clients for the work you’re doing, and you’d have to come up with a way to recognize each lawyer’s contribution (or lack thereof) to the firm’s success.

On the first point, you’d quickly find yourself on the phone to your clients, explaining the situation and asking for an urgent meeting. “Look,” you’d tell your client, “we’re doing X number of things for you right now, and we both know that some of them are critical to your success and some of them are not so much. We would normally bill you by counting how many hours we took to do that work and multiplying that number by our hourly rates. But the equation is broken; time is missing, and rates are useless without time. We need a new system to help determine our fees to you, but we need your input.”

Some of your clients, the good ones, would be sympathetic — who among us hasn’t had a run-in with the space-time continuum? They’d try to help pull together at least a short-term fix. Straightforward or routine work that any firm could do just as well would be covered by a monthly lump sum, while more complex, important or valuable work could be priced within a mutually pre-set range, with the final amount determined by the satisfaction of several previously agreed success indicators. I imagine you’d walk away from these meetings relieved and grateful for the lifeline.

Then you’d turn to the second point, internal compensation. You’d be forced to find new ways of reckoning each lawyer’s contribution to the firm. You’ve always considered a range of factors, of course, but let’s be honest: time-based billings were invariably on top, followed closely by income generated (on an hourly basis) by clients whom the lawyer had brought into the firm. Thanks to the space-time rip, both of these engines would now be seriously damaged or broken altogether.

Without access to time-based anything in assessing internal value, you’d soon find yourself thinking about more than just your lawyers’ direct and indirect “billings.” You’d look more closely at those lawyers who referred business to other partners and practice groups. You’d notice those lawyers who had a knack for answering clients’ calls and calming their worries, keeping those relationships strong. You’d identify those lawyers who both brought in business and kept it coming, those who took the best young lawyers under their wing, those who assumed real responsibility for knowledge management or talent retention or technological capacity. And you’d find yourself both eager and suddenly able to reward these lawyers and their behaviours.

Not only that, but over the course of time, you’d also notice that work patterns within your firm were starting to change. Your people could no longer think in terms of “how long this work will take,” so they’d need to come up with a new approach to their work. Naturally, they’d start trying to get the routine flat-fee work done as quickly and efficiently as possible, maybe through some kind of process or automation, because it’s only worth $X per month and so the sooner it’s done, the better.

They’d also start looking at the success factors — case won, damages limited, deal closed, budget respected, and so on — that drive the pricing of the higher-end project work. Each box they could tick off would become another premium added to the final fee. Time could still affect price as a client success factor — e.g., the work must be performed within three weeks — but in ways that further drive brisk, efficient workflow. Over the course of time, the tempo and rhythm of life at your firm would start to change.

Pretty soon, you’d find that without any way to track their time, your lawyers were focusing more on getting the job done efficiently and effectively, so they could increase their fees and move to the next task. You’d find that what used to be called “non-billable” activities were flourishing, because they could now be rewarded. You’d find clients calling to compliment you on your firm’s new attitude, the “breath of fresh air” you’ve brought to the relationship.

 And when the space-time rip was eventually fixed, you’d be hard-pressed to find anyone clamouring for a return to the old system.

This is my long-winded way of making a point: time is a factor in law firm pricing and lawyer compensation only because we choose to make it so. In most law firms, pricing is cost-plus, and cost is heavily time-based: the firm estimates how many hours from how many lawyers will be required to do the job, checks those lawyers’ rates, does the math, and puts a dollar sign in front of the result.

Remove or amend these two drivers — take time out of pricing, take time out of cost — and you have a legitimately new and potentially game-changing way of doing business.

[Note: This post was inspired by a conversation at ILTA last month among Toby Brown, Ron Friedmann, Susan Hackett, Doug Stansfield and me. Toby and I agreed to write about our respective views on the subject in point-counterpoint blog post fashion. Check out Toby’s post “Logic and the Value of Time” at 3 Geeks and a Law Blog, and please feel free join in with your own post on the subject!]

Jordan Furlong delivers dynamic and thought-provoking presentations to law firms and legal organizations throughout North America on how to survive and profit from the extraordinary changes underway in the legal services marketplace. He is a partner with Edge International and a senior consultant with Stem Legal Web Enterprises.

The high price of poor pricing

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The cynic knows the price of everything and the value of nothing. The average lawyer, by contrast, knows the value of everything but the price of nothing.

You’ve got to admit there’s something to that. We lawyers go on at great length about the value we deliver to our clients, the signal importance of having a lawyer on the case, the critical knowledge and skills we bring to the table, etc. A lawyer will leave his client in no doubt about the value he supplies. But that same lawyer, in almost every case, will be unable to assign a price to that value.

We can provide rates, sure — but rates aren’t prices, in the same way that speed is not distance unless you add time. Unless the matter is utterly routine and predictable, most lawyers cannot or will not answer the most straightforward client question in the world: “How much will I pay you for this?” We panic. We freeze up. We die a little. We resort to myths and excuses, and as we natter on, we see the client’s face fall….

We, as a profession, are terrible at pricing. Awful. Lost. Clueless. Atrocious. Self-immolatory. I could go on, but only to hammer home the point, so that we can come to accept it more easily. The shoe fits, so we might as well wear it. We’re useless at pricing — and that’s okay. It’s understandable. No one ever trained us in pricing, either in law school or during our bar admissions procedure. Even if a senior lawyer took us under her wing when we first started out, we only learned the same scattershot substitutes for pricing that lawyers have been relying upon for decades.

This was never a problem before, because we were the only people serving the legal market and clients had to accept our services on our terms. It’s a problem now, and we need to solve it. Studies from multiple industries confirm that pricing is absolutely critical to profitability.

Here’s what The Deloitte Review says about the subject in an article titled “The Price of Pricing Effectiveness”:

Great companies do pricing very well. [T]he link between pricing and profitability recurs both anecdotally and in more detailed analysis. One study suggests that pricing has two to four times the potential to influence profitability relative to other business levers. Companies that actively pursue pricing as an important part of their strategy typically outperform industry peers on several financial metrics. …

While price setting is an essential piece of the pricing puzzle, the overall discipline of effective price management concerns itself with managing transaction-level profitability, which requires capabilities in pricing strategy, execution, analytics and governance. The discipline also requires coordination across many functions including sales, marketing, finance, product development and customer service.

Add to that these excerpts from an article in the MIT Sloan Management Review, “Is It Time to Rethink Your Pricing Strategy?” (HT to Andrew Terrett of Borden Ladner Gervais LLP, who pointed me to the article):

[N]umerous studies have confirmed that pricing has a substantial and immediate effect on company profitability. Studies have shown that small variations in price can raise or lower profitability by as much as 20% or 50%. …

[S]uperior pricing is almost always based on skill. The companies we found that had achieved better pricing all had top managers who championed the development of skills in price setting (price orientation) and price getting (price realization). … Without managerial engagement, companies typically use historical heuristics, such as cost information, to set prices and yield too much pricing authority to the sales force.

Does that last sentence remind you of any legal organizations of your acquaintance? It should. Consultant Richard Burcher of Validatum describes this perfectly in his recent post, “Abdication of Pricing Responsibility: Whose Money Is It Anyway?”

How many businesses do you know where the employees are given a broad mandate to set the price of the products or services?  Would you invest as a shareholder in a business where the profitability fluctuated at the whim of often mid-level or even junior staff?

And yet this is what passes for business as usual in many law firms.  It’s not that realization rates, utilization rates, and other traditional law firm management metrics and wisdom aren’t important, but I see firms devoting time, effort and cost to these strategies, plugging pin-prick holes in the revenue bucket when there is a hole the size of a fist staring them in the face; the wrong people making pricing decisions.

I’ve come to believe that our failure to price well, as a profession, is our single greatest vulnerability in the new legal market. Our competitors, many of whom are not lawyers, can and do set a reliable price on their legal services. They can do this because they possess several things that most lawyers and law firms lack:

  1. knowledge of and control over their own costs of doing business, coupled with:
  2. systems that minimize or eliminate variables that generate cost instability, producing:
  3. a sophisticated understanding of their internal profitability, which combines with:
  4. enforceable, enterprise-wide discipline over the setting of price, made possible by:
  5. decoupling individual compensation from individual billing, dovetailing with:
  6. an appreciation of clients’ circumstances and the value of legal services thereto, all of it supported by:
  7. the confidence to accept short-term losses and fluctuations in exchange for long-term sustainable profit.

If you want to institute truly game-changing pricing in your law firm, you need to start by addressing these seven missing elements. Some will be easier to fix than others, and some will be excruciatingly difficult (4 and 5 in particular). But these are the tools with which your rivals, old and new, are attacking your hold on your clients and your share of the market. If you don’t have enough of these tools, or any of them, then it’s not going to be a fair fight, or a particularly long one.

Price, ultimately, is about knowing and meeting our clients’ needs and expectations in the context of our business goals and our competitive environment. What’s it worth to us? What’s it worth to them? Answer these questions and adopt those seven tools, and you’ll start to master the art of pricing legal services.

Jordan Furlong delivers dynamic and thought-provoking presentations to law firms and legal organizations throughout North America on how to survive and profit from the extraordinary changes underway in the legal services marketplace. He is a partner with Edge International and a senior consultant with Stem Legal Web Enterprises.

Pricing to the client experience

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Posted in: Billing, Clients, Marketing

Many lawyers, gnawed by doubt, regularly ask themselves, “What should I charge?” It’s the question with a million right answers — which is to say, with no right answer at all. Whatever number you finally settle on, however, is less important than the process by which you arrived at it. As far as I can tell, lawyers’ most common methods of determining price are:

  1. Find out what comparable lawyers are charging and, depending on your self-confidence, charge more, less or about the same as them.
  2. Calculate your internal costs of doing business, tack on a percentage equal to your desired profit margin, and charge that.
  3. Keep quoting slightly higher prices for successive clients until one of them winces or balks, then hang out at that price for a while.

Each of these approaches has its merits, I suppose. But you’ll probably notice that each has one thing in common: the client is not asked to participate. Lawyers have rarely if ever invited the client into the pricing process, mostly because they assume the client will do everything in its power to drive the final price down. That’s not an unreasonable assumption, on the face of it, but it means that the lawyer is left groping alone in the dark for a number in which the client has an equal interest.

An emerging line of thought in alternative (non-hourly) pricing, one with which I’m in strong agreement, asserts that the client is in fact indispensable to the pricing process. “Pricing your product is actually simple, as long as you consider it from the buyer’s point of view,” says Seth Godin, who knows more about pricing than most people. “The real trick is gaining an understanding of what [clients] actually do and do not value in a given piece of legal work. … [and t]he only effective way to understand a client’s value priorities is to have a direct conversation with them,” says Toby Brown, who knows more about pricing than anyone else in the legal market.

Now, I’m certainly not saying that you let the client determine what the price is going to be. I’ve said elsewhere that it’s the seller’s job to take responsibility for price, Toby emphasizes that the client’s value proposition must be reconciled with the lawyer’s, and Danny Ertel adds for good measure how critical it is that the lawyer learn what line of reasoning led the client to its own price estimate. Pricing is a two-way street. More to the point, it’s a conversation — not a monologue or a directive or a statement of fact by the lawyer. You cannot have a grown-up conversation about pricing without the client.

I want to take this line of thought another step further. I want to suggest that not only does client participation make pricing easier and more satisfying, but that clients themselves can actually be the basis of your pricing. Matt Homann points us to a great article called “Pricing strategies for creatives” (a category that I think includes lawyers), which included this powerful excerpt:

It’s a little-known secret that you can charge not only for your creative work, but also for the client experience around the work you deliver. In essence, you can price things that have nothing to do with design, but have everything to do with the experience your client encountered throughout the process of engaging with you on their project.

I think this is completely applicable to the legal profession. So many lawyers (as so many clients will ruefully attest) can barely bring themselves to notice how clients experience the legal process. We pay close attention to the nature and quality of the legal work we do, but we pay relatively little attention to how we deliver that work, how our services are received, and how the client feels about it. A small minority of lawyers and law firms, for reasons of personality or branding or both, do pay attention to the “how” of legal services, and they reap the benefit of happier clients (and often, happier lawyers). But I’m not aware of any firm that has explicitly said, “The client experience will be a key component of our pricing strategy.”

Think of it this way. One law firm might say, “We have the very best lawyers in the city, and we charge a premium for that unique characteristic.” Another firm might say, “We are the biggest firm in the country, and we charge a premium for that unique characteristic.” What if your firm said, “We make the client the center and purpose of everything we do here — and we charge a premium for that unique characteristic.” The nature and value of how your client receives your services can be the basis of your pricing, so long as hardly anyone else makes that their unique competitive foundation — and that, in the legal profession, is not a concern that should keep you up at night.

Law, as usual, lags behind other sectors in this regard. In any other service business, how you are served is a differentiator, if not a full-scale driver, of pricing. If you don’t believe this, think back to the last time you tipped more (or less) than 15% at a restaurant, and ask yourself why. I can almost guarantee that it had nothing to do with the food or the decor; the menu already priced those out for you. The tip is what you pay for service. And what you tipped your server had everything to do with whether or not you received service that was cheerful, responsive, quick, inquisitive, memorable, and genuinely focused on your enjoyment of the experience — or that was the opposite. That’s what you pay for when you’re buying services. Why would your own clients be any different?

If the way you treat your clients is cheerful, responsive, quick, inquisitive, memorable, and genuinely focused on their interests, you can charge for that. In the legal marketplace, in fact, it’s such a huge differentiator that you can probably charge a lot for it. You can charge for hiring people obsessed with client satisfaction. You can charge for returning calls within 24 hours. You can charge for giving clients 24/7 access to their files and billing status. You can charge for entering your clients’ birthdays into your CRM system and sending them a card on the big day. You can charge for asking, “Is there anything else, anything at all, that we can help you with today?” For crying out loud, you can even charge for not charging by the hour! These are real client benefits. They make clients’ lives easier or happier. And most lawyers don’t offer them.

Are all these things entered as separate line-item charges in the bill? Of course not! But they’re part of the service experience at your firm. They’re what make you special — because they make your clients feel special. And that is not a commodity. That is not subject to the vagaries of the market. The price of almost every lawyer product — the deliverable or outcome at the end of the lawyer’s efforts — will decrease over the coming decade. But the price of a lawyer’s service — the personal, customized, convenient, anticipatory, strategic, counseling, caring way in which the client is treated and their interests looked after — will hold steady and will very probably rise.

There is always going to be exquisitely challenging or important legal work for which clients will pay virtually any amount billed in any format, even if delivered with an impersonal touch bordering on disdain. But most legal work is not in that category, an emerging fact that’s cutting the legs out from under the standard billable rates that many lawyers and law firms have traditionally commanded. We need a new basis for asserting our value and differentiating ourselves from each other. We’re all smart and knowledgeable and hard-working. But we’re not all great at service. We don’t all care the same about our clients. We don’t all engineer our billing methods and matter management and client communication so as to maximize the client experience.

Markets reward scarcity. Great client experience in the legal market is scarce. It’s time to think about client-experience pricing.

Jordan Furlong delivers dynamic and thought-provoking presentations to law firms and legal organizations throughout North America on how to survive and profit from the extraordinary changes underway in the legal services marketplace. He is a partner with Edge International and a senior consultant with Stem Legal Web Enterprises.

The new price wars

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Posted in: Billing, Clients, Innovation

Their World Series victory last fall wasn’t the only surprise the San Francisco Giants sprang on the baseball establishment. Throughout the 2010 season, the team engaged in “dynamic pricing,” changing the price of single-game tickets according to demand. The same seat for a Monday night yawnfest in May against the Washington Nationals, for example, would be priced well below a Friday night game down the stretch in September with the L.A. Dodgers. The new system, which reflects the ancient marketplace rule that demand drives price, produced a 6% revenue increase throughout the season and is expected to spread throughout not just MLB, but also the NBA and NHL in short order.

The Giants’ approach will sound familiar to anyone who grew up, as I did, in the era of “cheap night” at the movies, wherein ticket prices for Tuesday night showings were less than half those of other nights. The theaters, normally all but deserted on Tuesdays, were instead always full. Given that cinema owners make most of their money off concession sales, I imagine that “cheap Tuesdays” were immensely profitable. But as Malcolm Gladwell observed in The Tipping Point, theaters could actually go farther and change the price of individual movies according to their popularity, much as the Giants are doing with their game tickets: charge more for The King’s Speech and less (much less) for Yogi Bear.

There’s a reason why price tags are printed on cheap stickers, easily applied and frequently changed. Price is not carved in stone; it’s elastic, a function of supply and demand. This is true even in the law: it’s the rare lawyer who has never offered a discount on his or her hourly rate to win a client engagement. But rate discounts are about as radical as law firms have ever gotten with price. For most lawyers, fixing a price in advance of providing the service is anathema, and adjusting that fixed price according to a set of evolving criteria is farther beyond the pale again. But I think that’s about to change.

What got me thinking in this direction were reports this week that henceforth, DLA Piper (the newest holder of the “world’s biggest firm” title) was instituting minimum purchase levels for its clients. DLA’s US offices are said to be mandating an entry-level threshold of $200,000 a year for all new clients, while DLA International will set the amounts at €25,000 for new clients that don’t pose a potential conflict and €100,000 for those that do. The reasons, as explained in an excellent post by Financial Times GC Tim Bratton, are interesting: the firm wants lawyers to consider the firm’s strategic priorities more than their own; it wants to reduce the size of “conflict shadows” cast by smaller clients; and it wants to reduce the administrative cost of dealing with so many matters. Essentially, the firm wants many fewer, and much bigger, clients.

Some of my friends in the blawgosphere have called this a “cover charge,” but I don’t think that’s exactly the right analogy. A cover charge is an amount everyone pays at the entrance to ensure that no matter how little you spend upon entering, the proprietor will still turn a profit. DLA Piper, by contrast, is hiring a large, heavily muscled man to stand at the front door and admit only those customers who are guaranteed to spend enough to produce a profit. They’re pre-screening their clients for wealth, much as a legal aid clinic pre-screens its clients for poverty.

It might not win any points for populism, and there are serious implications for current and future partners. But as a strategic execution, as a profitability measure, and as a clear marketplace signal about which clients it desires, it’s brilliant: as Ron Friedmann notes, “it’s about making a conscious decision about your business, your costs, and your market position,” something few firms do. And in its own way, it’s an example of pricing innovation that other firms should follow.

I’ve written before about how the maxim “Don’t compete on price” has limited value in a highly competitive, price-sensitive market. Law didn’t use to be one of those markets; it is now, and some degree of price competition is becoming inevitable. But “competing on price” doesn’t have to mean getting involved in a downward-spiraling price war. As DLA Piper has demonstrated, you can compete on price upwards, setting floors rather than ceilings on how much you charge. For that matter, you can compete on price sideways, diagonally, and inside out through the fourth dimension if you like. You can make price a market differentiator simply by being creative and gutsy.

Examples are already abounding. Carolyn Elefant suggests that DLA Piper might effectively “offer $300,000 worth of service to clients who are willing to lock in and pre-pay the $200,000 minimum. Between the cash-flow benefit of receiving $200,000 up front and use of offshoring or second-tier contract lawyers in house, DLA Piper could still earn a decent profit, even while providing a ‘volume discount.” John Wallbillich at The Wired GC goes further: “What about a firm that does $1 million plus for a client not charging for telephone consultations with a defined number of client in-house counsel? Or provide access to part of a firm’s form files or knowledge management repository? How about a 3+ year associate on-site, gratis, for clients spending more than $5 million?”

Here are some more possibilities that law firms should mull over.

1. Charge like an airline. Some client matters are utterly routine, some are high priority, and some are absolutely urgent; but most lawyers tend to price solutions to each type of matter the same. Airlines thrive, even in a cutthroat marketplace, by charging you more for a ticket tomorrow than for one in three weeks’ time. What’s to stop a law firm from saying to client with an urgent problem: “To get this done tomorrow, we’ll need to drop everything else we’re doing and work on it for the next 24 hours; that’s a lost opportunity cost for us that will be reflected in a higher price.” Or conversely: “This is a low priority for you and can be done at a fairly leisurely pace by us; we’ll chop 30% off our regular price to reflect those facts.” Clients might not like the former treatment, but they’d understand it and probably accept it; they would love, and remember, the latter treatment.

2. Charge like a cellphone company. A dangerous comparison, to be sure, since many cellphone contracts epitomize the concept of gouging. But I mean this in the sense that many companies will discount the price of a cellphone itself, all the way up to 100%, if you subscribe to the connection service and payment plan. What would a law firm give a client for free in return for the guarantee of a fixed (and pre-paid) monthly fee over a two-year period? Maybe ten hours a month of a designated senior associate or junior partner’s time, no bills, no disbursements; maybe access to multi-jurisdictional regulatory compliance status updates; maybe an emergency “hot line” number that would put the client directly in touch with a responsible firm representative 24 hours a day. It would essentially be the freemium model applied to law.

3. Charge like a partner in a relationship. Seth Godin points out the cognitive dissonance by which many companies give their best rates to their worst customers: the difficult, the demanding, the frequent switchers. Similarly, their most loyal and enthusiastic customers are taken for granted and are charged accordingly. My Edge colleague Ed Wesemann has noted the same problem in law firms: discounts are offered to entice new business, but if the one-time client comes aboard and stays aboard, its rates soon go up and it’s relegated to the same “standard” treatment as the firm’s other “best” clients. Reward your best clients, give them discounts and freebies without being asked, simply to say thank you for being your relationship partner. As Seth puts it: make your best customers into your best marketers.

Lawyers resist change in many aspects of their work, but most of all in pricing: they try to pass all the risk of price miscalculation onto the client, a goal that the billable-hour system fulfills perfectly. Mature markets, however, allow (if not demand) more sophisticated pricing in which both the buyer and the seller accept some risk as a justifiable sacrifice to the greater goal of a stable, mutually beneficial relationship. DLA Piper is taking a risk with this new client minimum scheme, because it has both upside and downside: good for them, no matter how it works out.

Price is a conversation, not a command; it’s a journey rather than a destination. Lawyers with the wisdom to recognize that, and the courage to be flexible and creative in response, will emerge the winners from the new price wars that look poised to begin.

Book Review: The LegalBizDev Survey of Alternative Fees

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Posted in: Billing, Books

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.

The new rules of pricing

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Posted in: Billing, Clients

Recently, I’m told, several GCs and senior lawyers of large law firms gathered in London for a high-level conversation about new billing mechanisms. One noteworthy observation to emerge from the meeting was the law firms’ insistence that whatever new mechanism was developed, it had to take into account chargeable time invested in the work. I wasn’t there to see the clients’ reaction, but if a few eyes were rolled, it wouldn’t surprise me.

Lawyers are going nowhere in this new marketplace unless they can lose this obsession with the effort-based valuation of work. At the heart of lawyers’ billable-hour infatuation, even beyond the attraction of low-risk pricing and the enablement of perfectionism, lies the basic belief that the harder you work, the more you should get paid. “It took me ten hours to do this, so I should be paid twice what another task took five hours to do.” The nature of the work, its relative simplicity or complexity, the knowledge resources it did or didn’t require, and the value or relative lack thereof to the client — all these variables are considered incidental to the effort exerted, the expenditure of the lawyer’s precious time, to accomplish the work.

Very few marketplaces, however, base price directly on effort and time.  Avatar cost 20 times what The Hurt Locker cost to make and took years longer to complete, yet my ticket to watch either Oscar contender costs the same. One real estate agent might make ten times more effort at finding the right buyers for a home than another, yet they both get the same commission upon sale. I can go to a global craft show and buy a beautiful hand-made shawl that an aged, arthritic, Guatemalan woman spent a painful three days to create for less than a family dinner at the local pizza joint will cost that same night. Price differences can emerge from expertise, or from quality, or from brand assurance, or from customer value — but they don’t emerge from how hard someone had to work to make something. Continue Reading

Beyond billing

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Posted in: Billing

Even a dyed-in-the-wool optimist like me didn’t think there’d be so much progress so fast on what’s increasingly referred to as “alternative fee arrangements” (AFAs). Fulbright & Jaworski’s 6th Annual Litigation Trends Survey says 45% of clients are using AFAs like fixed and outcome-based fees. Hildebrandt’s survey of 231 companies showed about half are or soon will be employing non-billable-hour fee arrangements with outside counsel, with another quarter considering them. An Institute of Knowledge Development poll reported that in-house legal departments in Australia are using fixed fees for almost 40% of their external legal spend. AFAs are the subject of panels at the ACC annual meeting and discussions between top GCs and managing partners. And all this talk is bolstered by some remarkable initiatives by several large corporate clients:

* Orrick will handle all of Levi Strauss’ legal work worldwide for a fixed annual fee, according to The Recorder. Levi Strauss will keep only one other firm to continue its brand protection work. Where Orrick doesn’t have an office, the law firm itself will retain and pay outside counsel.

* United Technologies not only requires fixed-fee arrangements with its law firms — it also wants the firm to show exactly how it arrived at the fixed fee in question and how it intends to make money off it, Corporate Counsel magazine says.

* Cisco Systems now buys all its legal work through AFAs, again from Corporate Counsel. Routine matters are bundled together and firms are invited to bid for the work on a flat-fee basis. For more complex or protracted files, Cisco pays a flat monthly fee and a bonus for a good result.

* DLA Piper won a tender process to handle most of Kraft’s legal work, aside from major M&A deals, LegalWeek reported. While the article doesn’t mention fixed fees per se, the DLA lawyer quoted in the piece uses phrases like “controlling costs” and “operational efficiencies.”

How are lawyers responding to all this? Generally speaking, not well. Many continue to believe this is a temporary phenomenon, not a complete re-ordering of the pricing of their services. Some are panicking: Jim Haslett reports that some law firms are engaging in de facto price wars, offering flat fees well below normal with no clear plan how they can deliver at that price. And even well-meaning, sensible lawyers are now tying themselves up in knots over how they should charge for their services: fixed fee? Discounted billable hour? Blended rate? Success fees? What’s clear is that to an unprecedented degree, the legal profession is finally ready and willing to have a serious discussion about billing methods. Which is kind of too bad, because the whole discussion is, to a great degree, now irrelevant. Continue Reading

Targeting the variable fee

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Posted in: Billing, Innovation, Talent

For as long as most lawyers can remember, the billable hour has defined, powered, and shaped their law firms. It determines how lawyers work, how they sell their work, how much they earn, and how they assess and reward their employees. It breeds inefficient, overworked lawyers and frustrated, resentful clients; but it has also proved almost impossible to kill. I’ve come to believe that we haven’t been able to kill it because we’ve been hunting for the wrong beast. We’ve been calling our target the billable hour, whereas we ought to have been describing it, more accurately, as the variable fee.

The fundamental client objection to lawyers’ fees is uncertainty: the client rarely knows the final price before the work is done. Neither, in most cases, does the lawyer — either because the price is truly unpredictable or, far more likely, because the lawyer has neither the means nor the incentives nor the inclination to figure it out beforehand. The fundamental variability of legal fees powers a business model that has proven enormously profitable for lawyers: because the fee varies according to the amount of time and effort devoted to the task, the lawyer has every incentive to maximize that time and effort. Uncertainty creates risk — 100% to the client — and reward — 100% to the lawyer.

The radical change facing law firms today is the end of variable fees as law firms’ financial engine and their replacement with non-variable fees — or, in the parlance of the day, fixed fees. Evidence continues to emerge not only that fixed fees are the immediate future of how lawyers’ services are sold, but also that they’re long-term future of how lawyers’ entire businesses operate.

Fees that vary according to the lawyer production process, rising in tandem with time and effort expended, naturally give rise to inefficient workflow, reinvented wheels, maximized activity and over-accomplished tasks. Conversely, fees that are fixed in advance by the purchaser naturally give rise to proportional efforts, recycled know-how, streamlined processes and hyper-efficient workflow. The first type of law firm business model is starting a steep decline; the second is in sharp ascendancy. In the result, we’re going to witness a sea change in the culture and operations of many law firms. It’s not destiny or professional genetics that makes law firms houses of horror for both the lawyers who sweat to docket the hours and the clients who grimly pay for them — it’s the fever grip of the variable fee. The rise of the fixed-fee-driven law firm is going to demonstrate just how different and better a law firm can be.

Two examples: first, an excellent article at LegalBizDev by Steve Barrett, former CMO of Drinker Biddle, with a title that says it all: “Alternative fees demand improved project management.” It argues that any firm thinking about adopting a fixed-fee approach to sales must be prepared to overhaul its internal systems and business culture. Fixed-fee firms can’t survive massive writeoffs by lawyers who made clients promises about price that they couldn’t keep, or succeed without tracking the progress of past fixed-fee approaches and instituting technological tools to analyze them. And no firm can even contemplate fixed fees without a very clear understanding of the most important aspect of their business: what it has cost them in the past to deliver their services:

Many firms mentioned that a good understanding of cost patterns has never been developed in their firms.  One said (paraphrasing) “We should know how much an ‘XYZ financing transaction’ typically costs, since we do hundreds of them every year.”  Another (again, paraphrasing) said “I can’t believe we don’t know the cost of a typical deposition, since we must do thousands a year.”

As clients ratchet up the pressure on their lawyers to deliver results on a fixed-fee basis, firms will be obliged — forced is probably a better word — to implement these systems and gather and use this data. Just as the variable-fee model discouraged the adoption of these processes and approaches, fixed-fee models will require it.

Second example: firms’ use of associates. Pamela Woldow and James Cotterman of Altman Weil warned law firms in a recent seminar on associate compensation that they need to cut associate salaries much more deeply and accept the fact that clients will never again pay for new associates billed out by the hour. Clients would much rather rely on their own contract lawyers or on offshore professionals than on inexperienced associates; but the opportunity to train associates with this work —  and, much more, the ability to generate revenue off these associates’ billed hours — is key to law firms’ success. The solution to this impasse: fixed fees.

Woldow pointed out that corporate clients are more amenable to using first- and second-years on their matters in fixed-fee arrangements. “So if you really want to use and train your first- and second-years, then up the alternative fee arrangements,” she said.

Endless battalions of associates only make sense in a variable-fee system. When the amount of money you make is tied directly to the number of people working on a file and the amount of time they take to do it, you have every incentive to increase both. In a fixed-fee system, profitability flows in precisely the opposite direction: fewer people hired, fewer hours spent. Law firms that abandon variable-fee structures will shortly find themselves completely rethinking how many associates they hire, how much they pay them, and what tasks those associates are assigned. Under a fixed-fee system, a firm that genuinely wants to train its associates can afford to do so, not least because there’ll be fewer of them — the demand for associates will plummet, along with their cost.

As variable fees give way to fixed fees, we’re seeing a corresponding shift of burdens from the client to the lawyer: the risk of financial shortfall, the maintenance and analysis of relevant data, the obligation to control costs, the necessity of working smarter, the requirement to properly define productivity, and the responsibility to prioritize value. These changes are poised to transform lawyers’ incentives, processes, systems, and attitudes — for the better. Forget the billable hour: the future of law practice is tied to whether lawyers’ fees remain variable — or, put differently, to whether the client or the lawyer decides how much the client will pay. If I were you, I’d bet on the side that’s holding the money.

Breaking the big firm

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Posted in: Big Firms, Billing, Diversity, Talent

My strongest, greatest fear by far, if it’s not too soon to look to the “other side” of this financial system meltdown and general economic interregnum, is not that things in law-land will look overly different when we emerge, but that they won’t look different enough.

That observation comes from Bruce MacEwen of Adam Smith Esq., and I share his concern that false confidence will lead too many large firms to believe that everything’s going to be basically okay. For large firms, everything is emphatically not okay.  The past couple of weeks have delivered a series of examples that demonstrate one thing: the ways in which large law firms have operated over the past few decades are coming to an abrupt end.

First, consider this this Legalweek report that two major international firms, Mayer Brown and Reed Smith, are jumping onto the fixed-fees bandwagon. Mayer Brown is readying itself to offer fixed fees for all its transactional work, as well as to make more frequent use of abort agreements and success fees. Reed Smith, meanwhile, plans to use fixed or capped fees in its financial industry group, in its corporate and real estate practices, and for transactional work.

What brought about this sudden departure from the easy-and-profitable billable-hour system? The firms’ leaders cite client relationships first and foremost, which is nice to hear. But perhaps equally instructive are two other articles linked from that Legalweek story: 55 job cuts at Mayer Brown in March, Reed Smith hiring a restructuring consultant in July. Few firms undertake changes of this potential magnitude unless the outside pressures exerted on them have made things very uncomfortable. (It’s worth noting, as Jim Hassett’s webcast does, that these are not the first AmLaw 100 firms to  climb onboard this train.)

Even more revealing are the contents of a leaked strategy memo from O’Melveny & Myers that appeared on Above The Law. The firm plans to “adopt a single rate card by FY2012, with volume and ‘investment’ discounts and appropriate alternative fee arrangements … becoming the leader in providing high-end legal services on a fixed fee basis, reducing costs to clients and achieving superior economic performance through practice management oriented toward cost effective client service.” Especially noteworthy are plans to reduce associate leverage to as low as 2-1, a ratio that’s positively Canadian.

Fixed fees, if done right (a big if), are demonstrably better both for the client and the lawyer. The question is whether large firms constructed on billable-hour pyramids can really adapt their culture and systems to make such a monumental change. Many big firms still think the key to flat fees is to take the last ten bills issued for this kind of work, average them out, add 10% for contingency, and present the final figure with a flourish. Fixed-fee veterans in smaller firms are skeptical, to say the least. Here’s Valorem’s Patrick J. Lamb on these big firms’ moves:

The essential element of alternative fees that actually work is that they shift risk to law firms, meaning the value changes from leverage and body count to experience and fewer bodies.  More brain power, less body count.  So a goal of reducing leverage “in some practices” to “as low as” 2 to 1 will make anyone experienced with alternative fees laugh out loud.  O’Melveny might as well take out a full page advertisement saying it really won’t be changing a damn thing.

I’m prepared to give O’Melveny’s initiative the benefit of the doubt, actually — every journey has to start somewhere, and I want to encourage every green shoot of innovation I see. But man, is this a long journey — changing a law firm’s fee and billing structure is like re-engineering your DNA, and the best will in the world won’t make it any less difficult. And for every large firm that is finally acknowledging that the horse they’ve ridden for years has died, ten more are still clinging on to the saddle.

The O’Melveny memo states at one point: “In the very recent past, our business model, as a whole, has yielded disappointing financial and practice growth results. … [O]ur litigation clients are looking for rate and fee reductions, and we expect that mindset will continue into the next good economy and beyond.”  That understates the size of the challenge. It’s not just litigation clients — a lawyer at a large firm confirms to me that the pressure for lower and/or more predictable costs is intense and is coming from across the client spectrum. This is the new reality, and large firms will struggle to make the sort of fundamental changes needed to adapt.

Let’s look at another key element of law firm success: personnel. The results of a survey published in The American Lawyer are interesting, if not surprising: associates in large firms are measurably more unhappy than their counterparts in smaller firms. Not only that, but graduates of the “elite law schools,” from which so many big firms insist on drawing most of their recruits, are the unhappiest of all when compared to their colleagues from “less elite” schools. (It doesn’t help that, as Ron Fox points out, law schools of every rank tend to funnel their graduates towards large firms and away from opportunities to serve ordinary consumers in smaller practices.)

You can probably guess the advice that the study’s authors offer big firms as an antidote: recruit outside your usual law school boxes, and make life for your new lawyers a little less punitive. It’s advice unlikely to be accepted, says Aric Press, editor-in-chief of American Lawyer: “I fear that we will look back at the exuberant spree of the last few years as the high-water mark of nonelite law school hiring. … This leaves an opportunity for the firms wise enough to seek first-class talent no matter what brand is on a diploma.” But how many firms will risk the CYA comfort of consistently recruiting from “the best and the brightest,” let alone make substantive changes to the overall associate model?

The study’s authors note that big-firm attrition is particularly frequent among women and minorities. Underlining that concern is this account of an event celebrating Working Mother magazine’s 50 Best Firms for Women Lawyers. Many of last year’s winners didn’t make the cut this time — in part, perhaps, because despite wishful thinking to the contrary, leaner times at big firms have made it harder, not easier, for women to advance and succeed:

It’s optimistic to believe that most large law firms are rethinking the work/life balance equation during these hard times. Frankly, most firms today are focused on survival and on a need to bring in more business — they are not, it seems, focusing on the larger questions of the meaning of work and job satisfaction. From where we sit, covering women in the profession for almost a decade, we don’t see a revolution on the horizon.

So: profits are dropping fast, more firms are getting ready to change the basic business model, the young talent is alienated, and diversity has been back-burnered. But that’s not the worst of it for big law firms. Because all this time, solos, small firms and midsize operations keep picking up all the opportunities that the large firms keep dropping.

While big firms allow women to walk away, one small firm encourages its employees to bring their children to work — not to an on-site day-care, but into the office, all day long. While big firms burn through their young talent, innovative companies like DirectLaw offer new lawyers reduced pricing to start up a solo virtual law platform — with 90 days’ free tuition to Solo Practice University to boot. While big firms set up committees to consider fixed fees, small firms have long since figured it out and will even tell you, as Jay Shepherd does, how they set their prices. All the momentum in the legal services marketplace today favours small, adaptable, innovative, client-focused, value-oriented, business-savvy providers. Most large law firms answer to immobile, traditional, self-centered, profit-oriented, and business-challenged. It’s not hard to pick the winner here.

Every marketplace, even one as artificially stunted as legal services, operates according to the law of supply and demand. The demand is changing, irrevocably. The suppliers that change with it will survive; the ones who don’t, won’t. Some more large firms are waking up to this fact and doing their best to change — but I’m concerned that 2009 is simply too late to be starting the change process.

Momentum

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Posted in: Billing, Innovation, New Lawyers, Outsourcing

Momentum is one of those things everyone talks about but nobody can ever precisely define or quantify. It’s that sense that things are turning around or gathering speed in a certain direction, usually for the better — with a corollary borrowed from physics that the larger the object and the greater its velocity, the more powerful the result. Skeptics dismiss it — baseball managers like to say that “momentum is tomorrow’s starting pitcher” — but I think there’s something to it, especially right now in the corporate legal marketplace. You can feel the pendulum swinging, the weight shifting — you can sense a gathering wind in the sails of change.

Exhibit A, which you’ve surely read about by now, is the decision by international mining giant Rio Tinto to send $100 million worth of legal work annually to a team of lawyers in India. This is not back-office administrative work of the type that, say, Clifford Chance has been sending overseas. This is associate-level legal work like document review and contract drafting, and you can call it “commodity” work if you like, but there’s tons of it and it keeps many large firms profitable. It represents $100 million that Rio paid its outside law firms last year but won’t pay this year or, probably, ever again. With an offshoring project of this size and scale, Rio is obliterating the “legal work” distinction that many firms have long believed insulated them from the effects of outsourcing.  And it won’t stop there, as Richard Susskind notes in a commentary for the Times:

People often assume that outsourcing and the options are applicable only to high-volume, low-value legal work. The Rio Tinto deal confirms this is wrong. There is no legal job whose complexity and value elevates it entirely beyond market forces. The reality is that significant parts of even the biggest transactions and disputes are repetitive and routine; and in-house lawyers will be delighted that these can be packaged out to less costly providers.

Rio Tinto’s move is bad news for traditional law firms in two ways. First, the outsourced Indian lawyers are doing this work for one-seventh the cost of traditional outside counsel. Think about that: firms have lately been offering their clients rate discounts of up to 10% and feeling magnanimous about the sacrifice, and here comes CPA Global doing the same work for 85% less. That’s a stunning cost savings, and it doesn’t just change law firms’ playing field, it destroys it: it reduces any proffered “rate discount” to  irrelevance. Rio Tinto has served notice to its outside counsel that the price bar for this type of work  has been reset at a radically lower level, permanently. It should go without saying that traditional law firms can’t compete for that work at that price, not as they’re currently structured.

But maybe more importantly, Rio Tinto’s move feels like a momentum shifter. Its own sheer size as a client, and the mammoth scale of the outsourcing commitment it’s making, should have enough critical mass to really get things moving within a legal marketplace that, despite recent upheavals, has yet to make real, radical alterations to its business. Rio is not the first law department to send legal work offshore, far from it — but it’s a very visible example of what Seth Godin called Guy #3 , the participant whose entry breaks the ice and gives everyone else “permission” or cover to join.

Rio is sending a message to other law departments that legal work can be exported en masse to India without GCs having to automatically fear for their jobs. And it’s sending a message to law firms that the game has changed — a message some firms have received. Just a couple of days after Rio’s move, large UK firm Pinsent Masons announced it’s sending litigation work to lawyers in South Africa, while competitor Simmons & Simmons is preparing to send its own legal work to India, Australia or South Africa. This quote from Simmons managing partner Mark Dawkins is gold: “We’re not going to defend a business model that clients don’t want to have to pay for.” It’s really as simple as that — it always has been — and the reality on the ground is now starting to reflect that.

What’s really interesting, though, is that this momentum isn’t restricted to outsourcing — look around the legal marketplace and you can start to feel real momentum shifts in numerous places.

Consider firms’ treatment of new associates: after peaking  at $160,000, starting associate salaries have been in retreat for a few months now, to no one’s surprise. What was surprising was last month’s decision by Philadelphia-based firm Drinker Biddle to chop those salaries to $105,000 but add training and apprenticeship services for these new lawyers. “In some ways, we intend for your experience in your first six months to be a bit of a throwback to how lawyers ‘grew up’ in their firms literally only a few decades ago, before the rise of the billable hour,” the firm wrote to its incoming associates. Within a month, Cincinnati firm Frost Brown Todd followed suit. (Defenders of the articling year at Canadian law firms are probably feeling pretty good right now.)

And then, just a few days ago, large international firm Howrey LLP played the Rio role and announced it was cutting associates’ pay but increasing their training. Howrey has a track record of paying attention to how its lawyers learn (and, interestingly enough, in outsourcing to India too) — its Howrey Virtual University has been providing coordinated firm-wide web-based lawyer training since 2005. Howrey managing partner Robert Ruyak’s words are also noteworthy: “The old model is broken. You’re bringing on these extremely bright individuals and letting them waste their careers buried in documents where they aren’t really learning the practical skills it takes to be a lawyer.“ The comment board at Above The Law, which invariably trashes any law firm decision that doesn’t involve more pay and less work, reacted positively to Howrey’s move overall — nearly 70% of poll respondents said they’d take the deal if it was offered to them. My guess is that right now, many large law firms are watching Howrey closely and treating it as their advance scout — like Rio, Howrey is a substantial player whose participation can and should tip the balance toward change.

There are other examples. Look at the recent frenzy of reports of law firms pricing their work at “fixed fees” — we’ve heard about flat-fee or fixed-fee initiatives underway at traditional firms like Alston & Bird, Lightfoot Franklin & White, Kirkland & Ellis, Simmons & Simmons (there they are again) and Morrison & Foerster, to name a few. Law firms generally still don’t understand fixed fees — here are some excellent critiques of their mindset and methodology from Tim Corcoran, Patrick J. Lamb and Jay Shepherd — and “alternative fees” are by and large still that, alternative.

But now along comes respected midsize firm Saul Ewing, creating a “cost certainty commitment” that standardizes fixed-fee arrangements with clients. Again, what’s unique here isn’t so much the offering as the prominent, high-profile way in which it’s being rolled out — the key to building momentum is to be seen to build momentum. From the Legal Intelligencer article: “Altman Weil’s Pamela Woldow said Saul Ewing’s cost certainty commitment is certainly unique. She said she isn’t aware of any other firm that has created such a program and made such a public, formal commitment by putting it on its website.” All of these moves — Rio Tinto’s, Howrey’s, Saul Ewing’s — are significant largely because of the signal they’re sending, quite intentionally, to the other members of the marketplace that things have changed.

Going first, and doing so conspicuously, is incredibly important to change in the law. It’s conventional wisdom to blame lawyers’ reluctance to innovate on the fact that they hate being first movers, that they much prefer to stand back and let someone else make the initial move. And that’s true as far as it goes, maybe even more so  for in-house lawyers than for private practitioners.  But the corollary to that is that lawyers also don’t like being the last ones to join the club. Ron Friedmann explains this very well by using “a discontinuous step-shaped function” to describe lawyers’ willingness to change:

Consider adoption in the legal market of e-mail, document management, marketing, lateral moves, or mergers. For each, there seemed to be only a few firms doing it and then, quite suddenly, many or all were. The “step function” reflects lawyer decision making: the first few adopters change slowly, gingerly, and quietly. Everyone wants to follow so once you have a dozen adopters, “the coast is clear” and the rest rush in.

“Gradually and then suddenly,” as Hemingway once put it — lawyers hate being  the first to change, but equally they don’t want to be the last ones left out in the cold. Law firms constantly monitor each other and the legal marketplace to see what’s going on, who’s doing what, and whether there’s anything big happening they should be part of. They’re watching for the “prominent first movers” Rees Morrison talked about in the Rio Tinto context. Once they feel that enough people have jumped into the water and declared it safe — once the reputational and financial risks of change have been taken and minimized by others — then they’re ready to leap, and if they sense a rush of movement among their competitors, they’ll even push each other out of the way to be the next ones in line.

I think that’s where we are today. In all sorts of ways, in many different aspects of the legal profession, first movers are forging ahead and dictating a new energy and direction, while the great silent vastness behind them watches closely and prepares to shift and follow. Momentum — mass times velocity — is an incredibly powerful force; we’re about to see it channeled through the legal services marketplace.