[walking away] Numbers, Mrs. Landingham.
If you want to convince me of something, show me numbers!
THE WEST WING "TWO CATHEDRALS" (2d season finale, 2001)
While clients agree with the criticism of hourly billing, the reality is they still have significant reservations about using an alternative fee agreement (AFA). Like fictional President Jed Barlit in The West Wing, clients aren’t going to tip and truly adopt AFAs until their lawyers can “show me numbers.”
Unfortunately, AFA firms don’t yet have the numbers. The great bulk of pricing data currently available is based on inefficient hourly billing, and, consequently, is of limited value. Furthermore, the tools necessary for outside counsel to collect, analyze and present meaningful cost and profit data on AFA cases across clients and markets still need to be developed.
Numbers from Inefficient Hourly Models Not Good Enough
Like other AFA litigation firms, CLP believes that it is fully capable of setting a fair price for even larger IP litigations. As we and others tell our clients, this is far easier than most of the issues successfully resolved by our clients in the regular course of business. “We are not building an oil platform on the North Sea.”
However, AFA firms’ confidence in their price-setting capabilities, while well-intentioned, is based primarily, if not exclusively, on historical pricing data from inefficient hourly models. They are therefore relying on data of limited value.
(True enough, seasoned IP trial lawyers have a wealth of anecdotal pricing experience to fall back on, and while this impresses our colleagues, it falls short of delivering “the numbers” we need to convince our clients to use AFAs.)
Billable hour firms seeking to shift to an alternative fee structure “[o]bviously  can’t rely on their billable information to date," according to CT TyMetrix President John Weber, “[i]t is that information that is at the root of their client’s dissatisfaction. Rather, they need benchmark information about what the same or similar cases cost when handled in the manner to which they aspire.”
Likewise, where historical data on hourly billing is used to price flat fee work, the tendency is to guess the number of hours a piece of litigation or other work will take, multiply by the hourly rates of people who will be doing the work, build in some desirable profit, and, you have a fixed fee. However, as noted by Valorem attorney Pat Lamb, under this calculation methodology, “none of the efficiency benefits [of a flat fee structure] are shared with the client.” Or to put it in the client’s voice, “I might end up paying even more!”
Accordingly, CLP limits its use of historical hourly billing data to providing a benchmark against which to contrast lower flat fee litigation prices. As we explain to our clients, the efficiencies realized under a flat fee model allow us to significantly reduce our price over hourly billing. For example, in a February 1, 2010 presentation to a software company looking to switch its patent litigation from hourly counsel to CLP, we came right out and said “take 20% off your current counsel’s estimate of fees and costs, . . . CLP will start there in developing price for pre-trial and trial strategy.”
(No decision yet on this one, but the February 16, 2010 post by blogger Jay Shepherd that “you can save 20% (or even 30%) by going with a firm that uses open pricing” provided additional support for our position.)
Nonetheless, the clients whom we seek to bring to AFAs continue to worry that they “may end up paying more,” “can’t be sure they are saving money with a fixed fee,” or that getting billed for “services rendered” leaves them open “to be taken for a ride.” That this is the current state of affairs compelled the recent observation in Adam Smith, Esq. regarding the current relationship between clients and lawyers generally: “clients don’t trust us with their money and we don’t trust them to reward us fairly.”
Numbers That AFA Counsel Should Have
So the transformation to alternative fee pricing depends upon not just “numbers,” but the right “numbers.” Per CT TyMetrix’s John Weber , the key to removing the barriers holding back the AFA conversation is “benchmark financial data about the costs and outcomes of similar [AFA] cases.”
To put an even finer point on John’s great observation, what CLP and its AFA colleagues really need is:
- data that demonstrate that AFAs lower the cost of delivery (allowing us to deliver the same high quality outside counsel legal service for lower price).
- data that allows us to better measure and generate a profit at a lower price, and to more intelligently share with the client the risk of a bad result – to have skin in the game.
- data that will allow clients and outside counsel to mutually and accurately assess a legal problem in affirmative terms, i.e., the value of mitigating the risk posed by a litigation or the value to the client of preserving a specific business model.
- data that will enhance the ability of client and outside counsel to mutually agree on "how much this will cost."
There Are Ways to Get These Numbers . . .
The apparent solution: outside lawyers should use the ebilling and management tools offered by companies such as Serengeti Tracker, TyMetrix 360, and DataCert. These ebilling systems are hosted by the vendor through an encrypted Internet connection, meaning there is no hardware or software that must be installed or maintained by the client law department or their law firms. Not only is billing processed on-line, but these systems also track law firm budgets and law department financial forecasts. Ebilling systems can automatically present comparisons of spending versus budget for the project phase, fiscal year or project duration. With one system tracking both spending and results across cases, “law departments can move beyond hourly fee structures to create performance-based alternative fees,” according to in-house counsel Chris Marlin (Lennar) and Stuart Roth (Olin).
. . . But They Are Not Available to Outside AFA Counsel
Sign us up, right? AFA firms like CLP should be using these systems to track and measure financial performance data across its AFA cases. Better yet, while there are some companies currently using ebilling systems to generate data across the cases handled by its law firms, outside law firms could use ebilling systems to generate even broader data – information across the clients/industries to whom we provide legal services.
True enough, there are a number of client law departments, who, along with their outside counsel, already use ebilling systems. However, many of the early adopter clients of CLP’s flat fee pricing models have been smaller to mid-size technology companies with little or no in-house resources and, luckily for them, relatively few litigations of significant size. This type of client tends not to be using ebilling systems and consequently their legal service providers like CLP aren’t either. Again, time to change that.
So I called my Legal OnRamp colleague and CT TyMetrix President, John Weber. I was his dream customer, or so I thought, because I had convinced myself that my start-up AFA litigation firm cannot live without his product.
To my dismay, John pointed out that the ebilling products that I was interested in were sold exclusively into client law departments, and currently are not offered to outside law firms. John patiently explained how the market evolved away from outside law firms because they were not interested in picking up the expense of the systems and their clients justifiably were concerned that they’d get socked with yet another hidden cost. Meanwhile client law departments, particularly those with higher volume of legal matters, were highly incented to acquire systems that allowed them to effectively manage legal spend in much the same way they managed the rest of their business.
This needs to change. AFA firms are going to need more and better pricing data reflecting the experience across similar AFA cases in order to truly tip clients in favor of alternative pricing structures. According to John, help is on the way in the form of a solutions for outside lawyers currently under development. In our opinion, they can’t come soon enough.