Peer to Peer Magazine

June 2010

The quarterly publication of the International Legal Technology Association

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Page 8 of 111

BEST I PRACTICES Responding to a Buyers’ Market With Alternative Fee Arrangements s your firm capable of successfully offering and delivering alternative fee arrangements (AFAs)? While there are several types of AFAs, what is common among them is that firms must deliver more for less. Whether these arrangements are rate rollbacks, fixed fees, risk rewards, capped, contingency, portfolio or other, they impose a new requirement on the individual partner and the firm: The matter must meet the client’s reduced cost and increased value requirements while maintaining the firm’s profitability. Given that the hourly billing model has been the norm since the end of World War II, few lawyers have significant experience delivering any other kind of model. This may be why some lawyers are holding fast to the belief that even though this recession is the worst in 80 years, it too will pass, and the legal profession will return to the billable hour. Judging by recent surveys of managing partners in major firms around the world, law firm leadership anticipates the opposite. They recognize that both the immediate and long-term implications are that law firms have experienced a profound shift to a buyers’ market. Just three years ago, law firms were the center of the legal universe. Today, clients are at the center and are calling the shots. They want predictable and lower fees, as well as risk and exposure protection. They are demanding greater efficiency in how work is undertaken and delivered, as well as transparency into the firm’s decision-making. THE NEW NORMAL Legal expenses, once considered unpredictable and exempt from cost planning and management, are now increasingly the responsibility of the firm. Lawyer resistance to project management is also being questioned. Clients are now able to challenge the notion that how long a firm 10 Peer to Peer spends on a matter isn’t the only or even the primary factor in setting price. To achieve their objectives, clients are taking more work in-house, culling the number of outside counsel and turning to a handful of firms to take on ever- larger portfolios of matters. Today, only 10 percent of a firm’s matters may be alternative fee arrangements. However, that 10 percent will profoundly impact the profitability of most firms. If your firm is a ten-percenter, is it positioned to deliver what your clients demand while still maintaining the firm’s profitability? What will happen when, as most managing partners believe, the number of alternative fee matters edge over 25 percent? The cultural change will be significant. How legal work is planned, resourced, managed and delivered is likely to shift, and it is unlikely that lawyers in these firms will remain untouched, particularly as they find a cadre of new professionals guiding their work on matters and their work with clients. Already, firms are hiring analysts, MBAs, pricing managers, project managers and highly skilled client and industry researchers to work with their lawyers. You could call this “the new normal.” The challenge for you and your firm is evaluating the firm’s competencies and capabilities in offering, monitoring and successfully delivering AFAs, whether they are single matters or portfolios of matters. AFAS, STEP BY STEP The shift required to successfully deliver AFAs reaches into every corner of the firm, requiring each department to evaluate the current state of its capabilities in delivering AFAs. All potential AFA capabilities are detailed in the following heat map chart. Firms use the chart in a three- step process. Step one defines each AFA competency. In step two, firms evaluate their current competency.

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