Alternative Fee Arrangements
Insight Michael Moradzadeh · June 30, 2011
The most radical changes in law firm billing which have occurred during the last two years has been the advent of value billing Alternative Fee Arrangements (“AFA’s). These billing arrangements are aimed at destroying or at least seriously maiming the invidious hourly billing process, which creates economic incentives for inefficiency. The hourly rate may be either dead, suffering a lingering death or in a simple state of somnolence, depending only on whether the observer is an optimist, a pragmatist or an ostrich.
While perhaps most law firms have slowly adopted to these changes, Rimon has been an industry leader in establishing alternative fee arrangements.
The facts are plain. We all know about the rising tide of fixed fees, alternative billing, and holdbacks depending on results, success fees, radical convergence and fixed retainers. Let’s be completely clear on what this means: Clients, particularly those of significant economic clout are passing all or most of the risk on legal engagements to the law firm. Rimon, confident of the honed skills of our professionals, readily stands shoulder to shoulder with our clients in assuming these risks.
In late March 2010, Evershed’s, London “Magic Circle” firm released the results of a survey it had undertaken of corporate counsel and leaders of major law firms. The Evershed report, as reported in the ABA Daily Journal of March 24, 2010, is critically instructive:
“The legal landscape has changed permanently and more quickly than anyone imagined,” the report says. In the new, post-recession legal market, general counsel have more status and influence in their corporations, fee levels will decline or stay the same, and legal work will become more efficient as tasks are outsourced and technology is used.
In this changed world, law firm structures may be vulnerable. Forty-six percent of managing partners said a reduction and change in premium legal work available would change law firms’ shape and size. The larger firms reported long-term cuts in headcount and leverage, and possible changes to the “up and out" pyramid structure of law firms. Only 30 percent of the partners said they were wedded to the traditional partnership model.
In this new legal world, hourly fees are giving way to value billing that is based on the value of work to the client rather than lawyer hours expended, the report found. Two years ago, only 22 percent of in-house clients and 48 percent of partners surveyed saw value billing as a trend for the future. Now, 86 percent of clients and 88 percent of partners say they often or sometimes use value billing. Among the partners surveyed from the United Kingdom, 79 percent said the hourly rate was almost dead.”
Clients, whose current demands for legal services are significantly lower than the existing supply, are requiring efficient delivery of quality legal services at predictable rates, consistent with the current market and with the law firms themselves, assuming a degree of the risk in such engagements.
Jeffrey W. Carr, Jr., Vice President and General Counsel of FMC Technologies, a company with sales of $4.4 Billion, has in recent months taken a leadership role on behalf of private industry in regard to the need for AFA’s and the insistence that corporate clients should dictate to outside law firms the terms of any engagement and that virtually every engagement demands “performance-based pay”. Mr. Carr has been a strong advocate of requiring that outside counsel have “a laser like focus on value.” In a recent interview withLaw360, Mr. Carr did not mince his words: “ FMC has advised all of its outside counsel that FMC required that “all existing matters to be handled below current matter budgets. [FMC] also advised that [it expected] new matters to have budgets 10 to 15 percent below historical budgets for similar types of matters.”
Mr. Carr’s advice to outside law firms, as reported by Law360 is direct, succinct and beyond misinterpretation:
“Change and do it now. Learn to focus on delivery of value by reducing your costs to remain profitable as opposed to leveraging the pyramid and focusing only on top line revenue growth. To quote a former U.S. Army chief of Staff, ‘If you dislike change, you’re going to dislike irrelevance even more.’”
Rimon has no leverage nor is it constructed in the model of a typical law firm pyramid, with armies of young associates at the pyramid base, compelled to bill large swaths of hours in order to maximize the profits for the partners who occupy the rarefied air at the summit of the pyramid. Rimon has also been sensitive about minimizing costs from the very inception of the firm. Recognizing that a significant driver in law firms setting fees has been the obligation of law firms to pay approximately one third of its revenues to pay for fixed costs such as real estate and technology. Rimon was determined that one of its principle core values was to limit these costs, while not sacrificing the quality of the legal services we provide. Rimon’s founding partners recognized that most large law firm were saddled with paying for expensive outmoded technology acquired years ago and that new technology was not only more efficient, but also eliminated the need for much of the expenses law firms occupy. Taking advantage of these features, Rimon has truly evolved into a new business model in which legal services at the highest order of professionalism can be offered at rates substantially lower than other competing national or international law firms.
Please call our managing partners, Michael Moradzedeh at 800-930-7271 ext. 201, (email: Michael.Moradzedeh@rimonlaw.com ), Yaacov Silberman at (415) 683-6876 (email: Yaacov.Silberman@rimonlaw.com ) or any of our partners (http://www.rimonlaw.com ) and see how our evolved law firm can benefit your business.