Presenting a live 90‐minute webinar with interactive Q&A

Alternative Fee Arrangements for Law Firms Alternative Fee Arrangements for Law Firms and Corporate Law DepartmentsNegotiating and Implementing Non‐Hourly Billing and Avoiding Ethical Pitfalls

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, NOVEMBER 23, 2010

Today’s faculty features:

Kerry Notestine, Shareholder, Littler Mendelson, Houston

Marc S. Mayerson, Partner, Hollingsworth, Washington, D.C.

Danny Ertel, Esq., Partner, Vantage Partners, Boston

The audio portion of the conference may be accessed via the telephone or by using your computer's speakers.Please refer to the instructions emailed to registrants for additional information. If you have any questions,please contact Customer Service at 1-800-926-7926 ext. 10.

The Challenge and Opportunity of Legal Fee Pressures: A Roadmap to Law Firm Margin Improvement

A White Paper

by Danny Ertel and Mark Gordon

Brighton Landing West 10 Guest Street Boston, MA 02135 T 617 354 6090 F 617 354 4685

www.vantagepartners.com

About Vantage Partners

Vantage Partners, a spin-off from the Harvard Negotiation Project at Harvard Law School, brings together the world’s leading intellectual property on negotiation, with unmatched experience at helping organizations create and manage critical relationships. For over twenty-fi ve years, we have helped leading fi rms around the world develop and implement strategies to work more closely and more effectively with their key clients, suppliers, and business partners. In the professional services arena, we have helped some of the leading law fi rms, public accounting fi rms, IT services fi rms, HR consulting fi rms, and management consulting fi rms deal with pricing pressures and scope management challenges.

Danny Ertel is a Director of Vantage PartnersEmail:dertel@vantagepartners.com

Mark Gordon is a Director of Vantage PartnersEmail:mgordon@vantagepartners.com

© 2010 Vantage Partners, LLC. All rights reserved.

Today’s market for legal services poses unprecedented threats to large law fi rms. Clients have been grumbling about legal fees for a long time, but they are now de-manding better, cheaper, faster service from outside counsel. They want bigger discounts as well as greater transparency on bills, and are refusing to pay for the law fi rm model which leverages junior associates and open-ended billable hours. Corporations are deploying pro-curement teams (and their favorite weapons — RFPs) more frequently to wrangle costs out of the system. Firms are fi ercely competing in a more crowded fi sh-bowl not only within the traditional competitive set, but with well funded, and frequently underestimated, preda-tors such as legal process outsourcers (LPO) and emerg-ing technologies like e-discovery and automated docu-ment management tools.

The historically comfortable professional relationships between law fi rm partners and corporate clients is being upended — largely driven by the radical shift in the way clients are interacting with fi rms about legal fees. In the past, discussions would focus on strategy and how fi rms would handle matters. Now clients are saying things like:

“We can’t afford to continue to pay your current

fees”“Billing us by the hour creates no incentive for ef-

fi ciency”“Your fees are higher than they ought to be”

“We refuse to pay to train your junior associates”

“Do us a favor, for the great relationship we have…”

“We’re going out to RFP unless…”

“I’m going to have to send you over to procurement

unless…”

These complaints are getting louder and more consis-tent, and the competitive threats from leaner, more ef-fi cient service providers are growing.

“ In my view, outside counsel have got to substantially change the way they charge for and deliver legal services. It is my opinion that the basic fee-earning structure in law fi rms is wrong. The whole thing needs a sea change.”— Susan Flook, General Counsel,

The Body Shop International

Firms can no longer dismiss this sea change as a fad or noise from the fringe or a blip due to a temporary business downturn, to be endured until it goes away in a short while. The need for action is both serious and immediate. However, for fi rms willing to take concerted action, there is an opportunity to convert the current sit-uation into a revenue and margin expansion opportunity, and to maintain and enhance their relationships with key clients.

Our experience in the professional services industry — not just with law fi rms, but with audit fi rms, IT services fi rms, and a variety of consulting fi rms — tells us that while making concessions on fees may be tempting, it likely isn’t a good solution for your fi rm over time. The former Big Eight accounting fi rms (now the Big Four) learned this lesson the hard way. Thirty years ago, CPAs at the big audit fi rms were much like top lawyers at the big law fi rms. They were consummate profession-als who quoted fees for their professional services, and clients either retained them or looked for less qualifi ed smaller fi rms to do the work. Clients did not haggle over fees. Clients did not seek (or receive) discounts. Clients did not contest line-items on invoices (at least not if they hoped to remain clients). Those days are now a distant memory as audit fees are now steeply discounted, with clients sometimes getting a “discount” of up to 75% on the “standard rate” from their accountants.

As lawyers contemplate how to deal with the new fee pressures they face, they would be well advised to learn from what happened in the accounting profession. The legal profession stands at the edge of a huge cliff in prof-itability. We should look hard before we leap headlong into the chasm of fee discounting.

Discounts are not a one-time thing: reducing fees con-fi rms many clients’ suspicion that law fi rm rates are in-fl ated, and agreeing to discount them sets a precedent for the future. It will be diffi cult to “take back” the discount and return to your standard fee schedule once you’ve given in. Once you are on a slippery slope of giving dis-counts on your “standard” rates, your entire rate struc-ture may be undermined and “standard” rates may no longer have any integrity. If you can reduce your rates by 10%, why not by 13%, or 18%, or 27%, or 72%? From the client’s perspective, how do they ever know they have “found the bottom?” Moreover, does giving them a big discount today imply you were overcharging them yesterday? Ultimately, reduced fees impact reve-nue, margins, partner profi ts, the satisfaction of lawyers

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in your fi rm, and your ability to continue to deliver high-value legal services over time.

We have found that resisting the impulse to “discount to make the client happy” and instead focusing on ways to respond to the client’s needs with more creative, ef-fective approaches can shift discussions about discounts into discussions about how you can build a deeper and broader relationship with your clients.

How do you turn a request for discounts into a broader and deeper relationship? Doing so requires more than delivering top-quality legal work, it also requires a so-phisticated capacity for negotiating creative, appealing fee arrangements which meet evolving client interests while also satisfying the law fi rm’s needs.

Resisting the urge to “give in” to clients is only a small piece of the puzzle. Just saying “no” to clients is not a winning strategy. Your fi rm must have:

A clear strategy and pricing policy for a broader a. range of fee arrangements, Infrastructure designed to enable your fi rm to b. deliver high-quality legal services profi tably, within scope, and consistent with the fi rm’s strategic ob-jectives, and A mechanism for building individual partners’ abili-c. ties to implement your fee strategy with clients.

Our clients have found that the most effective approach-es to fee negotiations are those which are the product of a clear and well-defi ned organizational strategy and implementation framework. Developing this approach at your fi rm has three critical pillars, each of which is essential to success over time.

The Elements of Successful Fee Negotiation and Service Delivery

Firm Pricing Strategy and Fee Policy

With the legal landscape changing and client demands for creative fee solutions increasing, many fi rms are tak-ing a close look at alternative fee structures. Premium and discounted hourly rate structures, volume-based rates, capped hourly engagements, fi xed fee, and con-tingent or value-based fee arrangements all present dif-ferent benefi ts and risks for fi rms, and most are quite different than the familiar straight standard-rate billable hour model. Properly utilized, each of these alternative arrangements can provide benefi ts to your fi rm — ben-efi ts which range from making a client more likely to select your fi rm for an engagement, to enhanced client retention, to increased margin on the engagement itself. However, evaluating the benefi ts and risks of these dif-ferent fee structures is a relatively new thing for many fi rms, not to mention for many individual partners. As fi rms adjust to this new fee structure environment, the potential risk of making “bad deals” and setting unten-able precedents grows signifi cantly. Given the stakes, decisions about which fee structures to offer which clients under which circumstances, as well as what ap-proval process is required, demands careful planning and alignment across the entire partnership.The fi rst step in negotiating the best fee agreements for your fi rm is to understand the unique benefi ts, risks, and overall value proposition of different fee arrangements for different kinds of work given the fi rm’s own econom-ics, practice strengths, and risk tolerance. Some of these discussions can be diffi cult within an often-independent

Components of Professional Fee Enhancement

Firm Pricing Strategy and Fee Policy

Fee Guidelines Grids

Rate Authority, Approvalsand Exceptions Process

Tracking, Measurementand Rewards

Leadership Messages

Enabling and Supporting Structures

Tools, Templatesand Playbooks

Metrics, Plansand Incentives

Pricing ConsultationMechanisms

IT toenableaccessand

usability

Processes and Systems

Individual Partner Capability Enhancement

InteractiveBehavioral Training

ReinforcementMechanisms

Coaching andGuidelines

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law fi rm partnership culture, but success requires align-ment on a fi rm-wide approach, yet one that is nuanced enough to fi t different practices and types of clients. We recommend that clients build a working group on fee strategy and then engage in a four-step process to gather the information requisite for building the new fee strategy:

Facilitated open discussions among senior fi rm lead-ership about the overall objectives for the fi rm and risk tolerance for different fee structures Open and detailed discussions with practice area

leaders about area offerings, client interactions, cost and profi tability models, and possible fee arrange-ments across different components of different types of projectsA survey of an appropriate cross-section of fi rm part-

ners to gather their views and perspectives on which fee arrangements are appropriate under different circumstances and their risk tolerancesInterviews (best conducted by a third-party) with

current and potential clients to explore their interest in different fee arrangements and motivations for preferring different fee structures in different con-texts

Conducting this exercise entirely within the fi rm’s four walls is akin to looking in the mirror on your way out to the dance on a Saturday night and giving yourself the “thumbs up.” These are gut wrenching, highly analytical exercises that most lawyers have little or no training to lead.

These facilitated discussions generate the key inputs that can be used to build a fi rm-specifi c, practice-specifi c, work-specifi c “value matrix” for different fee arrange-ments. This matrix can be used to shape policies on fee negotiation, or to provide more structured guidance and support to partners by providing a clear and agreed-up-on description of the benefi ts, risks, key considerations, strategies, tactics, and parameters for fees for different kinds of work in different kinds of client situations.

Once the fi rm has a robust set of fee and pricing guide-lines, it is critical that you articulate clear parameters for pricing, as well as roles and responsibilities for quot-ing and approving novel fee arrangements. As part of the strategy and policy suite, it is also essential that the fi rm design and then roll out appropriate tracking and measurement systems so that Partners know what will be monitored and what impact results will have. Talk-

ing about the critical need for profi tability, but measur-ing and rewarding top line revenue generation, is likely to create dissonant messages to the partnership. And, of course, any tracking and measurement systems need to be congruent with the fi rm’s culture and compensation system. Finally, the fi rm’s leadership must have a well orchestrated set of messages, both internally within the fi rm and externally to your client base and the public, if your new strategy and policy is likely to have the desired impact.

Individual Partner Capability Enhancement

No matter how well-constructed a fi rm’s pricing strat-egy and fee policies are, the linchpin of a successful fee negotiation remains the ability of individual partners to implement these strategies in real client situations. Whether the client is focused on a traditional billable hour engagement, an outcomes-based fee arrangement, a fi xed-fee package, or some kind of blend, it is essential that the partner be able to uncover the client’s interests, concerns, and internal challenges so that the fee proposal he or she submits will have the greatest chance of being successful.

We have all encountered some attorneys who are bril-liant at negotiating on behalf of their clients, but wholly ineffective at negotiating fees with their clients. In a climate where fee structures are important to retaining clients and defending margins, it is especially important that attorneys be as comfortable and effective at negoti-ating fees as they are earning them.

Lawyers are an impatient lot. They have little tolerance for classroom training, even when driven by CLE imper-atives. We have been training mid-career lawyers in ne-gotiation at Harvard Law School since 1981, and it has been apparent that enhancing personal skill of attorneys in negotiation cannot be accomplished at a one-hour lunchtime session. Taking a full day (or even two) away from billable hours to do negotiation training is a chal-lenge for many fi rms, and runs counter to their culture. Yet, to be successful, a negotiation training session must be fairly intensive, must be highly interactive, and must involve role-plays so that partners can practice dealing with diffi cult fee and scope conversations with clients.

Whatever kind of behavioral training program you roll out, it is imperative that you append some kind of rein-forcement mechanisms and opportunities for coaching and guidance in order to maximize the likelihood that partners will actually improve their skill at diffi cult fee

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and scope conversations with clients. Some fi rms are de-ploying more expertly trained SWAT teams which can coach and support partners, or assist directly in negotia-tions with diffi cult procurement teams.

Enabling and Supporting Structures to Effect Pricing Strategy and Fee Policies

Having a robust fi rm strategy on one hand and enhanced individual capability for partners on the other are both necessary, but not suffi cient, to deal with the changing fee environment. The structural support that keeps these two critical elements standing upright is the middle pillar: enabling and supporting structures. We think of these enabling and supporting structures as the middle-ware that enables applications to run on your network. Even if the pillars at either end are brilliantly crafted by your fi rm, unless the middle pillar supports the center, your initiative may be doomed to failure and eventually collapse.

Many fi rms have spent generations growing systems and structures to enable profi table hourly billing. Much ef-fort has gone into building the ability to recruit, train, and retain associates who will bill lots of hours, and much of the fi rm infrastructure is designed to help law-yers bill as many hours as possible. In the old world, the more hours put into a project, the more profi ts fl owed to the partnership. In the new world, some projects will be hourly billing, some will be fi xed fees, and some will be contingent fees. New structures and tools are required to support new fee arrangements.

In a world where many engagements will be fi xed fee projects, what new structures and incentives do you need to scope projects accurately, to manage scope with your clients, to project manage engagements for optimal ef-fi ciency, and to ensure that associates spend as little time as is necessary, rather than as much time as is defensible, doing the project? After all, profi tability on any fi xed fee work will depend on your fi rm’s ability to estimate and manage scope, and on your attorneys’ doing the work as quickly as possible while still upholding your service quality standards. Neither of those critical success fac-tors are supported, measured, or rewarded in most law fi rms currently.

In a world where many more engagements will be out-come-based fee projects or involve some sort of risk sharing (well beyond the kinds of contingent fee liti-gation cases many fi rms currently take on), what new structures and systems do you need to evaluate risks

Vantage worked with a global human resources consulting firm to reduce write-offs due to “scope creep” on major engagements. The organization found that projects often expanded beyond initial estimates for a range of reasons—some within their control and some not. Management developed an internal estimate that these scope-related write-offs were running at 17% of revenues. During the project, Vantage determined that write-offs were actually even higher than this because of a significant under-reporting of hours that was inadvertently encouraged by management’s repeated exhortations to reduce write-offs.

In order to understand the source of these write-offs, Vantage conducted interviews and workshops with clients and staff, launched a survey and reviewed the firm’s practices and systems. This exploration identified a common element linking these scope challenges: the failure of partners in the organization to engage with both their clients and their own staff in a discussion about the connection between scope and fees. While exceptional in delivering work to clients, many of the partners had significant gaps in their ability to negotiate scope and fees up front, to monitor whether initial scoping assumptions were holding true during the project, and to engage clients early enough and effectively enough when the work to be done exceeded the original scope.

To address these challenges, Vantage created a scope management model and integrated it with the firm’s regular client management process. The model included tools for managing scope internally and for recognizing the need to engage the client proactively. Vantage also helped the firm develop an internal change management program, including negotiation workshops which built the skills necessary for engaging in effective scope discussions without damaging the relationship. In just the first year, the program delivered bottom line savings that were more than five times the cost of the initiative.

Case Study: Scope Management

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for the fi rm, to estimate risk-adjusted discounted return and interdependencies within your portfolio of contin-gent engagements, and to terminate (or transform the fee arrangement for) work when the likely return does not support ongoing work within the original terms of engagement?

As you contemplate a practice that has fewer standard hourly fee engagements and a broader mix of different types of fee arrangements, how do you manage such a practice effectively? How do you ensure suffi cient over-sight of ongoing fee negotiation activities where indi-vidual partners may be setting precedents that have sig-nifi cant implications for the fi rm? Anyone charged with managing a fi rm in this new environment would likely insist on dashboards that quickly summarize key infor-mation on the status of current client relationships and projects and ongoing fee negotiations across the fi rm, on “tool kits” for partners which include “best practices” for different types of fee negotiations, on some form of structured pricing consultation process for non-standard fee arrangements so that partners are not all making uni-lateral decisions without having to vet them with some-one internally (even if they do retain broad discretion to act unilaterally after consultation), on appropriate incen-tives and metrics to align partner and associate behavior with the fi rm’s strategic goals for different fee models, and on IT systems that get critical information to rel-evant decisions makers in a timely fashion. Getting this middle pillar right is critical to running a profi table legal practice in the new environment.

The Transition to the New Legal Fee Environment

The writing on the wall is quite clear. The landscape of legal fees is changing. Some fi rms will try to tough it out with the old hourly billing model, stick their heads in the sand, wait to see what happens, and react by fol-lowing the crowd only when it clearly becomes impera-tive. Other fi rms will be more proactive and seize this as an opportunity to lead the way forward, bolstering both profi tability and client relations as they adapt to the new environment.

The leading fi rms who will be most successful are those who devise a coherent fi rm pricing policy and fee strat-egy, enhance individual partner capability to negotiate fees, and adopt the enabling and supporting structures to put the new strategy into practice.

Vantage worked with a large professional service firm to increase the capacity of its U.S.-based partners to negotiate fee agreements with clients and to align partners on the relationship between firm strategy and individual fee negotiations. The firm’s management had raised “standard rates” for fee earners each year, yet during these years found that the rate of fee recovery declined steadily. Vantage determined that individual partners, motivated by a fear of losing clients as a result of the standard rate increases, became accustomed to giving significant discounts to their clients in each new fee negotiation. This created a “slippery slope” where the firm’s standard rates lost their integrity and partners could no longer talk about their standard rate with any credibility.

To reverse this trend and empower partners to negotiate better agreements, Vantage conducted customized three-day interactive workshops on scope management and fee negotiations for senior personnel. Over 1,000 partners attended these workshops, and the program was very well-received: the ratings for the programs were higher than any other broad-based skills enhancement initiative the firm had run.

More than two years after the workshop rollout, the firm surveyed partners to ask: “what value has dropped to our bottom line from your own clients as a direct result of the fee negotiation workshops?” Over 400 participants responded to the survey. Using the bottom end of the range of each response (e.g. a response of $10,000-$25,000 was tallied as $10,000), the aggregate total response was over $42,000,000 in value to the firm’s bottom line.

Case Study: Fee Negotiation

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About Vantage Partners

Vantage Partners, a spin-off from the Harvard Negotiation Project at Harvard Law School, brings together the world’s leading intellectual property on negotiation, with unmatched experience at helping organizations create and manage critical relationships. For over twenty-fi ve years, we have helped leading fi rms around the world develop and implement strategies to work more closely and more effectively with their key clients, suppliers, and business partners. In the professional services arena, we have helped some of the leading law fi rms, public accounting fi rms, IT services fi rms, HR consulting fi rms, and management consulting fi rms deal with pricing pressures and scope management challenges.

Danny Ertel is a Director of Vantage PartnersEmail:dertel@vantagepartners.com

Mark Gordon is a Director of Vantage PartnersEmail:mgordon@vantagepartners.com

© 2010 Vantage Partners, LLC. All rights reserved.

The Challenge and Opportunity of Legal Fee Pressures: A Roadmap to Law Firm Margin Improvement

A White Paper

by Danny Ertel and Mark Gordon

Brighton Landing West 10 Guest Street Boston, MA 02135 T 617 354 6090 F 617 354 4685

www.vantagepartners.com