Alternative Fee Arrangements

Legal IT Professionals
November 14, 2011
by Christy Burke

Alternative Fee Arrangements Give Productivity Software Sales a Boost as Law Firms Brace for Efficiency

Recently, I went to a Microsoft Word users’ group meeting where a legal software application was being demonstrated. The software being shown was going to allow attorneys and legal staff to accomplish a time-consuming legal task in a fraction of the time it would have taken manually. The attendees, mostly legal software trainers, were amazed and very enthusiastic about the software.

Out of curiosity, I asked the trainers, “When you train lawyers and legal staff, do some of them resist learning productivity software tools because they actually don’t want the task to take them less time, because it reduces their billed hours?”

Some of the trainers dismissed this as a preposterous notion – of course no lawyer or paralegal at their firm would ever choose a slow, manual method over a fast technology-driven one just to log the extra hours!  However, as I let the question hang in the air, a few of the trainers started to come forward and admit that there were in fact legal professionals at their firms that resisted learning or using software tools to help them do their jobs faster, because they didn’t want to lose the billed time.

This begs the question…if the billable hour has been repressing the business motivation to be more efficient, then will the rise of Alternative Fee Arrangements (AFAs) – a shift away from the retail-price billable hour – give a long-awaited boost to demand for productivity software tools?  Inquiring minds – like mine – wanted to know, so I decided to talk with some lawyers, legal IT people, analysts and legal software vendors to investigate further.

Enterprise Strategy Group (ESG) recently released its ESG 2011 Corporate Counsel survey results and their research report, E-discovery Market Trends: A View from the Legal Department.  According to ESG analyst Katey Wood, “Some corporate clients are requesting their law firms use specific tools for culling, reviewing, or performing case assessments (which streamline the process), but more are simply requesting Alternative Fee Arrangements (AFAs) – saying in effect, ‘I don’t care how you do it, just make it cheaper.’”  The study showed that 71% of corporate counsel surveyed planned to request AFAs of their outside counsel law firms, and 64% already had requested AFAs from their outside counsel law firms.

Since AFAs are becoming more commonplace when it comes to pricing models, law firms who service them need to realize that they need to make some changes in order to stay profitable.  Toby Brown, an expert on AFAs and pricing, says that law firms “must figure out how to make money in spite of capped fees and one of the things they’ll look at is IT.  The day will arrive quickly that it won’t be a fight to get partners’ attention when it comes to increasing efficiency through technology.  The cost of productivity software won’t be an issue for many large firms – dropping $100,000 is what they expect to pay for new software – but it will be an adjustment for other reasons.  Legal IT’s role in this process will be mission-critical, especially if the CIO has a business-oriented view.”

Brown explains that “every corner of a traditional law firm is tooled for a cost-plus business model, where the profit is built into the billing rate.  Under the AFA model, the markets are setting the price and profit is no longer built in.”   Traditionally, Brown continues, “Legal IT has typically focused on installing and maintaining infrastructure like Windows and Office in-house.  Now, however, the complexity of legal IT work is changing – you can’t just upgrade Outlook without considering all the plug-ins you have to update as well (DMS, practice management, etc.)  This will complicate upgrading to the extent that firms may increasingly look to cloud computing for an easier, cost-predictable way of maintaining their desktops.”

So what’s the solution to this problem?  Brown says, “Legal IT should consider embracing the cloud – it’s the only way.  Virtual desktops will not save firms a dime initially, but down the line, they won’t have to worry about upgrades.”

If cloud-based solutions may see an uptick in adoption because of AFA pricing, then which other software tools stand to gain as well?  Andy Adkins, CIO at Steptoe & Johnson, is a longstanding expert on legal technology, particularly in the case/matter management area, having run the Legal Technology Institute for many years.  Though Steptoe is still mostly still on the billable hour and not using AFAs much, Adkins acknowledges that many other firms are having to face them, whether they like it or not.

Adkins is optimistic that AFAs will impact productivity software use, but so far, the effect has only been incremental.   “We have seen a steady rise in use of productivity software tools, but it is still minimal compared to the market at large.  Still only 30-35% of firms are using case management and many of them are smaller firms which can standardize on the technology more easily.”

For those of us steeped in legal technology we ask “how can this be?  Why are firms not adopting these tools like case management, DMS, CRM and other acronyms, which will clearly help them do business better, faster and cheaper?”  Perhaps because efficiency is not always seen as a good thing, particularly within a payment structure that pays out based on time billed in 6-minute increments.  Adkins cautions that law firms need to be careful when they decide to become more efficient.  “If you become more efficient, your hourly rate goes down, though you can go home earlier and/or take on more work.  When law firms look to become more efficient, they need take a gradual approach.”

Adkins suggested a 3-step plan for law firms to consider when pursuing efficiency involving communication, analysis, technology and training.  The three steps are:  1) have discussions, calculate metrics and numbers and analyze how efficient they can become; 2) ask management if they want to do billing differently and 3) ask whether the firm wants to provide proper training to the lawyers and staff on software tools.

Adkins will be heartened to hear that legal software vendors are reporting a definite surge in business from law firms, partially or largely because of increased AFA activity.  James P. Bergeron, Chairman and CEO of First To File, an IP management systems provider which markets to both inside and outside counsel, says, “In the past 12 months, we have witnessed a significant increase in business from law firms, both in terms of the overall customers as well as sales prospects.  Our law firm vertical market today has grown to comprise approximately 30% of our overall business, versus 10% just one year ago.”  He explains that law firms are and will be strongly motivated to buy productivity-enhancing systems given the cost pressure, added competition, soft-demand (less top-line revenue) and focus on the bottom line.

Bergeron definitely sees a connection between his company’s success and AFAs.  “AFAs have had significant impact on increasing our sales since our products help law firms deliver the same or better service faster and at lower costs.”

World Software Corporation President Ray Zwiefelhofer has seen a significant increase in sales of the Worldox DMS and its various add-ons this past year.  He notes, “When law firms bill based on the traditional hourly method, there is little or no incentive for them to become more productive on a case-by-case basis.  However, under fixed-fee pricing arrangements, the faster the firm can find and possibly reuse or repurpose prior work product, the more profitable they will be.  DMS programs like Worldox allow attorneys to quickly file and find their work, so the rise of AFAs definitely seems to have led to a boost in our sales activity.”

In a troubled economic era like this one, it’s amazing that any companies are posting dramatic sales increases at all.  The fact that legal software vendors are happily in the black proves that law firms are recognizing that IT can be a solution to a multitude of problems.

In fact, in October 2011, Tom Baldwin and Andrew Baker wrote a great article for Law Technology Newscalled “Rethinking Fee Arrangements Can Reveal Untapped Opportunities” in which they indicated a number of ways that a law firm can leverage technology more effectively to improve its competitive advantage, profitability and workflow in the face of AFA requirements, so there clearly is evidence to support the notion that IT can offer solutions brought forth by fixed-fee cost lawyering.

AFAs are not going away, and law firms must adjust to become more efficient in order to stay profitable and competitive.  Whether it’s cloud-based technology, document or case management or other tools, productivity software is finally being acknowledged for its time-saving benefits as an essential component of the firm’s workflow.  Firms which fail to leverage legal technology and train their lawyers and staff on using the software programs will not only be behind the times – they’ll also be behind the eight-ball when it comes to maintaining a healthy bottom line.

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