The Client Revolution

What toymakers and law firms are afraid of

If you celebrate Christmas, and you have kids, you probably spent a lot of time this morning opening toy packages. Which means you probably spent a lot of time cursing under your breath about the ridiculous antishoplifting devices in nearly every toy pack. ("Why does Daddy keep making those noises?" "Oh, he's just thanking Santa under his breath. Let's go into the other room.") From the impossible-to-cut plastic to the twisted and taped insulated wires, toymakers (and the retailers that sell their toys) are so focused on defeating shoplifters that they suck all the fun out of opening kids' presents.

Oh, sure, shoplifting is a problem, especially at the holiday and in a poor economy. But give me a break. The toy industry is more focused on the one or two percent of people who would try to steal a toy from a store, rather than on the 98 or 99 percent of people who actually pay for their goods. It's this much-larger group whose Christmas morning the toymakers are messing with. Rather than focusing on the happiness of their real customers, the toy people are worrying about the small minority who might steal from them.

Law firms are just like the toy companies. Their clients are clamoring for fixed prices, because they're tired of not knowing how much their legal work is going to cost beforehand. But the lawyers resist, worrying about setting the price too low. What if the other side drives up the costs? What if the client takes advantage of my fixed price? What if? What if?

Instead of worrying about the small minority of cases that might cause you to leave money on the table, lawyers should focus the happiness of the clients who want to know what their costs will be. There's much more money to be made from happy clients than there is to be lost from underpricing. Lawyers — and toymakers — should stop being afraid.

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The numbers behind the lip service: Part Two

In Part One, we talked about how BigLaw was congratulating itself for slowing the growth of its annual billing-rate increases. The jumping-off point was the National Law Journal's 2009 Billing Survey, in which 190 of the top 250 firms participated. The main story, written by Karen Sloan, requires a subscription.

One of the messages in the Billing Survey is that the lousy economy has increased the role that alternative billing plays. (Readers know that I hate that term. See "An alternative to 'alternative billing.'") Sloan writes:

Increasingly, clients are asking firms to enter into alternative fee arrangements that take into account the overall costs of their legal matters.

She again quotes our good friend, the ACC's Susan Hackett:

Some [clients] might say, "I really don't care what your rates are — that's not my problem. This is what I'm willing to pay for the work ... you figure it out from there."

The survey asked the firms about their use of alternative-fee arrangements (it didn't use the hyphen — ack!). Fifty-seven percent (up from 50% last year) reported that these arrangements accounted for ten percent or more of their firms' revenue. I suppose this is progress, but I remain unmoved. Here's why:

First of all, what's with this magic threshold of ten percent? Ten percent is a trial balloon, not a commitment to change. What is more, an astounding 43% don't even reach that level. The article cites a recent American Lawyer survey of 587 general counsel, finding that 39% of them have increased their use of alternative-fee arrangements this year. That means that 61% of the GCs reported that their use of these arrangements stayed the same or decreased. A nice one-page PDF summary of the GC survey is here, and a Law.com summary article is here.

Second, and this is an even bigger reason, is that "alternative-fee arrangements" is a weaselly phrase that obscures more than it informs. The National Law Journal's 2009 Billing Survey, after allowing the firms to congratulate themselves about their restrained rate increases and their perestroika-esque (admittedly not a common word, but whatever) attitudes to "alternatives," probes a little deeper behind the numbers. In asking about alternative arrangements, the NLJ sought some qualification. For example, the survey reports that an incredible 95% of the revenue at Paul Hastings came from alternative billing — in the form of discounted or blended rates.

What the what? Newsflash, people: Discounted and blended rates are still hourly billing. They are not "alternatives" to the billable hour. They are just forms of discounts. (For more on discounted rates, see "Legal advice: 30% off! (Why discounts don't always save you money).") Turns out that the other 5% of revenue at Paul Hastings comes from real "alternatives," including fixed, contingency, and retrospective fees. (Retrospective fees have their own problems, which we'll deal with in a future post.)

Not to pick on Paul Hastings. Others had similar results. Ogletree Deakins: 91% discounted or blended. Husch Blackwell: 98% discounted or blended. Dykema Gossett: 84% discounted or blended. And on and on. And many of the "real" alternatives include hybrid fees — that is, a hybrid of fixed and hourly fees.

Look: I credit the sentiment that many lawyers are saying that the time for "alternative fees" is now. But when the American Lawyer GC survey reports that the law firms initiated these alternative arrangements only 3% of the time, I wonder just how deep these sentiments run. And when the "alternatives" turn out not to be alternatives, I wonder if a lot of this is just lip service.

Clients: hourly fees — whether discounted, blended, or hybridized — are hidden prices. It's time to demand open prices.

The numbers behind the lip service: Part One

That loud noise you hear is the sound of large law firms patting themselves on the back for jumping on the so-called alternative-fee bandwagon. The December 7 issue of the National Law Journal has extended coverage of its 2009 Billing Survey. The lead article pronounces in its headline: "Reality dawns on hourly rates: The recession forced firms to moderate or forego rate increases." (We can't forgo the opportunity to point out that forego means "to go before," while forgo means "to do without." Just sayin'.) The story, written by Karen Sloan, requires a subscription. (A shorter version with a less-congratulatory headline — "Firms' Billing Rates Inched Up During 2009, NLJ Survey Shows" — is available here.)

Sloan's lede is this:

It took a global economic meltdown and a major upheaval of the legal industry, but law firms seemed to get the message that 2009 was not the year to substantially increase their billing rates.

Clients: hold off on your jigs just yet. Seventy-six percent of the large firms raised rates in 2009. And Sloan reports that a survey by The American Lawyer has 81% of the top 200 firms expecting to raise rates in 2010.

The NLJ article trumpets, in bright red figures, that the average billing rate at the 250 largest law firms rose only 2.5%, to an average hourly rate of $372. By comparison, rates increased 4.3% in 2008, and 7.7% the year before. But check out the numbers behind the numbers and do the math. That means that BigLaw rates have jumped 15.1% since the start of 2007. I should just shut this blog down, since we're all revolutionaries now.

Sloan writes, "Not everyone is convinced that simply reducing billing rate growth is the right strategy for law firms in this economic climate." Then she gets the money quote from my friend Susan Hackett, the visionary general counsel of the Association of Corporate Counsel and torchbearer of its Value Challenge:

I can tell you that whenever I talk to clients they actually laugh when they hear about firms raising rates in this environment.

Maybe the law firms can't hear that laughing over all that backslapping.

Honor and guilt

I was honored to learn that the editors of the ABA Journal have selected The Client Revolution as one of the 100 best websites by lawyers, for lawyers. There was a nice quote from Edward A. Adams, the Journal’s editor and publisher:

Each year, it’s gotten harder and harder to pick the 100 best blawgs because so many lawyers are now sharing their professional expertise online. We’ve never had as strong a group of law blogs as we have this year.

The entire list is here. (Make sure you look through the different categories. We fall under "Business.") The fine folks at Law Shucks (also selected) have created a Twitter list of Blawg 100 editors to follow, if you're so inclined. I've met many of them through Twitter, and I can tell you that it's a great group of people.

Lance Godard, whose excellent 22 Tweets site was also honored, wrote that this blog "envisions a different world where the focus is on value, not the cost of legal services." Well said, Lance, and thanks.

But along with this honor came a wet smack of guilt like a flounder in the face. In its summary, the Journal wrote:

The Client Revolution by Boston lawyer Jay Shepherd almost missed the cut this year because of fairly infrequent posts. But when he homes in on a client-focused topic, his insight and analysis is well worth the read.

D'oh. Like my conscience yelling at me to write more wasn't enough. But I appreciate the sentiment, and I'll work on frequency.

By the way, my new taskmasters (!) at the Journal are inviting lawyers to vote on their favorites in each of the Blawg 100’s ten categories. You can vote here. Voting ends December 31.