AFAs

$180K for a First-Year Associate – so what!

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One of the big news items this week has been the decision by Cravath, Swaine & Moore to raise its starting salaries for first year associates to $180,000. Cries of “Not worth it!” and “What value do first year associates provide clients?” (answer: probably none) can be heard from all four corners of the planet.

My view on this though is so what? I don’t really care what you pay your first year associates. In the same way I don’t really care what you pay your other associates or partners. Nor do I really care what your rent is costing you.

Unless, that is, I get to thinking that: I am the one paying for all this. In which case, I suddenly become very interested.

But here’s the thing: I’d only really start to think that I’m the one paying for all your luxuries – the boat you have moored at the marina, the sports car you drive, the house you live in, the first year associate you can call on day and night – if I didn’t value the service you provide me. In other words: If I didn’t think I was getting value for money.

So if you’re one of the many private practitioners questioning the move by Cravath, Swaine & Moore, my only comment/question is this:

If you are providing your clients with a value for money service offering – and you are able to communicate this, why should it bother you?

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Report: Collected realization plummeted to 82.2% in Q1 2016

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Thanks to an article by Dave Galbenski of Lumen Legal – ‘Overcapacity, Underutilization and Realization Rates Plummeting‘ – I have just been made aware of the publication last month (May ’16) of the Q1 2016 Executive Report (.pdf download) undertaken by Peer Monitor Index (Report).

While the Report gives glimmers of hope (demand slightly up for certain practice areas), the overall message is bleak. And none so more than this:

“After showing some recent signs of stabilizing, collected realization took a sudden and sharp drop in the first quarter. For most of the past two years, collection rates have hovered around the 83% mark. But in Q1, collected realization plummeted to 82.2%. Not only is this a new historical low, it was the largest quarterly drop in more than three years.”

OK, two things here:

  1. a collected realization rate of 83% is not a benchmark we want to be heading to, but away from.
  2. if you keep putting your hourly rates up (recently BTI Consulting’s The Mad Clientist asked: ‘Is $5,000 an Hour Next?‘) but your collected realization rate is “plummeting”, then you’re most likely losing money (as well as the respect of your clients I might add).

My only other thoughts are:

  1. why do we insist on the hourly rate model as our primary means of charging if our collected realization amounts to 82 cents in the dollar? Seems absolute madness to me; and
  2. how many law firms out there can continue to operate on such an “historic” low collected realization rate? I know a number of accountants and bankruptcy lawyers who’ll happily tell you: “not many”.

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AFAs accounted for less than 10% of all matters in the US last year

This month saw publication of the End-of-Year 2015 edition of the Enterprise Legal Management Trends Report by LexisNexis and CounselLink.

Based on data derived from outside counsel invoices – accounting for US$21 billion in legal spend in the USA – processed through the CounselLink platform, to my mind what makes this Report different to others is this: it provides insights others might miss because while talk can be cheap, the numbers rarely lie.

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From an Australian perspective, a couple of surprising statistics come out of this year’s Report.

  • the use of AFAs, to govern the service payment of matters, only accounted for 9.4% of matters processed through the CounselLink platform. Given all the chatter and whining you hear from law firms, I would have expected this rate to be much, much higher.
  • Employment and Labor (at 17.3%) is a fairly significant practice area leader in the number of matters (but not revenue – see below) using AFAs, but Real Estate accounting for something less than 2% of its practice area matters using AFAs seems out of whack.
  • Nearly 10% of Regulatory and Compliance matters are done under AFA arrangements. At first this seemed a little strange (given the grey hair nature of the advice being sought), but then I thought a large number of compliance programs could be sold using retainers, fixed fees and other AFAs.

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Moving on to percentage of “billings” executed under AFAs and things start to get really interesting.

  • at 12.4%, by far the biggest practice area using AFAs by billings is Corporate, General and Tax (excluding Mergers and Acquisitions, which is a separate line entry). Not sure I would have guessed that.
  • Finance, Loans and Investments ranked third highest practice area using AFAs by billings last year. Again, don’t think I would have picked that.
  • by billings, only 7% of Employment and Labor practice area matters are executed under AFAs. So, 17.3% of Employment and Labor matters were conducted under AFAs, but only 7% of billings. Might just be me, but that seems strange and I’d want to dig deeper into why that might be the case if my practice was showing these numbers. Then again, may just be the Pareto Theory in practice!
  • At roughly 2% of practice area billings, who says Real Estate has become a commoditized practice area? Because these numbers aren’t showing it.

Interesting numbers showing through this Report. Lots of chatter around the rise in M&A activity/revenue and the fact that “New Law” isn’t being hired to do big ticket work, but the use of AFAs and rationalization of legal panels (which I may well blog on later this week) were my two big takeouts.

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What are my pricing options?

what are my pricing options

You hear a lot these days about ‘pricing‘. This might be as it relates to Alternative Fee Arrangements (AFAs) or Value-based pricing (VBP).

Indeed, all the noise around this issue can get daunting at times.

So for today’s post I thought I would share a graphic that I have created from the many RFTs (tenders), RFQs (quotes), RFPs (proposals) that I have been involved in over the years and which I have named: “What are my pricing options?“.

Also, I’ll let you in on a little secret:- there’s isn’t such as thing as an “Alternative Fee Arrangement” – only pricing options or fee arrangement. Likewise, if properly explained and clearly transparent, all pricing options are value-based.

There’s one caveat I have though: any pricing option that includes a ‘discount’ or ‘volume discount’ component isn’t a pricing option – as you’re not getting your asking price!

I hope your find the graphic useful and if this is a subject you are interested in learning more about I would suggest you start with the Association of Corporate Counsel’s (ACC) Value-based fee primer.

How about applying the “Moscow” process to your next costing letter

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Over the weekend I read a post over on the www.pmhut.com website by Chuck Snead – An Agile Primer: Agile Estimating and the “MoSCoW Process” – which contained an interesting process that I would like to share with you today.

Although the www.pmhut.com website (the “pm” here standing for “Project Management”) doesn’t do posts that relate directly to either law firm business development or marketing, I enjoy reading their posts as I find many of the concepts they cover can easily be applied to the industry. As was the case this weekend, with a guest post by Snead which threw up a very interesting acronym and concept that I had not previously heard of – the “MoSCoW Process”  – and which I now believe should be tailored to form part of any law firm costing/engagement/fee proposal letter process with your client.

So here goes.

Snead stipulates that:

MoSCoW is an acronym for prioritizing feature development along the following guidelines:

  • MUST have features that are required for the project to be called a success.
  • SHOULD have features that have a high priority, but are not required for success.
  • COULD have features which would be nice to have, but are not high priority.
  • WON’T have features that stakeholders agree should be in a future release.

Now let’s apply this to the law firm costing/engagement/fee proposal letter process you go through with your client and agree that your next costing/engagement/fee proposal will include the following:

  • a section in the letter setting out all of the actions/tasks that MUST be done in order for the client’s objective to be met [Category 1 critical]. Here, assign who will be given the task and either the fixed or estimated cost to achieve these tasks; next
  • a section in the letter setting out the actions/tasks that would it would be ‘nice’ (SHOULD) if they were done, but they are not critical to the achievement of the client’s objective(s)[Category 2 critical]. Again, assign who would be given the task if there is sufficient time/budget/desire, etc and either the fixed or estimated cost to achieve these tasks; next
  • a section in the letter setting out the actions/tasks that are [remote] ‘possibles’ (COULD) that may arise out of the client undertaking the action they are planning to take. It should be noted that this should be remote variables/possibilities [Category 3 – variables]. Again, assign who would be given the task if one of these remote variables were to arise and wherever possible attach a fixed fee or estimate against the task; finally
  • set out clearly in the letter those actions the law firm WON’T be taking (is not instructed to take). Now it could be the case that these actions are still needed in order for the client’s objectives to be met, but they will be undertaken elsewhere (eg, in-house or through an LPO) [Category 4 – won’t dos]. Note, this is not a ‘disclaimer’ or limitation on liability section per se, but assigning tasks so that each party knows exactly what is and what is not required of them.

Anyone else out there think we may just have a few less angry client complaints if we went through a process like this each time we took on a new matter?

This process might not be perfect, and it could well need a tweak here and there, but I do think it will go a long way to helping lawyers fully understand the scope and nature of the instruction(s) they receive from their client(s) and lead to less misunderstanding in the industry.

And if that’s the case, the result is a win-win all round.

‘Stupid is as stupid does’

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In the 1994 movie of the same name, Forrest Gump is asked:

“are you stupid or something?”

to which Forest replies:

“stupid is as stupid does”.

Some 20 years later (yes, it really has been that long!), in general parlance this phrase has come to mean that:

‘an intelligent person who does stupid things is still stupid’ – (Urban dictionary)

and I have to say that this thought went through my mind earlier this week when I read that a third of [UK] commercial firms are likely to raise their rates in a bid to boost their profits (Solicitors Journal 6 May 2015 – “Number of law firms planning to raise charge out rates increases“).

Leaving aside the issue of whether a direct raise in your rates will equate to increased profits (for example, the psychological impact of rising rates/budgets on fee earners with no increased salary (cost)) –  what in the world would make 26 (1/3rd) of so-called intelligent finance directors of the UK’s Top 100 law firms say “it is likely their firms will increase their charge out rates in order to improve profitability in the year ahead“?

As I have blogged countless times before (the most popular being: ‘Is it time for law firms to break with the RULES when looking at profitability?‘), hourly rates are but one of the metrics in calculating profitability. And it’s probably not even the biggest metric driving your firm’s partner profit levels, which almost certainly would be better achieved via an increase in your realised rate.

Putting this mathematically (admittedly not my strongest area), say my hourly rate is $100 and my realization rate is 90%, then I’m being paid $90-. Taking this forward I’ve decided to increase my hourly charge-out rate to $110-, but find that my realization rate has now fallen to 80%. If my maths is correct, I’m now being paid $88-.

In other words, in real terms, I’m losing money!

Don’t think this could happen? Then take a look at Charts 4 & 5 from the ‘2015 Report on the State of the Legal Market‘ published by The Center for the Study of the Legal Profession at the Georgetown University Law Center and Thomson Reuters Peer Monitor (at page 5)

chart 4

 

chart 5

Those charts don’t make for pretty reading.

So when, as the article reports:

“…firms realise this is not going to be an easy sell to clients who are likely to negotiate hard to keep fees down, so their approach to increasing charge out rates is likely to be softly softly, rather than gung-ho”

my response would be: “why bother?”.

Instead,

  • try keeping your charge-out rate the same over the next 12 months;
  • try not to give discounts;
  • try to increase your realisation rate (by 3 to 5 cents in the dollar);
  • try to reduce your lock-up days;

and see where you end up.

You may just find that has a better impact on your partner profitability numbers than the likely impact that is going to come your way when you go annoying and off-siding your clients with the almost obligatory 1 July 10% rate increase letter.

But I could be wrong…

A conversation with Lucy Fato, General Counsel at McGraw Hill Financial

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Last week Bloomberg’s new Big Law Business website published a two-part extract [It’s All About Relationships and ‘Gut Checks’ Are Better than AFAs] from a recent interview Bloomberg had with Lucy Fato, General Counsel of McGraw Hill Financial (among others, parent company of Standard & Poor’s).

Transcripts from the interview make for interesting reading. While not agreeing with all Ms Fato has to say, her take on the following issues run close to how a number of in-house counsel feel here in Australia:

On the role of in-house counsel:

But my view is that the role of in house counsel is, in many ways, to be the face of the company in these situations. Outside counsel can never really have perfect information about what a board or a CEO is thinking. They can never really step into the shoes of in-house counsel.

That’s how in-house lawyers really add value. They can connect all the dots. I think, historically, general counsel deferred more to outside counsel than what you see today. It’s a process that has evolved.

On the role secondments can play in developing personal relationships with in-house counsel:

Secondments are a great way for a firm to build a relationships. The associate is actually here, in our building, getting to know our people, getting to learn our business, and when they go back to the firm, they bring all of that knowledge with them. It’s especially effective when a firm is new to the company.

On the developments going on in in-house departments:

In-house departments have become much smarter about how we manage our departments and how we manage our legal expenses. In-house departments are becoming bigger, more global, and many companies, including ours, spend a lot of money on outside counsel. Getting a handle on that is extremely important.”

On the role data plays on the modern relationship between in-house and external legal:

I’m very big on data and having a lot of information to work with…

E-billing gives you enormous visibility into how law firms make money.

On alternative fee arrangements:

Getting better control over who we’re spending money with, how they are staffing deals, how much time is being spent on matters — taking a hard look at those types of questions is more effective over the longer term than trying to do alternative fee arrangements.

On hourly rates:

But I will say it’s gotten a little out of control. It’s eye popping even for me, and I’ve been doing this a long time, when I see an hourly rate that’s over $1,000 an hour. I look at that and think, “Really?”

Ms Fato makes a number of other good observations and comments, both about the evolving role of in-house counsel and the relationship between in-house departments and their external legal advisers, but I wanted to finish this post with probably my favourite:

Firms have to be mindful that their client is not just the lawyer. It’s also the business person.

Absolutely.