We came across this excellent post by Patrick J. Lamb at In Search of Perfect Client Service awhile ago, and recently passed it on to colleagues whose outside counsel are doing the “alternative fee shuffle”. We’re all kidding ourselves when we define “alternative fees” as “anything that’s not straight hourly rates.” As Patrick says:
It’s easy to see why firms want to use this definition. Under this view, most firms have been using “alternative fees” forever and it is a great marketing ploy to tell clients and prospects that “50% of our revenue comes from alternative fees.” That sure sounds a lot better than “clients accounting for 50% of our work get steep discounts because otherwise they will move their work to another firm.”
The only meaningful “alternative fee” arrangement is when there is truly a shared risk. And that’s what makes it hard to define, and even harder to implement. As long as the practice of law (or any business for that matter) requires income to exceed expenses, law firms and clients do not, and can not, truly share risk — at least not for very long. In other words, litigation defense and closing a business transaction, are not joint ventures between the firm and the client. They are instead commercial transactions between sellers (law firms) and buyers (clients) of services, which are — and ought to be — transacted at market rates and terms. Thus getting a discount from the “regular rate” is not really a discount (or an “alternative” fee). It’s merely a data point in what will ultimately emerge as a range of fees acceptable to the “market” of willing sellers and buyers.
Having worked in a large firm for many years, it’s easy to understand why the basic business model is so hard to change. Nearly all costs are fixed or proportional to revenues (e.g., salaries, rent, library, etc.) So why jeopardize that margin? When law firms are asked to share the downside risk, it’s very difficult to find a market “comparable” for sharing the upside.
Some transactional practice groups will take a “success fee” (or warrants) against a fixed fee. Some litigation defense lawyers will bargain for a success fee as well, but paying off litigators for “not losing” is a hard sell to a CFO. Litigation defense firms are rarely willing to gamble 100% on an outcome (nor should you hire one who is — they’re probably hiding something from you).
Our view is that legal services should be looked at as neither strictly commodities nor as one-of-a-kind artwork. Instead, law firms should be treated as providers of specialized knowledge and skills who must work to meet the client’s requirements. In this sense they are no different from internal service providers, and should be treated accordingly: they should be held accountable for meeting the agreed expectations, and rewarded for exceeding them . . . even if the punishment and reward are nothing more than the client’s willingness to continue to do business with the firm.
So stop worrying about hourly rate so much and attack the real problem: poor planning and case management. In the next post we’ll talk about the most effective combination of tools we know (and which you already know about too).
In House Rants 
I do feel firms have a long way to go in terms of managing fee expectations, which leads to a much stronger relationship in the long term. I personally don’t see these “alternative arrangements” going very far, for precisely the reasons you set out above.
Overcharging is fairly common in law firms, but a lot of the time it’s more about perception than reality. For example, if a firm quotes me $100,000 for a transaction and the eventual bill falls around that number, I don’t look very closely at the time spent – after all, I essentially agreed to that figure upfront. If a firm proceeds on time cost for the same transaction, however, I start looking at every line item, questioning the number of lawyers used, the amount of time spent, even the number of phone calls made.
In other words, getting it right from the start makes the collections call a lot easier to handle!