The Hitchhiker’s Guide to Profitable AFAs

mrynowecer
Michael Rynowecer
President, BTI Consulting Group
Special Guest Post

Far out at the edges of unchartered space exists the mostly uninhabited planet of Profitable AFAs.

This isn’t science fiction comedy. Profitable AFAs do, in fact, exist. We partnered with our friends at Law360 to survey more than 750 attorneys. What we discovered is 22% of partners are prospering in what many consider a desolate land.

BTI_Alternative_Fee_Arrangements_AFAs_2014AFAs are old news. Clients demanding AFAs is old news. Turning a clear profit from AFAs is new.

Nearly 80% of law firm partners can’t figure out how to get to Profitable AFAs. Mismanaged scope, poor budgeting skills, and not enough flexibility to change internal work processes are the most common culprits to undermining profitability in AFAs.

Fortunately, 22% of partners have charted the path to profitability for everyone else to follow. Good tools and processes are the most massively useful things a lawyer can have to reach Profitable AFAs.

  1. Develop detailed budgets to understand and manage costs
  2. Track and monitor budgets like a hawk at least weekly
  3. Assign all work to lawyers on the team with time-specific deadlines and the number of hours budgeted for the task
  4. Review your clients’ objectives with the entire team
  5. Solicit suggestions from the team on how to eliminate unneeded work steps
  6. Discuss case progress with your clients as a normal course of business—a regular dialogue about progress
  7. Track changes in scope or underlying facts and share any budget impact with your clients immediately upon discovery
  8. Actively challenge the team to beat deadlines and deliver early
  9. Develop high trust relationships with your clients

AFAs only work when your client relationships are at the absolute highest levels of trust—not just a good relationship—but a deep, embedded relationship. Part of the simplicity and certainty delivered by AFAs comes from the client believing their lawyer will deliver. Lawyers who have a history of breaking budgets, have infrequent dialogue with their clients (with or without AFAs) or don’t believe in the power of budgets are more likely to end up in make-less-money column—far, far away from planet Profitable AFAs.

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About The BTI Consulting Group, Inc.

We conduct more independent research on how clients acquire, manage, and evaluate their professional service providers than virtually anyone. Our unique methods and approach have propelled over 20 years of fact-based research on buyers and sellers of professional services. We have interviewed more than 13,000 buyers. We benchmark how Fortune 1000 companies buy, how professional services firms sell, and how to manage service provider performance.  For more information visit http://www.bticonsulting.com

The Importance of Specificity

 

paigephotoDavid Paige
Managing Director, Legal Fee Advisors
Special Guest Post

A fee award in a recent case in the Eastern District of New York, Claudio v. Mattituck-Cutchogue Union Free School District, provided examples of several common problems with attorney billing records.  Though the court found that the attorney’s hourly rate of $395 was reasonable, the court significantly reduced the number of hours billed because of “substantial problems” with the billing records.

The attorney billed half an hour for all but one of 68 phone calls between the attorney and his client.  The court found it “inconceivable” that each of these calls had taken half an hour.  In fact, based on its review of the attorney’s records, the court determined that attorney had billed half an hour for any task that took one-hour or less—including a pre-trial phone conference that lasted four minutes.

The attorney had also billed excessive amounts of time for other relatively simple tasks.  For instance, the attorney billed two hours for a two-sentence letter.  The court noted that it was possible that the attorney performed other tasks during the time billed.  If so, the attorney’s failure to specify these tasks on the billing records constituted block billing.  In any event, the court found the number of hours billed “unreasonable.”

Time spent on court appearances also appeared to be overbilled.  For example, the attorney billed 3.2 hours for an oral argument that lasted 47 minutes (not including preparation or consultation with the client, which were each billed separately).  The court conceded that the attorney’s billing entries could have included travel time, but noted that fees charged for travel time should be at half the attorney’s normal rate.  Because the court was unable to determine how much (if any) of the attorney’s billable hours were due to travel, the court found an across-the-board reduction was warranted.

Due to the problems discussed above and the “vagueness” (not further explained in the opinion) of some billing entries, the court reduced the attorney’s hours billed by 33%.

This case highlights the importance of specificity in billing entries.  For example, the court noted that the attorney might have performed other tasks during the apparently excessive blocks of time billed.  If so, and if the attorney had described those tasks, the court may have been less inclined to find the time billed excessive, even if the entries were block billed.  Similarly, the attorney could have been more specific in describing how much of the time billed for court appearances was actually spent on travel and perhaps added more detail to the other “vague” entries described in the opinion.  If the attorney had provided such detail, it is quite possible that he could have avoided the across the board reduction implemented here.

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David Paige is the Managing Director of Legal Fee Advisors, www.legalfeeadvisors.com.  David can be reached via email at dpaige@legalfeeadvisors.com.  David is among the nation’s foremost experts on the propriety of legal fees and billings. Over the course of his 25-plus-year career, David has guided Fortune 1000 companies on the some of the most complex and high-stakes billing issues and helped them develop the methodologies for achieving significant reductions in outside legal costs. In addition, he has served as a testifying expert in legal fee dispute cases.

 

Time-Writing Knowledge Management Activities

nickmilton.
Dr. Nick Milton
Director and Co-Founder, Knoco Ltd.
Special Guest Post

A common question from clients in professional services, legal or consulting  firms, which usually operate a strict time-writing regime, is “How do we  Timewrite KM”?

How do you timewrite, and therefore bill, time spent in  Knowledge  Management activities?

Is the time written and billed to the  relevant client? Or do you introduce Knowledge Management as a separate time  code, and therefore treat it as an overhead?

Approaches seem to vary,  with some companies allowing neither, therefore relegating KM to a “personal  time” activity.

Personally, I think KM should be billed to clients.  Knowledge Management should only be introduced if it is going to benefit  clients, and indeed the whole purpose of Knowledge Management within a  professional services firm is to “bring the whole knowledge of the firm to bear  on each client’s problems”. Therefore KM is part of providing a better service  (in fact you could see KM as a component of good business practice), and should  be paid for by the client. Therefore the time spent in Peer Assists, After Action reviews and even Retrospects should be billed to the client, by the logic of  “we provide a better service to you through KM, so KM is billed as part of that  better service”. (Of course, by the same logic, if KM is not delivering a better  service, then you should stop doing KM). Timewriting in this way keeps the focus  on KM as a means to support the clients.

Giving KM a separate  timewriting code implies that KM is an add-on, and an overhead, which is why I  don’t like this approach. KM should be seen as an investment, both for the  client and for the firm, and not as an overhead cost.

Not allowing  people to timewrite KM at all will kill KM, unless you can find a sneaky way  around the system. Last week I was discussing just such a sneaky way, with a  KMer from a company with no KM charge code, and where nobody would spend any  time on Retrospects or Lessons Learned. However one thing they do, on every  client project, is to assign a junior as part of the juniors’ Development  Activity.

Here they have the opportunity for KM by Stealth – to use the  Junior as the corporate learning resource. The junior can keep a “learning blog”  or “lessons blog” on which they can identify and publish all lessons and good  practices recognised on that project. This is analogous to the “commanders  blogs” used in the Army, which prove an excellent source of learning. The blog  allows the junior to reflect and learn, and through that public reflection  allows the firm to learn as well. The community of learners can take a role  similar to the “lessons learned integrators” but without the  supporting lessons learned system.

Of course KM by stealth is not a long term solution, and should only  be used to demonstrate the value of KM with sufficient clarity that it becomes  fully adopted, which means it then becomes a valid timewriting activity and a  cost/investment that can be passed to clients.

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Dr. Nick Milton is director and co-founder of Knoco Ltd. Working with Knoco Ltd, Nick has been instrumental in developing and delivering KM strategies, implementation plans and services in a wide range of different organizations, many of them Oil-sector Majors. He has a particular interest in Lessons Learned programs, and has managed major lessons capture programs, particularly in the area of mergers and acquisitions, and high technology engineering. He is the author of “The Lessons Learned handbook” (Woodhead publishing, 2010) and “Knowledge Management for Teams and Projects (Chandos Publishing, 2005), and co-author of “Knowledge Management for Sales and Marketing (Chandos Publishing, 2011) and “Performance through Learning – knowledge management in practice” (Elsevier, 2004). Prior to founding Knoco, Nick spent two years at the centre of the team that made BP the leading KM company in the world, acting as the team Knowledge Manager, developing and implementing BP’s knowledge of “how to manage knowledge”, and coordinating the BP KM Community of Practice.

Strategy Brief: Do You Charge for Thinking?

toddgerstein.
Todd Gerstein
CEO & Founder
Smart WebParts

Go back to your office and think. That’s what my first boss told me when I started at Milbank Tweed in 1978. I was the firm’s first Director of Finance, it was law firm management in the Stone Age and there was very little, if any, precedent to follow. So, thinking was important.

His simple directive stuck with me throughout my career. Go to your office and think. Be creative. Look at the problem from different angles. Bat the issue around. After all, isn’t this why we spend so many years in school, in professional development, in retreats and conferences? To develop our minds? To solve problems? In other words, to learn how to think.

Billing for Thinking

But, what about attorneys? Everyone says you go to law school to learn how to think. But in the course of our research at Smart WebParts, we have run scans on millions of time entries to study timekeeping behavior, and it is amazingly rare to see a time entry that says something like, “think about the client’s problem.” Instead, today it’s all about action verbs: Prepare. Analyze. Research. But never: Think.

There’s no phase task code for thinking, but why not? Why shouldn’t “thinking” be given its own space in the billing universe, which would allow for honest reporting of time spent thinking? Why have we gotten to a place where attorneys are afraid to report time thinking and clients might see “thinking” as a red flag?

To dig deeper and uncover the causes for this, I posted a question on a few LinkedIn professional groups asking: “Do you charge clients for thinking time?” and I got some interesting responses.

One attorney had this to say:

“Not all my time spent on behalf of clients is “doing.” Some of it is “just thinking” — while sitting at a computer keyboard, pacing the hallways, or simply staring off into space. I don’t charge for travel time, but a lot of my travel time is also “thinking time.” (If I’m asleep on a plane or in a hotel room, my meter is not running.) Daydreaming afterwards about brilliant arguments that I ought to have made doesn’t count. But when I’m making sustained efforts to plan, compose, and rehearse brilliant arguments in preparation for actually making them on a client’s behalf, and when I am confident that my client has gotten good value for the time I’ve invested in this sort of “just thinking,” I will indeed bill for it. You ought not want a lawyer who’s incapable of — or resistant to, or even just under-acquainted with — reflective thought and planning. While thinking on one’s feet in a crisis is indeed a necessary skill for courtroom lawyers, it’s by no means a sufficient one. No plan survives first contact with the enemy; and thus, as Gen. Dwight Eisenhower explained, “Plans are useless, but planning is invaluable.”

And here’s another’s take:

“I’m a little reluctant to charge a client thinking time unless I’m solving an extremely unique problem for them. If I’m “thinking” because it’s new ground, then I might charge some of that time. Most of the time I just chalk it up to professional growth, especially if the solution I come up with may prove useful for other projects in the future.”

In response to that comment came this one:

“I disagree. I call this analysis and I consider that thinking about the issues my client’s problem raises and how to resolve them, including reviewing the facts and how the existing caselaw and other precedents, including my own experience, might predict a particular outcome, to be an essential “value added” element of my representation. To me, drafting or negotiating without first analyzing the situation and planning strategies on how to handle the challenges, both foreseen and unforeseeable, in my client’s situation is like heading to a new place without a roadmap — I can’t get “there” (successful resolution of my client’s issue) unless I know my preferred and alternate routes.”

Conclusion

Whether admitted on a bill, attorneys do think when they’re on the clock. What an attorney wants to do with that time, bill-wise, is an individual choice. Some will want to be forthright and explain time spent thinking, while others would rather explain thinking time using alternate terms.

In any case, thinking, whatever it’s called, is time well spent. On that, clients and attorneys can agree. No one wants a thoughtless attorney. Now if only we could agree on how to bill for it.

Block Billing by Law Firms Costs Clients Millions in Just Three Lawsuits

Grant%20Bio%20PhotoGrant D. Stiefel, Esq.
Litigation Limited
Special Guest Post

In August 2012, three different courts issued rulings which hold that vague, block billed time entries—which have long been the bread-and-butter of most law firms—just aren’t a very accurate or reliable reflection of how much time those law firms actually spend working on the clients’ behalf.  This article by Litigation Limited (http://litigationlimited.com/) summarizes these three decisions and considers their import for clients and corporate counsel who have not yet adopted outside counsel billing guidelines that prohibit block billing.

In Payan v. Nash Finch Co., Case No. 11CA0570 (Co. App. 2012), the Colorado Court of Appeals noted that “across-the-board percentage cuts are routinely employed by courts to remedy… block billing” and cited to a Ninth Circuit decision and California State Bar study which found that “block billing resulted in a 10% to 30% increase in time shown in billing statements.”

In The Walman Optical Company v. Quest Optical, Inc., No. 11-CV-0096 (D. Minn. 2012), the Court ordered attorneys’ fees as sanctions for defendant Quest’s misconduct during discovery and asked plaintiff Walman to submit a fee petition and billing statements. However, after being presented with vague, block-billed time entries, the clearly infuriated Court slashed Walman’s fee request by more than 85 percent: “Due to [counsel’s] practice of block-billing – that is, billing multiple tasks under a single time entry – it is impossible for the Court to determine how much time [the lawyers] spent on specific tasks.”

Finally, in Yelton, et. al. v. PHI, Inc., et. al., Civ. Action No. 09-3144 (E.D. La., Aug. 14, 2012). , a Louisiana federal district court rejected approximately $1.5 million (or 75 percent) of a party’s $2 million request for attorney fees and expert witness costs because the law firm’s time entries were “vague, block billed and irrelevant.”

What’s really interesting is that none of these disputes involved a contractual provision or statute that would have obviously awarded attorneys’ fees award to a prevailing party.  Instead, the courts awarded fees and costs as a sanction for the opposing party’s misconduct during litigation… which means that every lawsuit or arbitration holds the potential for a significant award of costs and attorneys’ fees.  However, because each of the clients in these cases permitted their lawyers to bill using vague, block-billed time entries, the fee awards were ultimately slashed by 57 percent, 75 percent and 85 percent, respectively.

While it’s well-known that clients who allow block billing pay a 10-30 percent premium over those clients who have outside counsel billing guidelines that prohibit the practice, these cases show that there are other reasons to prohibit block billing.

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Grant D. Stiefel is the founder and president of Litigation Limited, an experienced trial lawyer, and a consulting and testifying expert on legal billing issues.  He personally managed a large litigation portfolio for the world’s fifth-largest law firm, K&L Gates, and has served as national coordinating counsel for several major corporations. He is also a trained attorney-client fee arbitrator, a certified MCLE instructor on legal billing practices and ethics, and helps clients of all sizes identify and eliminate billable hour inflation.  He can be reached at grant@litigationlimited.com or his website, www.litigationlimited.com.

Billable Time?

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Steven B. Levy
Lexician
Special Guest Post

I’m often asked my opinion on whether time spent managing projects is billable.

My quick answer is, Billable time is what you and the client agree is billable.

That, of course, isn’t the most helpful answer, and I offer that answer with a smile.

Then I go into the specifics of working through this issue.

Obviously, this topic makes sense only in an hourly billing arrangement. (It’s yet another good reason for both clients and firms to consider alternatives to hourly billing.)

Consultant Tony Reiss posted an interesting quiz on billable time today, adapted from Robert Mowbray’s work (Taylor Mowbray LLP). You might want to take the quiz before continuing here.

You don’t have to agree with his suggested answers, by the way. (I think clients will disagree with half of them, but they are interesting and difficult questions open to numerous interpretations and, yes, negotiation with the client.)

I think this quiz sheds light on whether LPM time is billable. Perhaps the best way to approach the issue (beyond discussions with the client) is to look at two questions:

  1. How much of the less-than-organized time that you spend managing projects today do you bill?
  2. Should you bill the client for time spent reducing the overall bill (efficiency)?

Billing for Efficiency

Today, what is your firm’s policy on billing matter-related tasks that are not, strictly speaking, “lawyer work” such as preparing documents, research, offering advice, and so on? If you do not bill any of that time today, it’s unlikely you’ll bill for it using LPM. However, most firms do bill for significant amounts of this time. After all, it’s required in order to serve this particular client on this particular matter.

Consider treating project management the same way. Bill LPM tasks that address the client’s matter specifically, such as developing a project charter. You’re going to do the work required for a charter whether you prepare one overtly or not. You’ll ask the same questions, look for the same answers. The difference is that under LPM you’ll do so in a more organized, thoughtful, and efficient manner. You’ll be saving the client money compared to what you would have billed, because these tasks take less time. (It may not be obvious they take less time because you may be calling out tasks that previously you lumped into the great hard-to-define mush of billable six-minute increments, but that’s a different issue.)

Here’s another example: You give an assignment using the precepts I teach in my seminars and classes. It takes you ten minutes (times two people) to properly give the assignment. Billable? I think so. If you do it “the old way,” you might spend only five minutes (times two people), if that much. However, what about all the extra time you’ll spend during the course of the assignment offering clarification, looking for avoidable errors, doing work that wasn’t truly on point, and so on? That will add up to far more than the additional few minutes to give the assignment correctly. Even if you write off rather than bill work that missed the mark (which is a significant issue for the firm), your total billable time will generally be considerably more than if you had given the assignment optimally in the first place.

On the other hand, tasks or parts of tasks that relate to firm growth might not be billable. For example, the project debrief (a/k/a after-action review) at the conclusion of the matter relates to firm and professional growth rather than the specific matter. What you learn will benefit clients in the long run, but it won’t really affect the matter just completed. Thus it’s probably not billable. However, what you learn will make you more effective and efficient going forward, so there should be some line in the internal ledger against which you mark the time spent.

Do Clients Use Project Management?

It’s also worth considering whether the clients use PM in producing whatever it is they make. (Please don’t confuse what passes for PM in IT projects with PM in their engineering divisions. Clients whose only encounter with project management is the to-them incomprehensible and absurd demands of too many IT teams are not going to be favorably disposed toward hearing about your own project management. If IT has poisoned the well, you’ll have to work extra hard to find a clean water supply.)

Corporations with industrial processes are usually big on project management – pharmaceuticals, aerospace, manufacturing, etc. They get it, and are likely to be pleased that you get it too. They understand that paying a little for project management saves them a lot down the road. That’s not going to stop many of them from trying to negotiate it out of the bill – that’s their job as a customer (client), to get the best price possible relative to the quality of work they’re looking for. That doesn’t mean you need to take their negotiating stance at face value.

Bottom line – if you’re adding value to the client and for the client, you should be compensated for that work. Reasonable clients will consider that fair.

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Steven B. Levy, the author of Legal Project Management and The Off Switch, teaches classes and seminars to law firms, law departments, and government agencies around the world. Steven can be reaached at steven.levy@lusyx.com

Alternative Fees: Hourly Billing in Drag?

Allison C. Shields, Esq.
President of Legal Ease Consulting, Inc
Special Guest Post

In a recent article from legalweek.com “Defining value in law firm billing: art or science?”, author Tim Bratton notes that despite all of the discussion about alternative fee arrangements, the focus of in-house counsel continues to be on billable hours as a standard for measuring ‘value,’ even while all involved seem to concede that time does not actually equate to value. He laments the continued conversation among in-house and outside counsel about alternative fees, claiming that

[M]ost if not all … fixed fee deals … are reverse engineered into an hourly rate, give or take a bit…. [and] the number I come up with in my own mind as representing ‘value’ is still based at least in part on my own assumptions of the blended hourly rate of the combined legal team on a project and the time I think it will take them to do the job in question.

Are all alternative fees really hourly billing in drag*?

The problem, as Bratton frames it, is that, “Value is not always an objective touch point,” and lawyers do not know a better way than hours to measure value. But the amount of time a task actually takes and the amount of time clients, in-house counsel or anyone else reviewing a bill perceives that it ‘should’ take may not be the same, either. Even on hourly cases, the bill (and what the client pays) is not always based upon the actual time spent.

It’s no wonder lawyers have difficulty proposing, implementing, or even understanding alternative fees and pricing strategies. Perhaps that is why Bratton ultimately concludes that the change needs to be driven by the client and that clients need to “ be clear in our own minds and clear with our advisers on what we really mean when we talk about value.”

Of course, if clients drive the change, more lawyers will embrace it. But lawyers can be a force for change, too, if all involved can get a better handle on value; not only the value of legal services themselves, but on the value of moving away from hourly billing. To be successful at making a change from the billable hour to alternative fee arrangements, lawyers should be clear about the benefits to their clients and the consequences for failing to make the change.

Alternative fees and unpredictability

Many who use alternative fees (and flat fees in particular) think that they work best for routine work. Bratton seems to agree in his article, saying that in his experience, alternative fee arrangements run into difficulty when projects “blow up quickly or change direction unexpectedly, such that a quote at the beginning of a project based on a number of assumptions can become meaningless.”

Bratton is not alone in perceiving that alternative fee arrangements become difficult when there is unpredictability, and as a result, hourly fees and time tracking become the fallback position for determining value.

But that doesn’t mean that all alternative fee arrangements are or have to be simply hourly billing disguised as something else.

Defining the scope of work

Sure, unforeseen issues arise, and as Bratton also points out, sometimes the lawyer needs to keep working without the benefit of a detailed discussion with the client while the emergency state lasts, particularly in the litigation context. But the lawyer should always be in contact with the client to discuss with the client (or at least advise them) what is happening and how to respond. And if there is a clear conversation in advance about what the assumptions and expectations are, what the scope of work based upon those assumptions entails, what work might fall outside of the original scope and what circumstances might create that work, there should be no issue when the ‘unforeseen’ actually does arise and no problem securing an additional fee.

While neither lawyer nor client may have been able to predict the specific circumstances in that individual case, based on past experience, lawyers and in-house counsel should have an idea what kinds of things might arise. If this is part of the discussion of scope of work and fees at the outset, an advance decision can be made about how to deal with any such emergencies should they occur during the course of the representation and how the fee will be adjusted. This eliminates negotiation while in the process of completing the work, or after it has already been completed.

Implementing alternative pricing arrangements isn’t easy – it takes time and effort on the part of the firm to understand the needs of the client, to develop a fee structure that makes sense for the firm and the client, and to adequately explain that system to the client based upon the client’s needs. The client needs to understand why it helps them to agree to alternative fee arrangements and to let the firm know what their needs are and what they value.

Originally Published in the Lawyerist.com

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Allison C. Shields, Esq. is the President of Legal Ease Consulting, Inc., which provides productivity, practice management, marketing and business development coaching and consulting for lawyers and law firms. She is a frequent contributor to many legal publications and the co-author of LinkedIn in One Hour for Lawyers and Facebook in One Hour for Lawyers, published by the American Bar Association’s Law Practice Management Section. Her website, LawyerMeltdown, provides information for on legal practice management and marketing, and she is the author of the Legal Ease Blog. Contact her at Allison@LegalEaseConsulting.com.