Alternative Fee Arrangements Work Best When Both Sides Benefit

Companies are investigating ways to control costs and to link law firm billing to value received. This movement away from the billable hour can be seen as a 'fight' (as characterized by a recent Wall Street Journal article that framed the discussion as the 'Billable Hour' Under Attack), which may be unnecessarily adversarial.

Bill Sowinski heads the CT TyMetrix decision support services group, and has worked extensively with alternative fee arrangements:

"Alternative fee arrangements work best when both sides benefit. Ideally, an arrangement should benefit clients by reducing cost and more quickly resolving matters without compromising quality.

Law firms benefit in one of several ways. One way is to yield to the client’s leverage and reduce income but retain business.

A preferred model is to secure reduced cost, but to allow the law firm to manage matters cost effectively by allowing the firm to assign the appropriate resources to required tasks (this is the Sidney method described in the article.) Gross receipts might decline, but the law firm’s net will increase.

A variation on the preferred model is to reward a firm that will reduce cost with more business which it is allowed to cost effectively manage. In that scenario, both the firm’s gross and net increase while the client reduces cost.

Of course, poorer performing firms will lose business to the selected firm but that is a good result.

The difficulty in establishing healthy alternative fee arrangements is largely due to a lack of understanding by the client and the firm as to the costs associated with individual matters and groups of matters. That weakness can be overcome with careful analysis of the costs and resources deployed in past matters. That analysis should be shared with the law firm so the firm can determine if it can manage its allocation of resources to make an alternative fee arrangement profitable.

Finally, the client must make its matter management philosophy and objectives absolutely clear to the law firm so that the firm fully understands what is required and can support the matters accordingly."

CT TyMetrix continues to be interested in realizing advances in value-based billing, including providing in-house law departments with a set of fixed-fee and alternative fee arrangement tools to manage a range of billing arrangements, as discussed previously on this blog:

• Supporting and Standardizing Fee Agreements
• The Future of the Billable Hour
• Value-Based Billing

Nine Best Practices for Managing Outside Counsel

Outside counsel share a common goal with their in-house counterparts: to effectively manage matters and achieve successful outcomes. At the same time, each faces unique pressures: outside counsel are out to run a profitable business, while in-house counsel is acutely concerned with cost reduction.

CT TyMetrix and InsideCounsel magazine are presenting a free webinar on Thursday, September 10 to highlight nine best practices to achieve strategic, cost-effective utilization of outside counsel, while increasing valuable internal competencies. Learn how you can get a handle on the corporate law department’s highest cost areas — maintaining litigation budgets, improving matter management, and controlling e-discovery costs.

There is no charge to register.

CT TyMetrix 360 releases vendor management and robust alternative fee arrangement (AFA) support

As regular readers of this blog are aware, CT TyMetrix has been hard at work developing and launching release 10.0 of CT TyMetrix 360, adding robust vendor management capabilities, including the industry's most comprehensive support of alternative fee arrangements (AFAs), to our integrated legal e-billing and matter management platform. From the press release:

"The economic downturn has underscored the value of strategic spend management. In order to better predict and manage their legal spend, corporate law departments are looking increasingly beyond the billable hour. These alternatives to the billable hour, commonly known as AFAs, can better align law firm compensation to the corporation's interests. The latest release of CT TyMetrix 360° is the first comprehensive solution for AFA management that provides end-to-end support for the creation, administration, tracking and measuring of AFAs.

The AFA module is the result of in-depth research among the CT TyMyetrix user base. Included in the module are the commonly used and requested AFA templates, such as blended hourly rates, deal-based billings, fee caps, hourly rate discounts, hourly rate volume discounts, matter-based rates, task-based billing caps, and others. In addition to AFA management, Release 10.0 introduces an advanced timekeeper rate management, another integral part of vendor management. Highly configurable, the advanced rate management functionality gives users more control over how timekeeper rates are created and maintained."

See the CT TyMetrix site for the full announcement, or see previous discussion of alternative fee arrangements on the CT TyMetrix Legal Spend Management blog, or listen to the archived webinar we recently conducted on AFAs.

Webinar: Predictive Modeling in Litigation Management

For more than a decade, insurance companies have been leveraging technology to better manage their claims and the costs associated with litigation, including (by the early 90s) e-billing, which streamlined processes and automated enforcement of guidelines. This evolved (by the late 90s) into collaborative, web-based systems handling case management, and later into today's systems offering reporting tools to better understand law firm performance and other trends in litigation.

The missing piece has been advanced analytics to optimize this wealth of information into streamlined business processes and guided decision-making. Moving forward, predictive modeling will play a greater role in litigation management, promising significant improvements in process and total claim outcomes.

CT TyMetrix, in partnership with Deloitte and Claims/TechDecisions magazines, will present a webinar on this topic on June 16 at 2:00 p.m. ET. Our discussion of The Future of Predictive Modeling in Litigation Management will discuss the impact of system-aided guidance in matters including:

• Selecting the most appropriate defense law firm based on case details
• Providing guidance on resolution strategies given the carrier's and industry data
• Early automated identification of case severity

To learn more about this webinar or to register, visit www.claimsmag.com/cttymetrix.

CT TyMetrix to present ILTA product briefing webinar

CT TyMetrix is participating in the ongoing product briefing webinar series organized by the International Legal Technology Association (ILTA). We will present on Law Department Tools 2.0, or in other words, discuss how the next generation of law department tools can manage cases, reduce legal spend and accurately forecast the future, all of which are critical for attorneys operating in today's challenging business environment. This practical demonstration for ILTA members will show how your legal team can accomplish these goals with CT TyMetrix 360°, a comprehensive legal spend management solution incorporating legal e-billing, matter management and dynamic reporting functionality.

Webinar on Alternative Fee Arrangements

As pressures to manage legal costs mount, there's a renewed interest in alternative fee arrangements (AFAs) as a way to align the value delivered by an outside law firm with the amount billed for services (as Craig Raeburn discussed in his post on this blog about AFAs and how CT TyMetrix 360° supports alternative fee arrangements with the AFA module).

In our webinar, we discussed considerations to address when creating AFAs, and how a law department's e-billing system can support and enforce these arrangements. The webinar is available as an archived recording if you missed the live event or would like to review the topics we covered:
CT TyMetrix Alternative Fee Arrangement Webinar Archive

The presenters:

• Keith Brown (Consultant, Law Department Service Line, Baker Robbins and Company)
• Craig Raeburn (Vice President of Product Development, CT TyMetrix)
• Jennifer Pearce (Manager of Legal Operations and Records Management, International Paper)

Best Practices for Managing Outside Counsel

Our latest whitepaper focuses on best practices for inside counsel to achieve alignment and efficiencies with outside counsel:

"The relationship between outside counsel and their in-house counterparts has always been somewhat tenuous in nature. On one hand, both parties share a common goal—to effectively manage matters and achieve a successful outcome by applying their legal expertise. On the other hand, their goals and priorities can conflict, especially when it comes to cost reduction and utilization of resources.

One of in-house counsel’s top concerns is cost reduction. As the economy necessitates a reduction in corporate spending and corporate executives place increased pressure on departments to slash costs, in-house counsel must find ways to manage litigation effectively while staying within their budgets.

Meanwhile, outside counsel are out to run a business and turn a profit. Their hourly fees continue to rise, and in-house counsel often receive pushback when negotiating alternative fee arrangements and reduced hourly fees."

The paper details nine best practices for managing outside counsel, and is co-authored by CT TyMetrix expert Bill Sowinski and Keith Schrodt of CT Summation.

Download the free whitepaper (registration required)

Law Department Operations - Plato and Socrates Wrestle with Legal Technology

I just finished Anathem, the latest novel by Neal Stephenson. Even by Stephenson’s wildly creative standards, the book itself is pretty “out there”. Set in the future, Stephenson speculates about religion, war, technology, and believe it or not, multiple universe theory.

To me, one of the most interesting parts of the book was Stephenson’s attempts to disguise a discussion of classical philosophy in the clothes of a sci-fi novel. He does this by creating a battle between two monastic sects: one clearly adherent to Platonic idealism, the other to the dialectics of Socrates. Although he never mentions either philosopher by name, Stephenson runs through their dialogues in a way that highlights the differences –- and points of intersection -– between the two. Moreover, by couching classical philosophy in unfamiliar garb, Stephenson gives himself free reign to expand on the ideas -- and warp them -- as he sees fit.

But what the heck does this have to do with law department management and legal spend management? In short, Anathem got me to thinking about how Socratic dialectic could help solve what I view as one of the biggest impediments to the future of legal technology. Essentially, the problem is this: we have two different, and seemingly incompatible, types of legal systems. One on hand, you have the structured, “backbone” systems like ERP systems that are essential to the efficient operations of an enterprise and have the clear benefit of demonstrable ROI. In legal tech, both basic matter management and spend management fall into this category. These solutions are platonic in that they assume perfect input will result in perfect output. In other words, if you create a perfect matter, you can attain a perfect understanding of that matter. If each of the matters in a portfolio were equally perfect, the combination would also be perfect, or to Plato, ideal.

Unfortunately, as Socrates tells us, you can't really know anything except through semantics and context. The same goes for systems. I do not need to tell anyone who has worked with data that neither the data that goes into a system, nor the data that comes out, is ever perfect. For this reason, we need context. In Socratic terms, we need semantics to create meaning from an insoluble problem. In my terms, we need metadata, both structured and unstructured, to add context to a matter. Currently, T360 enables users to use collaboration tools to supplement matter and financial data with a variety of critical meta-data. In addition, there are other excellent point solutions that can be used to supplement basic matter information. A couple of the best examples include data hosting providers like CT Summation’s CaseVault and sites that rely on Web 2.0 tools like Legal OnRamp.

Fortunately, it looks like we may have reached an historic moment where structured and unstructured data can be correlated in ways that optimize law department and claims operations. Much in the same way CT TyMetrix 360° was first to integrate the point solutions of matter management, e-billing, and document management into a single platform for the management of law department operations, we are on the cusp of integrating T360 with the industry leaders in document hosting and Web 2.0 for the legal profession. By complementing our enterprise legal management platform with on-demand solutions for handling unstructured data, we will synthesize the formerly incompatible systems to optimize law department productivity. The combination will result in a more perfect understanding of all aspects of law department operations.

There’s no way to know but I’m guessing that that's an outcome that even classical philosophers would consider “ideal”.

Supporting and Standardizing Fee Arrangements

While many arguments can be made for why Billable hours are outdated, or perhaps the value they provide (as discussed by John Weber in his prior posts on the future of the billable hour and value-based billing), it is clear the direction for many years has been toward Value Based Billing or Alternative Fee Arrangements. Unfortunately, there are no set standards for these arrangements. Fee Arrangements can vary by case, by firm and by client. In certain circumstances the parties are working off de facto standard frameworks, but the devil is in the details and with each one there are often slight variations from the others.

Supporting these “one-offs” through e-billing systems can sometimes be a challenge as you need to work within the industry-standard LEDES formats. To address some of these challenges CT TyMetrix has developed an Alternative Fee Arrangement (AFA) Module that will allow clients to set up the case-specific or law firm-specific AFA and have the system enforce the agreement.

The module will be launched with eight templates: Blended Hourly Rates, Fixed Fee, Hourly Rate Volume Discount, Task-Based Billing, Deal Based Billing, Hourly Rate Discount, Matter Rates and Years of Experience. This module was originally designed as an Add-On Module for e-Billing clients, but with the recent economic challenges and the strong shift towards AFAs , CT TyMetrix believes this module should be a standard part of all e-Billing solutions and will be offering it for no additional charge other than a nominal setup fee.

While all of this is good and exciting stuff, I still worry about the lack of standards around AFAs. The eight templates were created based on extensive client input and our 14 years of experience. But even with that we know we haven't addressed all possible AFAs (as we’ve seen, folks can get very creative with some of these agreements). The good news is the module is flexible enough to create additional templates, even client-specific ones, as necessary.

I can’t help but wonder, just as the industry saw fit to establish a non-profit group to oversee the LEDES formats, should Law Firms and Corporations considering creating an AFA Standards Committee? While the LEDES 2.1 format allows for the identification of a few AFAs, it does not (nor should it, I would say), address the specific details of how to bill and properly capture these arrangements. I’d welcome your thoughts.

Craig Raeburn
Vice President, Product Management
CT TyMetrix

CT TyMetrix at LegalTech NY

I had the pleasure of being interviewed by the New York Law Journal's Beth Bianculli yesterday at the Incisive Media Legaltech Video Booth (their site provides the full list of Q&As with conference participants and exhibitors). We spoke briefly about the advantages CT TyMetrix can provide to the in-house law department, particularly in a business environment where costs are under ever-increasing scrutiny. Unfortunately, it would seem that my microphone hadn't been turned all the way up, so you may need to listen closely. In any case, we're happy to have been a part of their video conversations (and to be among the company of notable legal bloggers: Rees Morrison also features his Legaltech video today on his Law Department Management blog).

If you're at Legaltech today or tomorrow, please feel free to stop by our booth (#217). And don't forget to mark your schedule to join CT TyMetrix's own Matt Den Ouden for this afternoon's panel discussion on matter management systems, moderated by Scott Rosenberg of Huron Consulting (click here for a preview).

Law Department 2.0

I just heard an excellent presentation by John Barker, Wolters Kluwer’s guru of all things Web 2.0. In it, John refers frequently to Marc Prensky, a futurist who posits a fundamental difference between “digital natives” and “digital immigrants”. According to Mr. Prensky, a “digital native” is anyone born in or after 1981. In essence, digital natives have evolved past email to Web 2.0. They have grown up instant messaging, texting, and tweeting. They rely on social networks, blogs, and wikis to communicate. They require video game excellence in user interfaces and Google-like performance. Importantly, they rely heavily on the “meta” in the digital world, in which the ratings from their community on a particular product or piece of content are as important, or more important, than anything else. According to Mr. Prensky, the digital native not just demands all things Web 2.0, their neurons require it. Studies have shown that digital immigrant’s nervous system is hard-wired differently than digital immigrants.

The rest of us are “digital immigrants” (he says having been born a couple of decades before the cut off). We might be adept at the use of technology, even excited about it, but the vast majority of us will never have the wiring to fully understand the digital native.

What does this mean for the legal community?

By my calculations, the first digital natives are about half way to becoming partners in law firms and senior members of law departments. In other words, those individuals who expect video game excellence in graphics and all the bells and whistles of Web 2.0 are only a couple of years from making “buy” decisions on the technology that the profession will use to communicate among itself. Suffice it to say that application platforms that rely on the design metaphors satisfactory only to the digital immigrant (like Microsoft’s current UI metaphor) will likely face a tough audience in the natives.

More than just a usability issue, I believe that the ascendancy of Web 2.0 -- and its adoption by digital natives -- will help the legal community finally claim that Holy Grail called knowledge management. Why? Web 2.0, and its use by digital natives, solves the two main impediments to successful KM.

From my perspective, the first impediment to successful KM was difficulty of adding and extracting – in a timely meaningful way – the data that puts the “K” in KM. Correct input required slavish adherence to a onerous workflow, as well as strict discipline regarding the addition of structured metadata. These two tasks added so much overhead to the input process that it very quickly fell into the category of “more trouble than its worth.” Once in, the data was then lost in an imperfectly structured blob, forever lost to potential consumers of the info. Web 2.0, in its various flavors, creates so many channels to share the data that the “overhead” issue is resolved. Moreover, the combination of concept search and tools designed to lever the abundance of metadata available in today’s data stores enables users to easily retrieve contextually relevant content. This process if refined even further when used inside of “profile driven” networking sites like Legal OnRamp and LinkedIn.

The second primary obstacle to success in KM? Digital immigrants. There are mindsets and behaviors among most digital immigrants that do not easily adapt to the openness required for KM to attain its highest state. Personally, I don’t feel comfortable “publishing” my work until I have had a couple of chances to review it. Even then, I have some apprehension before I push the publish button. I do not see that type of self censorship with digital natives. A peek onto any Millenials’ Facebook page is an object lesson in my point. Therefore, as digital natives become the majority, the primary behavioral impediment to successful KM will disappear.

Finally, you may be asking yourself, why in the heck is a guy who sells the industry leading matter management and e-billing platform waxing on about Web 2.0, digital natives, and KM? Well, I certainly find it interesting. Also, I’m sufficiently paranoid that I work hard to anticipate what’s next. At the end of the day, however, the reason that I’m really interested in the topic is because I see it as the next stage in the evolution of law department technology. Currently, and at the risk of immodesty, our T360 platform is the best in the market and the core operating system for law departments that use it. Candidly, for as good as it is, I think that most digital natives would find it somewhat restrictive. In order to serve both our current clients – most of whom are digital immigrants -- and the next generation, we are going to have to incorporate the wisdom of digital natives into our thought process.

Legal Spend Management Is News Fit to Print

Alternatives to the billable hour, long a "holy grail" topic among legal thought leadership, has gone mainstream. Take a look at the New York Times article entitled Billable Hours Giving Ground at Law Firms. In the piece, our newest champion of alternative fee arrangements, Evan Chesler of the esteemed law firm Cravath Swain & Moore, as well as other luminaries of the profession, lay out the basic argument against the billable hour. I would be very interested to know how much of Cravath's revenue is based on the billable hour and what, if any, specific plans the firm has to offer value billing alternatives. That, to me, would truly be news fit to print.

Matter Management 2.0

I've been invited to participate in a LegalTech panel on Tuesday, February 3.

Matter Management 2.0
If there was ever an offering that was in need of reality show make over, it is (at least as commonly conceived by the market) good old “matter management”. Like the Ford 150 that just got taken for granted as a necessity, it is time for a redo. And I think there is actually a lot to talk about if you compare what people think as to what is or should be included in or asked of matter management circa 2000 verses 2009 / 2010. This very subject will be put to a panel organized by Huron at Legal Tech Tuesday in NYC. Myself and two leaders from other legal software companies will all be asked to talk about how matter management has changed, what its ROI is or should be, and what is coming around the corner. In short, why should the law department market care and think about updating their old system.

At Huron’s request, the three leading vendors have agreed to “lay down their arms” for the session and talk openly about what is on the road map in the area of integrated platforms, EDD, legal holds, DM, spend management, reporting, and a host of other topics. I am looking forward to it and I do feel it is time to challenge the industry in tough economy to show how these platforms add value and how it is possible for a law department to not have to stop at every booth at Legal Tech to stitch together a solution that meets its needs. “Necessity is always the mother of invention”, but happily I think the market is ready to meet this challenge.

Value Billing -- The UK Way

Following my recent post on the billable hour, I saw an article in law.com about how firms in the UK have never fallen as hard for the model as American firms. Of particular interest to me was the reference to the model used by Slaughter and May, a distinguished old-line London firm. As Nigel Boardman, a partner explains, Slaughter and May has never billed clients by the hour, nor do partners and associates have any targets for hours worked. "At the end of a deal we sit down with a client and ask, 'How good a job do you think we've done?'" says Boardman.

This reminds me very much of my early days as a litigator at the venerable -- but now defunct -- firm of Thacher Proffitt & Wood. At the end of case, the billing partner would ask the associate (typically only one) to bring the file into his office. The partner would look at the number of substantive documents/pleadings that were in the file, adjust for case results, and then announce the amount to be charged for services rendered. This amount was then discussed with the client and invariably approved. It was value billing in a very pure sense.

When I think back on that approach, I wonder how much better both Thacher and the client would have been with the knowledge that comes from the benchmarking data available with e-billing. Thacher would have been able to accurately predict the fees for a client, a must have for any in-house lawyer today. Moreover, Thacher would have been able to use e-billing data to create success based alternate fee arrangements that increased the premium that it received for an excellent, as opposed to adequate, result.

Has the Billable Hour Become a Liability for Law Firms?

The billable hour and its place in the legal business has always been a hot topic for us. In a pleasantly surprising change, the issue has been raised recently by two high profile law firm lawyers. First, Fred Bartlitt asked the question “Is the litigation market at last ready for a new business model?” on the fascinating new site Legal OnRamp, an invite only site for the glitterati of legal thinking. Next, Evan Chesler of Cravath detailed his case against the billable hour in a recent Forbes Magazine editorial, which sparked a flurry of further conversation in the legal blogosphere (including a law.com article, an abajournal.com blog entry, LegalOnRamp, and of course, the blog entry you're reading right now.)

This discussion is of particular interest to me because, in a very real way, the question of whether, and how, firms can move beyond the billable hour is the reason that my company, CT TyMetrix, was founded.

In 1994, TyMetrix was founded to answer a single question: How can corporations identify which of its firms is providing the most value for each legal service dollar spent. Since that time, we have developed business methods and solutions that are designed to do just that. Our clients gather the information required to assess the value being provided by their firms with our patented e-billing solution and collaborative matter management and case planning tools. They then use our business intelligence tools to mine the data gathered and determine which firms are providing the most value. Our clients then use the data that they have gathered to help firms value cases and implement alternatives to the billable hour.

There is a strong argument to be made that the hourly method of billing is no longer effective in all litigated cases. In fact, many of the top corporate legal departments are using TyMetrix 360 and similar tools to assign, plan, measure, and cost effectively manage litigation using alternative billing arrangements.

How do they do it? With the correct structure and data, it is actually quite simple. With a sufficient number of cases of a particular type (scores not hundreds), the exposure reserve, the litigation reserve, and the actual results, a company is able to use segmentation and a simple algorithm to accurately estimate which firms are resolving cases for the lowest total case cost. With this knowledge in hand, corporations are then able evaluate the staffing and tactics of the successful firms and share them with all the firms used by the corporation.

With a modest amount of historical billing data, they can work together to fairly value cases and set up alternate fee arrangements for matters or portfolios of work. Moreover, corporations and firms can collaboratively plan cases and effectively manage the staffing and workflow.

Using these methods, our clients have made some findings that are quite interesting. For example, based on our experience (which includes more than $20 billion in legal fees), there is strong evidence that cases are most cost effectively handled by small teams, often teams of one, and that the optimal staffing profile includes what can best characterized as junior partner level attorneys. This is the gist of Fred Barlitt’s argument on Legal OnRamp.

In addition to the objective methods for assessing the value of a firm or attorney’s work, our clients rely on attorney and firm ratings. These ratings, while qualitative, often add necessary color to the quantitative findings.

This, of course, begs a big question. If the tools for correctly valuing and managing a case and the litigation expense associated with it already exist, then why does the billable hour continue on as the dominant model of billing for litigation?

Although there are as many answers to this question as there are companies, I would offer some of the following as examples that I have heard over the years.

• I’m too small or I don’t have enough cases of a given type of litigation to have a meaningful segment.
• My cases are unique/too large/too complex/et al.
• Even if I have enough cases to have a statistically valid segment, I don’t want to share what I have found because it is a competitive advantage.
• Even if I have enough cases to have a statistically valid segment, I don’t want to share what I have found because I have data security concerns.
• I don’t want to offend my firms.
  

To these objections, I say this. It is your corporate prerogative to handle litigation as you wish but none of the foregoing is sufficient to continue to rely solely on the billable hour.

To make this work, I would offer a modest proposal: First, and without running afoul of any of the objections set forth above, we would need to agree to a standard for rating attorneys. This is an initiative that has been put forward by a number of companies although I believe that this type of standard is best put forward by a group like the members of Legal OnRamp, as an impartial (and "open source") exercise.

Second, we need to cooperate to build a highly segmented database that establishes fair value for the tasks and activities most commonly undertaken in litigation and, for that matter, in transactions, though that's another topic. Because there are already hundreds of companies that have most, if not all, of the required information through companies like TyMetrix, the data gathering exercise is largely complete. From there, we should consider the significantly larger task of agreeing on standards for the building and usage of a database that captures the data elements essential to enable companies and their firms to make educated bets on different projects or portfolios of work. Firms will have an educated basis on which to create alternate fee arrangements that align their interests with their clients, without the risk associated with blindly jumping into the risk pool. That's how a standard will emerge.

In addition to the existing standards for tasks and activities, we should consider standards for:

• Case types
• Exposures or reserves for the case and the litigation expense
• Reserve segments
• Staffing profile
• The type of the resolution
• The amount of the resolution

Because the quantum of data will be enormous, there will be no question about the validity of the sample size. Because the data will be anonymous, there should be no objections about privacy or a company or firm being singled out. The information could then be tapped by contributors whenever required.

I note that there are numerous precedents for this type of voluntary database. Notably, I think about ISO, to which virtually all insurers contribute “proprietary” information about their losses so that their policy forms reflect a broad risk pool.

I feel strongly that this is a critical issue. Fortunately, I think that there is a clear path to success for the entire profession.

I'd appreciate your thoughts.

John Weber
General Manager, CT TyMetrix

www.cttymetrix.com

Webinar recording now available!

If you missed our live webinar in December, we have now posted a recorded version of "How law departments can simplify their e-discovery: from matter to production."