1. Alternative Billing Arrangements Based on a presentation to FICPI Open Seminar on Best Business Practice On 24 February 2011 Nick Dougan Nick Dougan Consulting
2. When my attorney told his clients that he had a sliding fee schedule… what he meant was that after he billed you, it was hard to get back on your feet financially.
4. An Alternative to What? Time –based Billing Hourly rate started as late as early 1980s! was an alternative to... Plus “creative” recovery of costs? e.g. Equitrac So “Time & Service Charge” is already an “alternative” to mainstream legal thinking!
5. What are the Alternatives? Variations on a theme Blended rate Capped fee Conditional and Contingency Fees Fixed Fees +/- Value Adjustment Plus a Success Fee Retainer Equity And thousands of permutations?
6. Why do clients want “Alternatives”? Legal fees –a growing cost A noticeable % of profit 2009: BT’s Legal Fees 16% of profit, Novartis’ 3%* Better cost management spreading to legal How General Counsel make their name More predictable budgeting Distrust of time-based billing * Jomati Consultants LLP, 2010
7. Problems with Always Using Hourly Billing for Legal Services We look at fee structures differently than most law firms. The industry standard for the pricing of legal services in business law firms is hourly billing—number of hours incurred multiplied by the hourly rate. While such a system does have its place, its predominance and overuse create a number of issues, both internal to the law firm and external to the law firm's clients. Below are some of these issues: It does not link law firm success/failure to client success/failure Without direction from the client, it does not encourage project or transaction planning and management by the law firm It penalizes the efficient law firm It encourages (or at least does not discourage) excessive "lawyering," attorney layering, and duplication of effort It does not reward the law firm for productive use of technology (in fact…productive use of technology can reduce the firm’s revenues) http://alphatechcounsel.com/fee-structures.html
8. Budget Predictability - Fixed fees We reject the premise that the best way to arrive at prices for our services is to use a time-based billing model (time x hourly rate = price). Billing by the hour tends to emphasize time spent, not the value provided. Nowhere is this more true than patent preparation and prosecution. Further, this misplaced emphasis discourages innovation, efficiency, and communication. http://www.mekiplaw.com/how_we_bill.html
9. Why do clients want “Alternatives”? Legal fee – overall – a growing cost A noticeable % of profit Better cost management spreading to legal How General Counsel make their name More predictable budgeting Distrust of time-based billing Incentivise legal providers Reduce their risks What are clients saying – see www.acc.com
10. From Firms’ Perspective Disadvantages: Uncertainty – Firm sharing the risk Resets the price – at a lower level May be squeezed out in consolidation process Advantages: Closer relationship to a client & client people Higher “wallet share” Greater predictability Encourages clarity around systems, costs, efficiency Every threat an opportunity to some
11. An Approach to “Alternative Billing” Understand your costs Understand fee income Target Markets: what do they want? Draft & offer alternative billing structure(s) Monitor delivery and variances Apply knowledge and revise
12. Understand your costs How long does it take? How great is the variability? What’s the standard deviation? What causes the variability? What are the principal cost drivers? So, what is the cost of a work type?
13. Take a Case Type My own biggest example Let’s use a hypothetical case type Service Charge of £500 5 Hours of attorney time @ £300 per hour So bills around £500 + £1,500 = £2,000 Estimates normally given at £2,000 But what do time records say? Ask me if you’d like the spreadsheet
14. Variation in Time Taken Why were these cases so efficient? What factors contributed to these cases taking so long?
15. What would your data tell you? Note: This data is not real data – it’s based on the formula with some assumption and partial randomisation What patterns would your actual data reveal?
16. Understanding the Variation Lower time recorded associated with: Experienced client/attorney relationship Clear initial instruction Realistic expectations Attorney busy? Higher time recorded associated with: First time patentee/first time working together Client changing mind Invention developing as draft written Less busy attorney?
18. Understand actual fee income What is the current charging structure? What do you actually charge? Use regression analysis? What is the difference? What causes the variability?
20. Think about your target markets How profitable/potentially profitable? What value are you delivering? How happy are they with current billing? Benefits of alternative billing to them? What would WIN:WIN look like?
21. Draft a new fee structure Are you going to base the fees you charge on Your current charges, or Go back to your cost analysis and Work out an appropriate mark up Rebase target fees on that cost plus mark up?
22. Draft a new fee structure Time Billing with a Cap Fixed Fees Fixed Fee (lower?) plus a Success Fee Fixed Fee +/- Value Adjustment Moderate fixed fee with limitations/exclusions High fixed fee, all included Retainer Equity Plus Define specification “partnering” agreement Sophisticated analysis, simple fee structure
23. Fixed Fees for our Example Big Client – Partnering Arrangement Take rough with the smooth Base charges around mean – say £2,100? Review quarterly, renegotiate annually Discuss cost drivers; improve mutual efficiency One-off Work Charge more Base charges around mean plus 1 s.d. – say £2,400? Emphasise value of predictability Offer fee reduction if certain criteria met? Review regularly – retain flexibility to change
24. Monitor delivery and variances Is the service being delivered to specification? What are the time/cost variances?
29. Apply knowledge and revise Now that we’re no longer paid for our time... what can we do to use less?
30. Find Learning Curves Time Taken per Activity, t Number of Times Activity Repeated
31. Summary Understand costs Understand cost drivers Work out a fixed fee proposition Monitor variances Learn from the experience Get more efficient
32. Resisting Fixed Fee Arrangements Be transparent, be trusted Define the value you’re delivering, deliver it Become the “trusted advisor” And find a way to charge for it Misalignment of value proposition and charging model (look up Merrill Lynch “Integrated Choice” case, HBS) Be the psychotherapist or brain surgeon
34. Resisting Fixed Fee Arrangements Be transparent, be trusted Define the value you’re delivering, deliver it Become the “trusted advisor” And find a way to charge for it Misalignment of value proposition and charging model (look up Merrill Lynch “Integrated Choice” case, HBS) Be the psychotherapist or brain surgeon Be thankful you are a patent attorney!
