Although I see the appeal of the Just Do It crowd, there needs to be some performance metrics when it comes to Alternative Fee Arrangements (AFAs). And all paths on this subject point to The Budget. So for our next “How To” step towards AFAs, we need to dive in deeper on this subject.

The Bottomless Budget

The lawyer personality tends to want to eliminate risk (we have mentioned that before here on 3 Geeks). From this perspective, the best budget is the one that takes into account every possible task, the people who will work on it and the number of 6 minute increments each person will apply to these tasks. In a perfect world, this type of budget would be tremendously valuable. Unfortunately, we live here on earth. Besides – this type of budgeting approach allows lawyers to spend all their time analyzing instead of pricing and engaging with clients. In my experience, even when the effort is made to produce a budget like this – it is not a final product. Lawyers will step back (to yet again analyze instead of act) and consider how much resource is going to each task, phase or budget line item. From this larger perspective, it becomes apparent that adjustments must be made. The lawyer knows in his gut that too much resource or not enough is committed to different portions of the budget. So even this “get-down-in-the-weeds” approach to determining a budget and a firm’s cost of production will not produce a perfect budget. In fact, this quest for the ‘perfect budget’ is a journey and not a destination. Which is another way of saying it allows lawyers to do what they like (analysis) and avoid what makes them uncomfortable (talking to clients about price).

The Wafer Thin Budget

“My gut tells me … $.” Although likely an accurate estimation, the “feels-right-in-my-gut” budget does not give enough information to measure performance. Although at the end of the matter you will see how well you did, a firm will benefit from gaining metrics through-out the representation. Theoretically, you could use the gut measure to estimate various phases of a budget (e.g. investigation, discovery, …), but those sorts of numbers won’t give you a solid profitability measure (a.k.a. leverage). Obviously we need to find some middle ground – somewhere between the “weeds” and “my gut.”

The Balanced Budget

I propose a reasonable, middle-ground for building a matter budget. A seasoned lawyer’s instincts on estimated fees are a great resource. We just need to focus them to the right level of detail. Let’s start with the UTBMS task codes. I know – these are both universally vilified and praised. I say start with them because they are an existing (and accepted) standard and they are in use in most every e-billing system around. This means even though they may not be the most directly applicable division of tasks, they provide common ground. Another advantage they bring; they provide reasonable case phase definitions (L100, L200, and so on).

Now take your seasoned partner’s gut and point it at this structure. Get him/her to estimate fees per task code and phase. Take it a step further and have them estimate how each task code should be leveraged – partner to associate wise. Some codes or phases will be partner intensive – some associate. I suggest the resulting budget will be a good approximation of fees, arrived at in short-order and with enough information to serve as a performance metric benchmark.

The “Balanced Budget” is one possible approach. There must be others. Whatever a firm or lawyer does for AFAs, they will need to understand the cost of providing services and be able to measure how each matter stacks up in terms of profitability. The Budget will play a central role in meeting both of those needs.

We want alternative fees! This has become the new mantra of clients. Alternative Fee Arrangements (AFAs) are all the rage now and rightly so, given the state of things.

But …

I’ve previously noted that clients, in addition to law firms, will need to change to adapt to AFAs. I’ve come to realize this is a deep-seated challenge and one not to be written off lightly.

The Hypothetical: Law firm offers client a fixed fee (the holy grail of AFAs) of $100k for a litigation matter. Client agrees, thankful the law firm is taking the risk on this matter. A week later the matter settles, based to a good degree on the law firm’s efforts. Should the firm be paid $100k? For all the talk about how fixed-fee AFAs will benefit clients, this scenario presents a challenge. From experience … the client is going to ask why they should pay the whole $100k fee. The law firm barely put any time into the case. How could they deserve that level of fee?

The point here is that clients have an implicit understanding that time equals value when it comes to legal services. This understanding exists based on years of experience. On an academic level, fixed-fees make perfect sense. But your gut may tell you something different when push comes to shove, like in our example above.

My read is that clients are really wanting efficiency in the short-run. They equate time with value, but they want to make sure that the value and therefore price equals the right amount of time. For the time being, this means they will almost always want to know “how many hours” did it take (and as an extension of hours “what is the rate?”). That’s the measure of value they have known and trusted for years.

I recommend law firms keep this deep-seated mindset in mind as they approach AFAs. A short-run focus on demonstrating efficiency will probably go a long way to keeping clients happy on the path to AFAs. As clients come to trust that AFAs equate value with price, then fixed-fee and other aggressive AFA engagements will become more palatable.