Alternative fee arrangements – Still relying on that crystal ball? Part One

Alternative fee arrangements are in vogue. Everybody loves them. At least, that’s what clients are hearing from their lawyers. Any enthusiasm for a fixed or capped fee proposal, or a more innovative risk-sharing fee structure, is quickly lost once an actual number needs to be presented to a client.

Bring out the crystal ball.

Assumptions – The lawyer’s friend in alternative fee arrangements

Any alternative fee arrangement from a lawyer will come with an asterisk. Lawyers, after all, are expert in the fine print. And it’s a big asterisk.

The easiest alternative fee arrangement to give is to not give one at all. Most alternative fee arrangements are simply time-based proposals masquerading as an ‘alternative’ arrangement. In my experience lawyers will spend longer writing their assumptions and qualifications which, if triggered, result in a time-based fee being charged, instead of actually considering the ‘alternative’ aspects of an arrangement.

I appreciate the argument that assumptions and qualifications are a ‘necessity’ because of the “unpredictable nature of legal services”. But having a time-based ‘out’ is still curious. To me, an inability to quantify assumptions and qualifications is symptomatic of a larger problem. It demonstrates either:

  • a poor understanding of the client’s business and an inability to understand client instructions; or
  • the huge potential of matter and timekeeper metrics are being collected in a way which is fatally flawed in this new legal paradigm.

Perhaps it’s both. But here’s why I think it’s the latter.

Matter and timekeeper data – A squandered opportunity

Law firms collect huge amounts of data. About their lawyers, their clients and even their competitors. However, the data currently being collected is intended for one use – practice management.

While tracking metrics like utilisation, realisation, matter fees and disbursements, aged WIP and debtors is undoubtedly essential to running a practice, the timekeeping data being collected suffers a fatal flaw. It isn’t comprehensive enough to be used as a tool for matter forecasting.

I’ve tried to build statistical models to estimate future matter costs based upon historical timekeeping data. Even on the simplest of matters my models were useless. Building a model based upon five near-identical previous matters to predict an estimate for the sixth near-identical matter wasn’t particularly useful. In each case there were too many uncontrolled variables given my tiny sample size. Reconstructing my dataset to better control for those variables simply wasn’t time efficient. The crystal ball approach to determining fee estimates continued.

However, the legal industry’s growing adoption of legal project management is a very promising development. Appropriately integrated with legal technology, I think we’ll start to see some firms rapidly advance in the alternative fee arrangement field.

Legal project management – The undiscovered friend of alternative fee arrangements

Advocates of legal project management primarily focus on the benefit of building bottom-up estimates to produce more accurate matter fee estimates and to better track matter progress against fee budgets. Most are overly simplistic and lack any real aspect of innovation. I’m yet to appreciate how approaching fee estimates from an ‘hours worked multiplied by hourly rate’ perspective is, in any way, novel. I’ve always seen basic multiplication whenever I’ve looked into my crystal ball.

I think there’s an unexplored benefit of legal project management. Matters which are being project managed have the potential to generate superior matter data. While currently intended for tracking WIP, I think it can be used for a second purpose. To better control for variables between matters.

To illustrate, matters are typically broken down into particular phases, tasks and action codes, with these extra variables forming part of fee earner time entries for the matter. The more highly defined particular phases, tasks and action codes, the clearer your matter’s overview becomes. Combined with other quantitative elements – such as total number (and length) of documents reviewed and the number of emails sent or internal conferences held – much of the variability between matters begins to be explained away. This, in turn, enables truly predictive fee models to be built – overcoming the unreliability issues I experienced with my model.

Given many firms are starting to seriously consider legal project management, here are some key suggestions to ensure you future-proof your firm:

  1. Is every piece of matter data being collected? If so, are the right drivers of the variable being measured and accounted for? Counting the number of documents per hour reviewed isn’t helpful unless you adjust for the length of those documents.
  2. How will you ensure the same phases, tasks and action codes are used consistently across similar matters? What about the ensuring a consistent approach to time-recording between lawyers?
  3. Does your firm have the in-house capabilities to develop statistical models for use in matter forecasting? Actuaries I’ve spoken to are amazed lawyers so blindly agree alternative fee arrangements.

Further Reading

Keep an eye out for Part 2, where we’ll discuss why lawyers need to be taking the threat of alternative fee arrangements and legal technology more seriously. In the interim, there’s a range of other excellent sources dealing with the principles of legal project management and untapped potential of ‘big data’: