Cleveland Chapter ALA Presentation

1. Cleveland ChapterALA Presentation May 3, 2011 Alternative Fee Arrangements How to stay Profitable while living with AFAs Doug Graham Jay Erdman

2. Learning Objectives • Set the context for understanding why Alternative Fee Arrangements are important • Give you an overview of some of the types of AFAs and their pluses and minuses • Provide an introduction to firm profitability, its measurement and how impacted by AFAs • Give some ideas on sustaining profitability in an AFA environment • And close the loop with some thoughts on using the experience to make future ones better Fay Sharpe LLP IP. It’s All We Do!

3. Why? 2007 - “State of Technology in the Law” speech: “Put most bluntly, the most fundamental misalignment of interests is between clients who are driven to manage expenses, and law firms which are compensated by the hour.” Mark Chandler (Cisco SVP/GC) AND then came 2008 and the “rules” changed - moving legal services to a Buyer’s market and creating a focus on pricing. Fay Sharpe LLP IP. It’s All We Do!

4. Why? Clients want: • Better value • Lower rates • Fixed rates • Defined deliverables • Better Resources • Better Project Management 4

5. ACC Value Challenge The Premise "...the ACC Value Challenge is based on the concept that firms can greatly improve the value of what they do, reduce their costs to corporate clients and still maintain strong profitability." Michael Roster, Chairman, ACC Value Challenge Steering Committee Fay Sharpe LLP IP. It’s All We Do!

6. It’s All About Value • Value - noun "The worth of something compared to the price paid or asked for it.“ • For services, value is defined in the eyes of the recipient vs. the provider. • ACC’s goal - reconnecting the cost of legal service with value to the client. Fay Sharpe LLP IP. It’s All We Do!

7. The Quid • As stated in the ACC Value Challenge, this means: • For firms: fixed fees for projects or stages, structuring relationships to reward results, outcomes and efficiencies, leaner staffing or alternative sourcing, better mentoring and training, a focus on process and outcomes (rather than a continued focus on lawyers just performing tasks), and more attention to client goals and results. Fay Sharpe LLP IP. It’s All We Do!

8. The Quo • As stated in the ACC Value Challenge, this means: • For in-house lawyers: rewarding firms with longer‐term, trusted relationships, giving firms greater continuity of work and getting out of micro‐management (so long as there is trust that costs are related to value), managing their own functions and personnel to enhance firm performance, and communicating better on expectations and budgeting up‐front. Fay Sharpe LLP IP. It’s All We Do!

9. The Cornerstone - Trust The ultimate goal for AFAs is a mutually beneficial arrangement – a win / win situation. And Mutual trust and a willingness to share risk typically leads to long-term relationships. Sounds like a Partnership! Fay Sharpe LLP IP. It’s All We Do!

10. What? If you Google, “Alternative Fee Arrangements,” Wikipedia states: “In the practice of law,Alternative Fee Arrangements (AFAs) occur when payments to a Law Firm are based on a method other than billable hours. The classic example of an AFA is the contingent fee, sometimes called contingency or conditional fee, in which a Law Firm collects its fee as a percentage of the money won at trial or on settlement; the client generally pays nothing unless the legal action is financially successful. However, AFAs—especially in the practice of corporate law—encompass a large variety of arrangements in addition to contingent fees: Fixed fees, where the Firm handles a single case (or portion of a case) for a pre-specified, negotiated amount. Flat fees, where the Firm handles a "book" of cases (multiple similar cases) for an agreed negotiated total. There may be a specific number of cases, or the agreement may be for all cases of a specific type that occur during a set time period. Bonus arrangements, where the Firm receives an extra payment that depends on case resolution, such as level of success, speed of resolution, or cost savings.” 10

11. What are AFAs? • As defined by Wikipedia – they are NOT the billable hour. So we’re not going to talk about discounts or blended rates as AFAs. • AFAs are an approach to establishing a price for legal work that provides value; provides certainty; and is risk / reward equitable. Fay Sharpe LLP IP. It’s All We Do!

12. Menu There are as many types of AFAs as you are creative enough to invent - I’m going to talk about: • Contingency Fees • Fixed Fees • Menu Pricing • Portfolio Pricing • Pay me what you think it’s worth • Ceiling Fees Fay Sharpe LLP IP. It’s All We Do!

13. Contingency Fees • We’ve all used this before • Client does not pay unless a favorable result • Law firm gets a % of the amount of the award – varies depending on where in the process the result happens • Can be very lucrative OR very expensive • Need to be careful of ethical rules and when cannot use • Variant – the Success Fee • Law firm gets to bill at a discounted rate (usually deeply discounted) during the process • Gets a “kicker” if project is successful; gets a bit of downside protection from the discounted rates • Hinges on a really good definition of success Fay Sharpe LLP IP. It’s All We Do!

14. Fixed Fees • Tends to be used for “commoditized” legal services • Is usually associated with a “volume flow” of matters • Not always a mutually determined amount! • For example, in patent prosecution, larger clients expect a fixed fee to develop and file an application with the USPTO. • Key – Scope of Work definition for the Project– you really need to know what’s going to be involved. • Not very profitable if you take more time to complete than the fixed amount! Fay Sharpe LLP IP. It’s All We Do!

15. Menu Pricing • This is A La Carte fixed fee pricing for elements of legal work • Breaks “typical” projects down into discrete small pieces making them easier to scope and price • Usually follows the Task or Activity Structure of the UTBMS codes • Potentially allows the client to use different vendors to effect different tasks or activities within a project • Potentially allows the client to decide how many of a task they want done – e.g. number of depositions, etc. • Has to be priced right Fay Sharpe LLP IP. It’s All We Do!

17. Portfolio Pricing • A fixed fee for an extended period over an entire line of legal service needs – e.g. a monthly amount for the year to handle all Trademark matters, etc. • Still needs good Scope of Work definition – in the above example, are USPTO filing fees included, does it cover foreign filing, is litigation included, etc.? • Gives the client a “hard” number for the year • Allows for wins & losses within the spectrum of matters handled Fay Sharpe LLP IP. It’s All We Do!

18. Pay me what you think it’s worth • This is a retrospective fee based on value, as perceived by the client, after all the dust has settled • Attempts to match fee paid with value received, i.e. the benefits to the client vs. the amount of work done. • Does not have any real upfront cost certainty • Requires high degree of trust and partnership – constant communication – continually need to be on the same page • Potential for disagreement – the client’s perception of worth vs. the firm’s perception • The law firm carries the cost Fay Sharpe LLP IP. It’s All We Do!

19. Ceiling Fees • What the Client really wants – a fixed maximum amount for the project with a provision that if it takes less time you’ll bill less time (to really put the icing on the cake calculate the time taken based on “favored nation” rates) • Has been used in management consulting for years • Provides the client with certainty & risk sharing but with the potential for a kicker if gets handled quickly & efficiently • Requires excellent Scope of Work definition AND active legal project management Fay Sharpe LLP IP. It’s All We Do!

20. When to Use? • Match the AFA type to the Client’s Motivation – one size does not fit all Fay Sharpe LLP IP. It’s All We Do!

21. A Common Thread • AFAs can be profitable or not – the difference is Legal Project Management • Paraphrasing Peter Drucker – “Administration is doing things right. Management is doing the right things.” • Legal Project Management is: • Published scope of work definitions, task deliverables, timeframe and related budget • Real time assessment of progress & deliverables • Advance communication to client of “bumps in the road” or “direction choices” and how those may affect the budget and the value delivered Fay Sharpe LLP IP. It’s All We Do!

22. Is the Billable Hour really Dead? “Reports of my demise have been greatly exaggerated.” Mark Twain • AFAs while here to stay have been slow to catch on – at largest law firms only 16% of revenues are from AFAs (ALM Legal Intelligence, 2010 Survey) • Even when AFAs become more prevalent, lawyers (who would love to no longer keep track of time) will still have to track time if for no other reason than the hours worked (and related cost) provides a measurement basis for project management, productivity & profitability Fay Sharpe LLP IP. It’s All We Do!

23. Profitability Accounting 23

24. What is it? A Systematic Approach for Measuring the Profitability of the Firm… • Identify Revenue • Identify Direct Costs • Identify Indirect/Overhead Costs • Apply Direct and Indirect Cost to Revenue 24

25. What it is not… It is NOT the Firm’s Next Compensation System 25

26. What is the Profitability Measurement Process? 26

27. INCOME STATEMENT FEE INCOME PERSONNEL EXPENSES (Direct Cost) OVERHEAD (Indirect Cost) NET PROFIT 27

28. What Net Profitability are we measuring…? ZERO – After all profits have been distributed The Pie – Profits after basic draws

29. The Profitability Steps

30. Identify Direct Costs/Timekeeper 30

31. Identify/Isolate Variable Expenses • Salary • Bonus • Taxes • Medical • Benefits • Parking 31

32. Indirect Costs Allocation of all Other Firm Expenses 32

33. CALCULATION RESULTS Direct Costs/Timekeeper/Hour Indirect Costs/Timekeeper/Hour 33

34. REPORTING RESULTS • Office • Department • Billing Attorney • Originating Attorney • Responsible Attorney • Working Attorney • Areas of Law • Client • Client/Matter 34

35. PROFITABILITY REPORTS

36. SECRETARY DIRECT COST 36

37. SECRETARY ALLOCATION 37

38. ATTORNEY BENEFITS 38

39. REPORTING RESULTS • Office • Department • Billing Attorney • Originating Attorney • Responsible Attorney • Working Attorney • Areas of Law • Client • Client/Matter 39

40. LMS + Business Intelligence Dashboard The Profitability Accounting Dashboard displays: • Collected Hours and Fees • Direct Cost Partners • Direct Cost Non-Partners • Gross Profit • Indirect Cost Absorbed • Net Profit by Dollars and Percent • Non-Partner Leverage Percent • Revenue, Cost, and Difference by Hour 40

41. LMS + Business Intelligence Dashboard Chose between Trend or Comparison Graphs 41

42. Business Intelligence Reporting …To produce a PDF report 42

43. Alternative Fee Apps Analysis Alternative Fee Apps 43

44. Alternative Fee Apps Analysis Profitability Reporting By Client By Matter With Date Ranges For Profitability Analysis of Clients Matters Alternative Rates Discounts Write-Offs 44

45. Alternative Fee Apps Analysis Profitability The 2 columns default to Current Period and YTD this year vs. Current Period and YTD last year, but the user can choose any period ranges they prefer. Graphing Options 45

46. Alternative Fee Apps Analysis Now….if the Profitability needs to be further analyzed…what should you be looking at…? 46

47. Alternative Fee Apps Analysis Time – Reported, billed, write up/down hours and amounts. 47

48. Alternative Fee Apps Analysis Cost – Reported, billed, and write up/down amounts. 48

49. Alternative Fee Apps Analysis Write Off Analysis – Identifies write offs, including Client discounted rates from time entry, time write offs and/or discounts (billing realization), cost write offs, and Accounts Receivable adjustments. 49

50. Alternative Fee Apps Analysis Write Off Analysis 50