AFA 3.0 – the Evolution to Effective Fee Agreements: Part 2 (What Doesn’t Work)

Before I can discuss where AFAs need to go (v. 3.0), it makes sense to look at the first, largely unsuccessful attempts (v. 1.0), taken by clients to control their outside legal spend.  In an earlier post, “The Good, the Bad & the Ugly: the Evolution to Fair Legal Fees“, I would have characterized these techniques as “The Bad.”

• Discounts:  Dissatisfied with ever increasing legal fees and facing pressure to reign in costs, clients began to demand hourly rate discounts.  Clients figured that if they could wrangle a 10-20% hourly discount, it would follow that their overall legal spend would fall by 10-20%, right?  Wrong.  Managing partners are really good at many things, but particularly so at one simple math equation.  Total Fees = Hourly Rate x Hours.  Client gets lower rate, managing partner adds another attorney or paralegal to the case, and total fee remains the same or even increases.  Okay, so maybe we will add some billing guidelines.
• Billing Guidelines: Clients, especially insurers, developed “billing guidelines” that their attorneys were supposed to follow.  Any research over 3 hours had to be approved, adjustors were to receive regular status updates, only one attorney could bill for joint conferences, etc.  Makes sense.  And doesn’t work.  While research is never billed for more than 3 hours, time actually spent is just re-billed as preparation and review of memo or brief.  Regular status letters become form letters with a bit of new fluff added at the end.  Three attorneys meeting for 20 minutes, becomes one attorney “analyzing” for 60 minutes.  Final result:  Total spend remains the same or increases.  Dang it, then what should we try next.
• Capped Fees:  Here, the client agrees to pay the regular hourly rate, but with a maximum cap for the matter.  This agreement provides predictable cost certainty to the client, but can be a big loser to a firm if the case exceeds the cap.  Not surprisingly, there is little incentive for the firm to try and resolve the case early, and most cases settle right at the time the cap is reached, for whatever price that takes, otherwise the firm loses money (angry managing partner).  Hmmm, these guys are slippery.  Maybe we better take a look at those sky-high hourly rates.
• Blended Fees: A blended fee is a specified hourly rate to be billed on the entire matter regardless of what attorney works on the file.  A blended fee should incentivize the firm to delegate work to less expensive attorneys rather than have higher priced attorneys working at substantially reduced rates.  In reality, however, that means your case is likely to be handed off to the least-experienced attorney (or paralegal), who is then encouraged to spend as much time as possible on the matter, because “Low Hourly Rate x Lots of Hours = Big Blended Fee.” Aaargh, we must be able to control these guys somehow…hey, how about fixed fees?
• Fixed Fees (early versions):  Many clients who had many similar types of routine cases, began requesting fixed fees for this standard work.  The goal was cost certainty and predictability.  Past costs were considered and a fixed price was given for each case, with volume discounts also added if applicable.  Finally, some good news.  The client achieved predictable costs, at the expense of generally unmotivated lawyering.  Further, as I pointed out in my Porsche dealer analogy here, you are still likely paying a relatively high fixed price, because, while fixed fees are technically “freed” from time-tracking, their fixed price was almost always directly determined from looking at the hourly pricing of earlier cases.

All of the above methods were real attempts by clients to control their legal spend, so why were they largely unsuccessful?  Perhaps we can gain insight from Einstein:

Which explains why it is no surprise that the above methods largely fail, because they do nothing to free themselves from the problem itself – the billable hour model – since all of them are entirely based on time, either directly or indirectly.  Or, as the common saying goes: