Last week, Carl Herstein, Chief Value Partner at Honigman LLP discussed his experience in developing and implementing a firm-wide legal project management (LPM) program at his firm. The conversation continues with a candid discussion of the pricing of legal services, how it relates to project management and what clients really think of firm initiatives in this regard.
Q. How would you describe the relationship between pricing, collections, AFAs and LPM at your firm?
When a client approaches us with a new matter, the first question that every one of our lawyers should ask is “what are your goals?”. The lawyer should ensure that he or she understands the client’s perspective, what the client wants to achieve, and what the client thinks it’s worth. We can then create a budget, set sensible expectations and develop a method to achieve goals based on a cost structure that works for the client and that works for our firm. It doesn’t do any good to engage a client in a matter where the client thinks it’s going to cost $100K and you think it’s going to cost $500K, but no one has the conversation up front.
You always want to ensure that your customer believes that they are getting appropriate value for the price they pay.
Every consumer of every service wants to pay the lowest price for the most value, but I think we all recognize the fact that the lowest price for the best value isn’t just about price. It’s about what your net outcome is with respect to what you’re trying to achieve.
This is something that I think is very important for both clients as well as lawyers to think about.
Put yourself in the client’s shoes: let’s say you’re a plaintiff who thinks you’re entitled to a million dollars, for example. One law firm wants to charge you a lower hourly rate for their services, another wants a higher hourly rate and another wants to charge an even higher hourly rate. How do choose which firm to hire?
Well, you don’t just look at their rate. What you want to know is “what’s the best net result for me, after I’ve paid what is essentially just a series of transaction costs?”. Let’s say I hired the lawyers with the lowest hourly rates; they ended up charging me $250K for this work, and they got me a $500K settlement. It would seem like a good result and I got the lowest transaction cost. But….maybe the most expensive lawyers would have charged me $350K and reached a settlement of $900K of the $1 million that I wanted. What was the best net result?
This is what makes looking at things like price so challenging for a consumer of legal services. While price signals certain things, it doesn’t give you anywhere near all of the information you need to know. It does tell you, though, that if people are willing to pay a higher price for services, they must perceive that there is a higher type of value that they are receiving. Now, some clients can’t always afford the highest price because they have absolute constraints – but they should be very careful about making judgments based on any single factor.
Q. How do you approach alternative fee arrangements (AFAs)?
What I like to say is that we try to offer fee alternatives, not just alternative fees. We’re happy to talk about alternative fees, but really that oversimplifies the options.
For example, we represent a lot of major property owners across the state in our real estate tax appeals practice. Sometimes, the cases that we’re involved in are enormous – if three to five years of filings are at issue, you can be talking about tens of millions of dollars of over-taxation and refunds. Most big clients – whether they are an automobile manufacturer or a nuclear power plant – turn down our proposal to handle this on a contingency fee. Why? If they can afford to fund the work up front, and take all the risks themselves, they’ll get more of the reward. On the flip side, the more risks the firm takes, the more reward it needs because lawyers are not always going to be successful (don’t tell my partners that!).
When you’re analyzing an AFA as a client, you have to ask yourself a series of questions, only one of which is “would I rather not pay the legal fees and have someone else take the risk?”. That sounds great, until you realize how much of the potential reward you’re giving up. You can see this in major plaintiff awards where lawyers get 33-1/3 percent of $100 million judgments. Most of the plaintiffs in these situations would normally never have any hope of paying these fees up front. But…if they could fund the cases themselves, they might have said, “Well, gee, maybe I’ll have to shell out $4 million in fees, but I won’t have to give up a third of a $100 million reward if I win.” It’s always a matter of analyzing:
- What’s the risk?
- What’s the reward?
- What can I afford?
- What can I afford to lose?
- Over what period of time is this taking place?
- What are the odds of success?
- What’s the arrangement that I am most comfortable with?
- What arrangement is the law firm most comfortable with?
- What will work best in the entire set of circumstances in which we find ourselves?
If you can have that type of discussion with your client, you’ll start the relationship off on the best possible footing. Then you’ll understand the costs, benefits and risks, instead of just thinking about things like “what is the best hourly rate we can offer?” or “can I get a 5% discount?”. Those things are marginal. It’s not that they are unimportant, but in the grand scheme of things, they are really marginal.
Q. How did you link collections to all of this?
Collections is ultimately a function of having a good intake process and ensuring that there’s a good match between the clients you’re taking on and the work they can afford. You’re not helping a client if you accept a matter that you would like to handle, but that will be too expensive for them to pay for. If that’s the case, then you need to work out an alternative fee where risks and rewards are shared appropriately, or you need to send them to some other lawyer where there’s a better match.
The collections process forces you to understand this dynamic from the back end. If you are in a situation where the client is unable or unwilling to pay or has to pay over a long period of time, you can often see that there are issues that could have been addressed better at the beginning of the relationship.
Sometimes, things just happen – problems mushroom and circumstances change – you can’t just talk about hard and fast rules like “It’s always a failure of intake.” That wouldn’t be fair. But…you should try to have a general framework in mind while keeping some flexibility in place.
One of the greatest legal scholars, Arthur Corbin taught that legal rules have to be contextualized. They are more like guidelines, or “working rules” as he called them, because there have to be exceptions and there has to be flexibility because they are very fact based and change based upon the variety of human experience.
We try to be rules-based because it’s important for fairness, equity and understanding. But at the same time, we try not to become prisoners of rules and, instead, use them more as guidelines.
Q. What do clients say about your LPM program?
Clients are always appreciative of lawyers who understand their perspective, who are cost-conscious and who are trying to handle their work in the kind of business- like fashion in which they handle their own matters. We’ve really not made a big deal about this with most of our clients so far. We haven’t sent out press releases or tried to label ourselves as the world’s leader in LPM.
Fundamentally, if a firm can’t address client needs in a way that makes them feel comfortable, makes them feel like they are being listened to, makes them feel like there is real communication and an understanding of their goals and needs, then that firm is not going to be successful in being a good service-based business, which, ultimately, is what we are.
Hopefully, we’ll continue to do what we’ve been doing, which is to keep working on LPM, expanding it, doing it more than talking about it, and gradually making it self-evident throughout the firm.
In some firms, one practice group will really embrace LPM, but they might only represent a certain portion of the firm. A client might hear about their program, but deal with a practice group that doesn’t know anything about it. We’re definitely trying to avoid that situation. Our goal is for clients to think of Honigman LLP and well planned and managed projects as being synonymous.