With law firm salaries on the rise, it is reasonable for clients to wonder if their interests are aligned with those of their law firms. Risk sharing incentive structures can help insure that both client and firm are in lock-step when it comes to objectives and desired outcomes. Sound complicated? Creating risk sharing agreements is quite possible, but takes more time and effort than relying on hourly billing. Separately, your firms will not be surprised if you broach the topic. Per Altman Weil’s 2018 Lawyers in Transition survey, 79% of law firms feel non-hourly billing arrangements are here to stay.
Risk Sharing: What Does It Take?
What Does it Take? A Deliberate Discussion.
Risk sharing agreements do not materialize out of thin air. They require thoughtful conversation and will likely enhance the client/law firm relationship. Questions to answer:
- What is the outcome you desire? For your matter? For your budget?
- How do you want the matter staffed?
- What are the phases of the matter?
- Which tasks do you expect the firm to complete at each phase of the matter?
- What incentives would align the firm most closely with the outcomes you desire?
What Is the Most Typical Risk-Sharing Arrangement?
According to BTI Consulting’s State of Alternative Fee Arrangements study, 60% of in house teams prefer fixed fees. So how are clients best leveraging fixed fees? For predictable, repeatable work. Be it patent prosecution or immigration visa processing or EEOC claims, fixed fees fit like a glove. With these types of matters, firms have a good handle on how much time the work takes. As a result, firms can more easily estimate a fee that is fair for both you and them. When legal work is more unpredictable, making that fair fee-estimate is more challenging. Here firms are much more likely to include a notable buffer to mitigate their risk. When it comes to risk sharing on complicated matters, price predictability comes at a higher cost.
Are There Downsides to Risk Sharing?
A common concern about using fixed fees is that your firm will be inclined to use lower cost, less experienced attorneys disproportionately on your engagement. You can avoid this potential pitfall by having your law firm build a line-item budget at the onset of the engagement. The budget should include details around how many hours the firm expects each staff member to work on each phase of the matter. While the budget may not hold, you will have a solid point of departure for conversations about how the engagement has unfolded and whether the firm is using the right people to do the work.
About the Author: Kathy Heafey is President of BanyanRFP, a cloud-based RFP platform that helps companies control spend on legal services. She has over 20 years of management experience working with large brands such as Pillsbury, Green Giant and Progresso Soup. A proven leader in Cost Management and Continuous Improvement, she enabled over $20MM in annual cost-savings for General Mills and is now saving in-house legal teams millions of dollars as they find best-fit counsel for their legal work. For more information, visit www.BanyanRFP.com