Issue link: https://epubs.iltanet.org/i/83718
Value-Based Legal Services (Not Just Estimating Hours at Standard Rates) phases when more facts and information regarding the opposing party's strategy are available. Matters that fit into this category are litigation, mergers and acquisitions, and commercial transactions. Clients benefit from this approach because they do not bear the risk of a windfall to the firm if the matter settles early before completion of all the phases. Conversely, the firm benefits because it is not at risk for a fixed fee prior to gathering valuable information during discovery and motion practice. Billable Hour with Fee Caps: With matters that are more difficult to predict, the client may be more comfortable with a billable hour arrangement, but the client may still want to cap its legal spending. In this situation, capped pricing is used and the client and the law firm agree that the fee will not exceed a certain dollar amount. Bonuses can also be factored into this approach. If the matter settles before the fee cap is reached, the client only pays for the time it took to settle. This approach involves a true partnership between the client and the law firm because the law firm accepts the risk that the matter will not settle before reaching the fee cap. Volume or Tiered Discounts: If the law firm and client do not have an existing relationship, and they anticipate a significant volume of work, volume discounts or tiered volume discounts may be appropriate. Once the volume exceeds "X" dollars, the client receives a discount off standard rates for amounts over "X" or, in a tiered volume arrangement, the discount would apply to the entire amount retroactively. Volume discounts allow the client to be billed at reduced hourly rates in return for the client guaranteeing a certain volume of legal work. In addition to the above arrangements, Baker Donelson also offers the following AFAs: • Collar Up: A "collar up" implies that there is an amount set as the budget. If the firm goes over the limit, it cannot charge for any additional work until it reaches a certain amount over the limit (the collar amount). At that point, the law firm is allowed to charge a certain percentage of the amount over that limit. Example: The budget limit is $1,000,000. The collar is $100,000 and the percent is 60. The amount from $1,000,000 to 1,100,000 cannot be billed. If the firm's fees reach $1,200,000, then they can bill the client 60 percent (40 percent discount) of the $100,000 that is over $1,100,000 (or $60,000). • Collar Down: A collar down is the same as a collar up, except it also rewards the firm for being under the limit. Example: If the firm only bills $800,000, it would get a bonus of $60,000 or 60 percent of the difference between $800,000 and $900,000. • Blended Rates: A rate is established that will be charged for all timekeepers or a rate for each class of timekeeper — associate, shareholder, paralegal, etc. Using LPM To Evaluate the Work Although value-based fee structures, such as fixed fees, have been around for years, they have been fraught with difficulties. Firms did not have the tools to estimate the work accurately or to manage a budget efficiently. The end result has been write-offs that strained the firm-client relationship or requests to the client for additional fees prior to the completion of the engagement. Neither of these approaches achieved one of the primary goals of an AFA: predictability. The key to identifying a predictable fee is confirming the reasonable expectations of the firm and the client. "Reasonable" is the common denominator. Clients normally base their expectation of legal costs upon prior experiences with other attorneys. This is rarely accurate, because it fails to identify the unique aspects of the case at hand or the adversary. Likewise, attorneys who lack the tools and skills to estimate a budget accurately typically rely upon the last two or three engagements they have conducted to derive an estimate. LPM provides a methodology to estimate fee arrangements and ensure that the legal team operates ILTA White Paper 19