This article was first published April 20, 2010

Editor’s note: This is the second in an occasional series examining how individual firms implement project/process management techniques.

More than 20 years of collecting data on the costs and profitability of matters and years of experience in handling contingency fee cases have Duane Morris feeling well positioned to take advantage of the alternative fee arrangement wave that is sweeping the industry.

But that wave of client interest is more often just a ripple in the water as clients still question whether they are really making out on these deals.

“There’s a little bit of a misconception out there that these alternative fee arrangements are becoming a much larger percentage of firms’ business than they were before,” the firm’s chief financial officer, Daniel J. Sheeran, said.

Really, many things that are coded as alternative fee deals are just a version of a discounted rate, he said. While true alternative fee arrangements are gaining traction, Sheeran said he doesn’t think they will equate to 25 or 30 percent of revenues at most firms for quite some time.

A lot of that has to do with client comfort levels.

Sheeran said oftentimes clients will go through the whole process of looking at what alternative options are available and at the end of the day they still go with the billable hour.

Sheeran said one general counsel from a southern company recently told him that if the firm is willing to do the proposed alternative deal and take on the risk, that must mean it thinks it will win and will probably earn a lot of money. The client said he’d rather go with the billable hour.

Duane Morris Chairman John J. Soroko shared in Sheeran’s experience of clients sometimes balking at alternative arrangements but said he thinks they are going to start becoming more receptive to the concept.

As general counsel work more closely with C-level executives on the business side who are “migrating from certainty of rate to certainty of total cost,” Soroko said they almost by definition have to move to some sort of alternative fee arrangement.

For the slowly but surely increasing number of matters being handled on an alternative basis, Sheeran said project management “is key” and having more lawyers who are better at managing projects to a budget is the only way these arrangements will gain traction.

Sheeran said almost every firm he has talked to has converted its contingency fee committee into a contingency/alternative fee committee. Duane Morris did that between 2000 and 2001, converting its forms so that attorneys could check off whether the new matter might be contingency or alternative fee. If they check the latter, there is a different evaluation process, he said.

Duane Morris has for years allotted between 4 to 5 percent of its billable time toward contingency matters, reaping the benefits some years and not as much in others depending on when and if fees were won and paid.

When clients tell a Duane Morris lawyer they are interested in handling a new matter on an alternative fee basis, Sheeran and his team are called in to crunch the numbers. He said the firm has been tracking data on the numbers behind its matters since the mid-1980s. It can run reports on what matters were the most and least profitable in that month or that quarter, whether realization rates were a problem and whether the right people were staffed on the matter, he said.

When that new matter comes in, Sheeran and his team go back to the history of that client’s matters and look at the average time spent on a type of case. If it is a new client, he said, the firm needs a lot more information upfront and there are often more carveouts in the agreement to protect against unexpected issues.

Duane Morris has about a dozen alternative fee arrangements it typically uses, with about four or five being boilerplate options that are most common, Sheeran said. Once the numbers are crunched, some of those options are presented to the client for review and selection.

Sheeran said that is often when the firm can find out if the client is really interested in partnering on the deal or if it is just looking for a discount.

If the client chooses an alternative option, the lead attorney on the case gives Sheeran a list of proposed attorneys who would work on the matter. He may work with the lawyer to tweak the list if, for example, the attorney wanted to use senior-level associates in a specialty practice who were being paid a premium on their salaries for that specialty and could easily be replaced by a midlevel associate. The list might also get changed if a proposed associate were already working on a matter billed out at full or hourly rates, Sheeran said.

Once the team is in place, the lawyers run with it and a group of about five people in the finance department can run financial analyses on the matter as it moves forward. Reports are delivered to the partner’s e-mail each month.

Duane Morris doesn’t have any firmwide mandate or computer system it expects its attorneys to use when it comes to project management. But Sheeran said he has been sitting down with practice group leaders and individual partners whose clients typically ask for alternative fee arrangements. They go over how the models work and some partners have begun creating spreadsheets on their own to track the matter and have even brought clients into the process. For other lawyers, the entire project management process is really left up to the finance side, he said.

Soroko said the firm recently rolled out a new “dashboard of financial information” to practice group leaders that details rates, hours and other financial metrics. The goal is to get more pertinent information to the managers so that they better understand the actual cost of the supply side and how they can be more creative, he said.

The key to being able to track the profitability of matters, Sheeran said, is to continue to track work by the hour as well.

“That’s where the fallacy of ‘the billable hour is about to die’ really comes home to roost,” he said.

Project management is based on managerial or cost accounting and the hours have to be properly tracked to know whether an alternative arrangement was profitable, he said. The key in all of this is trust and open and honest communication between the attorney and client, Sheeran said.

Though consultants and firms have said alternative fees can work in almost any practice area or any legal matter, Sheeran isn’t as convinced. While Duane Morris has done some litigation cases on an alternative basis, he said it is much easier to do on the transactional side for matters like mergers or bond deals. The non-traditional litigation where everything is at stake and the beginning often looks much different than the end is a much tougher prospect when it comes to alternative arrangements, he said.

The intellectual property practice has lent itself to such arrangements, particularly on the patent application side. Employment work is becoming more amenable to alternative deals as well, Sheeran said, but there is a caveat. Firms have to make sure they aren’t being hit with what he called “adverse selection.” It would be hard for the firm to turn a profit on the deals if it later found out the client was only going to give the toughest employment cases that were all in New York where costs are higher, he said.

Even bankruptcies are becoming pre-packaged and can fit into the alternative fee arena, Sheeran said. Ultimately, he said, these alternative arrangements aren’t going away, but they will end up being offered in certain practice niches that lend themselves to the deals.

“It’s definitely a changing world,” he said. •