Dissolution Should Not Be a Firm’s Only Contingency
Dissolution Should Not Be a Firm’s Only Contingency
Mar 24 2011, 05:01 PM
Joined: 17-July 09
Member No.: 125
Clients clamor for alternatives to hourly rate billing because they want lawyers to have an incentive stake in the outcome of a matter. This is the case with contingency fees, where lawyers get a flat percentage of the value earned for the client. Contingency fees are often used in litigation, from personal injury cases to high-stakes corporate disputes. But this raises major problems when other lawyers in the firm still bill hourly rates. The hourly rate lawyers in effect cover the costs of the contingency fee lawyers until the matter is resolved.
If the contingency fee lawyers win and the dollars flow in, how should the income be divided? That issue was apparently at the heart of Howrey LLP’s recent demise. In March, the firm, which once employed as many as 750 lawyers, dissolved after many lawyers had already left. A major factor in the departures appeared to be that, as a litigation-focused firm, up to 11% of Howrey’s billings were devoted to contingency matters. According to its CEO in news interviews, many lawyers grew increasingly impatient waiting for the contingency matters to pay off.
Every firm’s situation is unique, but Howrey’s dissolution would appear to raise some major questions for advocates of value billing as an hourly rate alternative. Value billing strategies, such as contingency fees, generally put the fee decision in the hands of the buyer of legal services. There are various scenarios on how this can work:
Apparently, Howrey partners wanted pure hourly billing, and were uncomfortable with advancing costs for matters in which they were at risk.
Another consideration is that contingency fees reached 11%, probably a high number for those partners wanting immediate gratification and profit distribution from their efforts. When one client exceeds 10% of a firm’s revenue, you tend to be dependent on that client; a dangerous situation. Eleven percent contingency, in this case, may be deemed equivalent to having one client past the 10% threshold. I suspect, however, that the 11% was made up of a number of different clients, thus changing the threshold issue a bit. To further reduce the danger of this threshold, while continuing contingency billing and its ambiguity, the firm must be accurate in its case selection, taking only cases whose outcome is reasonably assured. This may reduce the potential of a major payoff, more lawyers may be more comfortable with accepting the more narrow window of ambiguity and uncertainty.
Creating a unified compensation system that is fair to all, despite the fact that contingency billings are paid irregularly, is the best way to preserve a firm with such cases. A contingency compensation system that fosters an environment of solo silos where some lawyers receive a great deal of money on an irregular basis, not an environment where everyone is pulling for the whole, is one fraught with potential for unhappiness and ultimate dissolution. A firm that encourages lawyers to maximize their individual compensation may have fast near-term growth. But approaching compensation as an institution makes for greater firm harmony and longevity.
Check out Ed on YouTube
Follow Ed on Twitter
Join the LawBiz Forum
Become a fan of Ed's on Facebook
8 Steps to Greater Profitability The Lawyer's Path to Prosperity
Are you frustrated with how your law firm or practice is running? Are you looking for ways to jump-start your
business? Do you want to make the dream of starting your own successful firm a reality?
This 8-CD set provides the most complete audio guide to law practice management available. From crafting a
business plan to selling your practice for maximum value, Ed will lead you from start to finish through the eight
most crucial steps to law firm success. Earn the living you deserve and find fulfillment throughout your career -
embark on the path to success today!
Special New Release Price: $149 (until March 31)
Regular Price: $199
or Order Online at: lawbiz.com
Ed's Latest Book, Published by WEST ®
Growing Your Law Practice in Tough Times
By Edward Poll
Following the worst economic crisis since the Great Depression, and facing a sea change in clients' demands and
expectations, law firms must respond and adapt quickly and effectively. Law firms must choose the kind of law
practice they will be; the marketing and business development tactics they will use; the overhead that is critical to
their functioning; how to price, bill and collect for services; and how to manage the cash flow cycle. Success lies
in identifying and capturing the right kinds of clients, providing the services those clients need in ways that add
value, and ensuring prompt payment and the ability to grow profits. This book, based on the experiences of the
author and his clients over 20 years of coaching and consulting, provides the keys to successfully thriving in the
Call or Order Online at:
1-800-837-5880 or www.lawbiz.com
2011 LawBiz® Management. All rights reserved.
|Lo-Fi Version||Time is now: 20th May 2013 - 04:49 PM|