LPT Interview with Rick Simses, November 2004
LPT Interview with Rick Simses, November 2004
Apr 21 2009, 12:18 PM
Ed Poll: Rick, thanks for joining us today. I look forward to our conversation.
Rick Simses: Good morning, how are you?
Ed: Iím excited because our topic today is alternative fee billing, or sometimes called pricing. Youíre one of the leading folks in this. In todayís world, the preeminent method of billing is based on the hour. And yet, weíre talking here, today, about alternative fees. Has hourly billing been the way that lawyers have always billed for their services and, if not, how did we get to where we are today?
Rick: When I started practicing in 1981 through probably up to about five years ago, it was definitely the billing format of choice by both the clients and the lawyers. In the last five years itís changed quite a bit, going towards an alternative fee arrangement.
Ed: Thereís been dissatisfaction expressed in some circles with the hourly billing methodology. Weíve been using hourly billing for a long time; is there anything still right with it, or was there ever anything right with it?
Rick: I think there is. I think itís a matter of preference between the client and the attorney or the law firm, and how they want to arrange for fees. I think in some situations the hourly rate is just fine. It depends on what the client wants. If the client wants purely to be billed by the hour, then you do it. There are other ways to bill if both the client and the law firm are willing to take some risks and share the risk, more of sharing the risk than taking the risk, I should say. I think thatís been the trend.
Ed: When we talk about sharing the risk, what kinds of risks can we share? When I went through law school, the one thing the lawyer was taught not to do is share the risk. We were taught to be objective and not get into bed, so to speak, with the client. And, in, fact some of the Rules of Professional Conduct say we canít be in business with the client. So where and how is it that we can share risk in this new system?
Rick: You donít become partners in their business. You become partners in the lawsuit. It doesnít have to just be a lawsuit. You can have alternative billing in other types of legal services. It can be transactional. It can be litigation. It can be consulting. I think that the sharing of the risk is based on the outcome. And itís based on budgeting. And itís based on early case assessment. Take all those together and you come out with a goal, a success goal. You have to meet that goal. If you donít meet the goal, then you take a risk in not meeting that goal. And if you exceed that goal, then you share the rewards of exceeding the goals. Itís not sharing in the business of the client, because youíre not doing that. Youíre just sharing in the risk and rewards of that particular litigation or transactions.
Ed: You talk about two things Ė budgeting and early case assessment. If you donít mind, can you walk us through the process that you go through when you have the conversation with counsel, corporate counsel, or even a private corporate client in getting to this point.
Rick: Iíll give you an example how we do it for some of our clients. We start with the request for proposal on the piece of litigation. You go from there. You obtain the litigation work and from there you have to budget it. You can do a preliminary budget with a set fee for a certain amount of time to do certain things, like an early case assessment.
After that, we will budget for the entire litigation. We will have different milestones in that budget that are tied to success. For instance, if our early case assessment suggests we can get out on a summary judgment, we will have to do certain things to get to the point in the litigation where we can successfully prepare and file the motion for summary judgment.
You can budget the whole case or you can budget just to that point in the litigation where you feel itíll be appropriate, after a certain amount of discovery, to do a motion for summary judgment. At that point you may say, "Okay at that point we believe thereís x-amount of probability that we will be successful in the motion for summary judgment." You tie your success goals to that probability, and you can also tie a success bonus to whether you stay within budget to get to that milestone. So you can do it a few different ways. You can tie it solely to success. You can tie it to success and budget. You can tie it to budget. Early case assessment is important, because you have to determine together; this is something that the lawyer doesnít just do on his/her own and the client doesnít do on its own. You submit your early case assessment to the client. The client and you sit down, usually over the phone, and you go through it. You determine and agree that these are reasonable success goals and this is a reasonable budget. And then at that point, you have an agreement, and youíre working as a team to achieve that goal. Then, when you do, both parties benefit--the client achieves its objective, i.e., getting out of the lawsuit if weíre using the motion for summary judgment as the example, and you, the law firm, get a success bonus. So itís a win-win situation for both the client and the law firm.
Ed: Weíre talking about success. Using your example, what happens if you donít have success?
Rick: That happens. One way to deal with is issue is to use a success bucket or a bonus bucket. You then determine together with the client what of your hourly fee you want to put into the success bonus bucket. For easy calculation, assume you bill $100 per hour and you and the client agree that 15 percent of the fee will go into the success bucket. Thus, for billing four hours, you bill $400. Fifteen percent or $60, of that $400, goes into the bucket. If you donít achieve success based on the previously determined definition, you donít get your bonus. There are different degrees of success. Suppose we go all through trial and youíve agreed that the case is worth x-amount of dollars, and you settle the case for that amount, you would get your success bonus, or you might just get your bucket back. If you exceed the expectations, and say you settle it for twenty percent below what the client and you agreed to settle the case for, or that you thought was a reasonable amount to settle for, then a percentage above that which is in the bonus bucket would be paid. So if you have $100 in there and you determine that the success goal is twenty five percent below the number that you both agree is a reasonable settlement figure, you would get a bonus on top of whatís in the bucket. Thatís usually what occurs in our experience. Our goal and the bonus percentage are totally based on an agreement between the client and the law firm.
Ed: So there are gradients. Itís not 100 percent or zero?
Rick: Thatís correct. It can be. We tend to do it that way just because there are different degrees of success, too. And things change. And what you have to have, whatís really important, is that you need to have a good relationship with your client. You have to be able to know when things are going really well and adjust it downward, maybe. Where you get out of a case on a summary judgment in a multiparty case because the plaintiff, if youíre a defense, decides he doesnít want to go after you, you shouldnít get what you would get at the end of the case for the same result. So you can back off that way. But, also, if all of the sudden youíre up against an opponent that decides he wants to take thirty-five depositions when you thought only ten would have been reasonable in this case, the clientís going to have to work with you to adjust the budget upward, as opposed to downward. And the success goals may change as well. Itís got to be a flexible arrangement or it wonít work. Weíve been really lucky. We have great clients that are flexible. And you have to have sophistication on both sides. I think you have to have a lawyer in a law firm that can evaluate cases and or transactions and do it consistently, and not change every time something goes wrong. But if something is a major twist or turn in the litigation, you have to have a sophisticated client who can realize that there has been a twist or a turn in the case. It had nothing to do with the company or the lawyers representing the company. It just happens in litigation, newly discovered documents, facts, witness, or whatever; both parties need to be flexible and have a good relationship, then it tends to work very well.
Ed: Well, obviously, what youíre talking about now is a level of sophistication, and a level, at least in my experience, that lawyers are not taught, neither in law school nor in general practice. Where do we get this education? How do we become so sophisticated, not in the law, but in this area of creating early case assessments, budgets, and relationships with the client?
Rick: Thatís a good question. Ed, Iíve been out of school for a while, so Iím not sure exactly what theyíre teaching in law school today. But they didnít teach what youíre talking about when I was in law school, graduating in 1981. I guess things change. We werenít doing alternative fee billings and things like that back in the early eighties. This is something thatís kind of evolved during my practice. But Iím not sure you teach that skill as much as you acquire it through experience. Itís one of those things Ė you know a good lawyer when you see him. But he has to become a good lawyer. I think there are courses that could be taught. I think maybe there should be more continuing legal education on these topics where thereís got to be more ways to do this than I know of. And probably some pretty good ways. I think thereís literature out there, and thereís probably an abundance of it, regarding the different types of alternative fee arrangements; here are how they work; here are the downs, or the pitfalls of these particular methodologies; and here is how to implement them. Weíve been lucky weíve had clients that have been innovative on their side and have wanted to change from being billed by the hour; and we were willing to change. So weíve kind of worked these things out. They didnít just pop out of the air. We evolved these different methodologies. I think there is room for a course in law school for this. I donít know what you call it, but thereís definitely room for that. If I remember law school correctly, thereís room for a lot of different things in law school that we didnít get; a lot of the practical side of practicing law you learn the day you walk out of law school. I think this would be a good part of a course at least to give students today.
Ed: Youíre certainly preaching to the choir. They donít even require courses on law practice management in most law schools today, let alone on the more sophisticated issues of billing clients in methodologies other than by the hour.
Rick: I certainly didnít have any of those courses. I think we may be on the same page in that regard. I think law schools, in general, probably need to look at those types of things because those are the realities when you get out. How to manage your law practice, how to do it properly, how to provide client services, and things like that in law school. And to do it right, it may be a good idea to have a course or two.
Ed: You talk about various methods, and I think I started our conversation by describing it as alternative fee billing method. Can you describe some of the different approaches you take, assuming that youíre taking more than one approach to your alternative to the hourly billing?
Rick: Well, for the most part, Iíve kind of described how we do it. We do it with a success-bonus. There are situations I imagine that you can do it on a straight contingency fee if youíre on the plaintiffís side. We donít do a lot of plaintiff work, so we donít get into contingency fees very often. And even when we are representing a company and we happen to be the plaintiff, we typically donít do it on a contingency fee. I find that our clients are not all that interested in contingency fees. Iím not sure why. We just had never really discussed it in depth or why theyíre not in favor of it. And quite frankly weíre satisfied with the alternative billing methods that we use, which is primarily the success bonus way to do it. Because it drives both client and attorney to get together and really strive for the best result you can get. And it keeps both parties involved. It keeps the client involved. Theyíre attuned to it. Put the whole package together, with the early case assessment and continuous updates. Thatís how weíve been doing it.
Ed: You talked earlier about the initial approach, an Request For Proposal (RFP). You said you need a close collaboration with the client, building on a staged basis. In other words, before you can lay out the budget for the entire litigation, or the entire transaction, youíve got to take it to the first stage, and only then move forward. How do you get the representation if all you can do is a proposal for the initial stage, or am I reading something into your RFP? Is not an RFP to the world to get the lowest bid? Or, rather, is the RFP from an existing client just to get an idea where you want to take this process for a particular matter?
Rick: I can tell you what we typically receive and how we respond. Certain clients have certain cases that come in and they have certain firms that they use on a regular basis. We have been lucky enough to be one of those for several of our clients. Sometimes if there is a case thatís a little different from the norm, we may send an RFP to a couple different firms for a couple different reasons. One, and itís not always competitively for pricings, itís looking for the right expertise. Do you have the right assets in your firm to handle this particular kind of case? Thatís what Iím referring to. Typically, we donít get RFPs. But we more often than not now, not on cookie cutter cases, on cases much more different from others, get RFPs for that. Theyíre looking for whether we have the expertise, whether we have the assets, meaning do we have the teams to put together to handle the case because theyíre usually large litigations. Are we willing to do an alternative fee, and if we are what that alternative fee is? And then several other questions go on with the RFP, whether the case is removable and things like that. Or if itís on the commercial plaintiff side, whether you know where the best venue is and things like that. So thatís whatís made up in the RFP. Part of that is sometimes what will you charge to do the early case assessment? And more on a flat fee and then going forward on an alternative fee basis after that. So thatís kind of the RFPs we get and so we respond to them accordingly.
Ed: Well, one of the things that is implicit in what youíre saying is that your work is directly with corporate America in most of these instances. And the accusation or the statement, may be a better phraseology, has been made that what weíre talking about has really been driven by insurance carriers. And I donít sense that in your comments. This is not an insurance-based movement, is it?
Rick: From my personal experience Ė I canít speak for other firms- but I find it to be just the opposite. I find that this is driven by both willing law firms and, just as important, innovative in-house counsel from the GC, general counsel, down. I think theyíre the ones that are looking at it. The alternative billing isnít solely fee driven. I think itís result driven. I think itís people in corporate legal departments. And law firms are just looking for a new way to do it, a new and better way to do it. But I donít find it being driven by insurance companies. We do some insurance defense. And weíre glad we do. But they donít appear to be as interested, I should say, in going into the alternative fee arena. Hopefully thatíll change.
Ed: One of the elements that underlies my understanding of where weíre going with this is the need for the lawyer to give up the concept of being perfect Ė something we learned in law school, I think. You have to take every deposition possible to make sure that thereís not some significant piece of evidence that is underneath somebodyís cranium. And yet this is one of the things that drives prices up incredibly high. You talked earlier about the element of risk sharing. How is it that risk is shared in this context, where the lawyer says to the client, "You know, weíve got to take all these different depositions. Weíve got to do this motion and that motion," and so forth. You talked earlier about the motion for summary judgment. And making the decision to do that motion. How is the notion of being perfect come into play here?
Rick: Well, I think itís kind of case-by-case. But I think I can explain it pretty well. Again, you need the relationship between the client and the law firm. Thatís where the early case assessment comes in. Youíve got to determine early on, and it evolves throughout the case, who you really need to depose and what discovery you need to do, and what discovery youíre willing not to do at least at the given moment when you make your assessment. What I mean is suppose youíve got six witnesses out there, but you think you need to depose four of them definitely and two of them are marginal. You may not take the two witnesses you think are marginal with the agreement of your client. Whereís the added value to the case? Are we taking it because they might have something to say? Well, if you take a good deposition of the four other ones and youíre confident that theyíre not going to add anything to it, why take it? I think in the olden days, people would just take those depositions because they were concerned that they might miss one thing. Clients are willing to take that chance. In the overall scheme of things, and based on history, those two depositions probably arenít necessary. Thatís not the case in every litigation but I do think there are times we have taken that approach. And weíre seeing the same results. I think there is room for the change in the way we do discovery as well. I donít think itís "take no prisoners." I think itís do it reasonably, do it concisely, and know what youíre looking for. I think thatís important, too. And I think that has to do a lot with working with your client. If you have a sophisticated client thatís involved in the litigation and is willing to help you do your discovery, get the people to interview and things like that, that goes a long ways. Itís a lot less costly for them if they participate in it.
Ed: Well, that is well and good during the process. At the end of the day, however, if one of the two depositions would have led to the discovery of something that turns out to be important, whoís at the end of the line, so to speak? The lawyer is there exposed with his malpractice insurance policy. Whatís to protect the lawyer? Whatís to say that the client will not then pursue a claim against the lawyer?
Rick: Thatís a good question, Ed. I think that boils down to whether you have a good relationship with your client or not. And whether you communicate. Youíve got to communicate these things to your client. If you decide that thereís six depositions that could be taken, four are crucial to the case, and two are marginal, you discuss that. And then you make an agreement Ė weíre not going to take those depositions if you agree to it. Hereís the down side if we donít and hereís the upside if we do. There are ups and downs for both. And I think with a sophisticated client theyíre going to understand that I may not have to take Edís deposition. Well, letís see. Right now weíre not going to plan on taking it. And letís see how it goes. And you know, a lot of times you never take Edís deposition. And I think that weíre finding out that we can get along in litigation with less discovery.
Ed: Lawyers are taught, I think with the emphasis and the catalyst of the insurance carriers, to document every conversation, every factor, practically, so that your file is complete in case a claim is made. Is this a methodology for the lawyer involved in this kind of alternative fee billing practice to make sure that the file reflects the clientís participation and the clientís agreement to not take those two depositions just in case a claim is made down the road? Or is there some other way of doing it?
Rick: I think documenting things like that is probably a good idea for both sides. We have a lot going on and our business isnít our lives. With the advent of e-mail, things like that are very easy to do. I donít think thatís what you call CYA; I think itís just, " hereís our plan and hereís our continuing plan." If my client wants to go back to the file in two months to see where we are, he can. We have taken these four depositions and then he also sees that we decided not to take these two. That way, he can call up and say, Rick, do you still think we donít have to take these two depositions? And we discuss it. So, the answer to your question is that itís a good idea to confirm those kind of things in writing, just so both sides have a file that reflects the agreement and also something that memorializes the path forward. I think thatís important. But I donít look at it as every time I get off the phone with the client, do I send an e-mail confirming it? No, I donít do that. But on the important matters, I think itís important for reasons other than to just cover yourself.
Ed: Well, Rick, there are a whole bunch of other questions that come to mind, but I think that your answer probably would be reflected in the concept that it requires great communication between the attorney and the client and it requires a great relationship between the attorney and the client. So, to me, it all boils down to one question. And that is, how do you get such a relationship? How do you find those clients who are sophisticated? How do you continue a relationship thatís open and candid and collaborative, especially in this world of competition where youíve got twenty, if not more, law firms wanting the business from that particular client?
Rick: Well, the easy answer would be that weíre good and weíre lucky. And good first and lucky second. But I donít know. Iíve been lucky, too. Iíve been with the same law firm forever. So weíve grown together. And we have some very talented lawyers in our firm that have gotten good results. You donít walk out of law school developing these relationships. You have to have the goods and the service and the talent to provide the clients to have them trust you doing your work. And then the other part is relationships. Developing them just through working together. These relationships have evolved from representing these clients for quite a few years and changing together. I donít know if we have any clients today that we didnít have when we were just billing by the hour. Theyíve changed; weíve changed. How do you develop these relationships? You enter into them and then they evolve. But you consciously evolve these relationships today because if youíre going to do these alternative fee arrangements, you have to know up front that it takes a degree of trust to do it. Youíre talking trust as you develop your relationship. It has to be based on that.
Ed: Well, Rick, I guess one final question would be what is it that you see as the future Ėthe future of the profession, future of alternative billing systems, from today forward?
Rick: I see it getting more prevalent. I think more and more clients and law firms are interested in trying alternative fee arrangements that work for both the client and the firm. I think itís the way to go. I really do. But Iím not sure itís rapidly going forward. It seems to be creeping along. A lot of things creep along until all of a sudden, the legal industry, both clients and law firms, see that this is really something that works. So I see a good future for it, but Iím not sure when itís going to be here.
Ed: I guess itís sort of like the book "The Tipping Point" by Malcolm Gladwell. Itís got to get to a certain critical mass and, then all of a sudden, itís going to jump forward.
Rick: Yes, I think thatís a good way of looking at it actually. But Iím not sure when or where that tipping point is. But itís somewhere on the horizon.
Ed: Rick, thank you very much for joining us today. I appreciate your taking the time to share your thoughts with us on a fascinating topic and one of great import to the legal community.
Rick: Itís been my pleasure. Thank you, Ed.
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