The New Game in Town: Recovery and Value-Based Legal Fees

Article excerpt

These days, watching customer creditworthiness is as much of nail-biter as watching your favorite basketball team miss every key play in a championship game. Seeing the opposition steal the ball is tough enough, but not knowing what happens next is even worse. Sometimes you think the team is playing in blindfolds. So, we just keep watching until the game is over, always hoping the team can pull it out no matter how desperate their position looks--and we're almost always disappointed with the results.

A string of losing plays on front-end risk analysis--putting on our own blindfolds--also means that credit managers have more to do, many times with less staff. Pressure continues to mount for credit managers and their collection manager counterparts to increase recoveries and claim whatever is left in a failing company's coffers before some other creditor does. There are days when it's hard to steel yourself for the hours ahead, wondering if you'll be able to score enough points before a company's assets are exhausted and the clock runs out.

As if the economy alone hasn't laid enough burdens on the credit function, Sarbanes-Oxley has really stretched the resources of some credit managers. They now are faced with developing and implementing new, stringent processes designed to help them certify credit, cash and receivables. Even more tedious, they've been charged with creating an impeccable audit trail for every credit transaction.

The fourth-quarter challenge in this game is the management team, compelling credit managers to continually improve their numbers. Maybe your favorite commercial or collection lawyers can help to remove hindrances and help you succeed--so long as you both have skin in the game.

A New Approach to Legal Fees

The most recent issue of Law Practice Management magazine boldly directs lawyers to "Give Them What They Want! Cater to clients instead of precedent. Rethink the basics of how to package and deliver services." This type of progressive messaging is becoming increasingly popular with law firms, as clients clamor for "value-based pricing" of legal services instead of hourly-based or contingency fees. Simply defined, value-based pricing incorporates a number of alternative fee arrangements--including those based on milestones or stages (not tasks), settlement or outcome bonuses, tiered contingency rates, etc. The focus of value-based pricing is on results, efficiency and reward and not on hours billed.

The credit and collection manager's interest in value-based pricing is three-fold: first, the need for improved predictability of legal fees and expenses; second, the need to mitigate the risk of loss; and third, the need to stop paying "too much" for those accounts that are recovered. Credit managers also seek out firms that support their decision process and respect their corporate objectives.

The best value-based pricing alternatives for the credit and collections industry tend to be those focused on milestones or stages, so that attorneys are compensated only for the services they actually provide on a pre-priced basis. Using this model, attorneys don't reap a windfall of 25 percent or more of every dollar recovered--first dollar, last dollar and every dollar in between--leaving their clients only a small fraction of the recovery, once costs are deducted. More goes back in your pocket.

The Game Everyone Wins

Yet, value-based fees work because they are a win-win for creditors and law firms alike. Law firms can count on being paid something on every file they work, even though they won't enjoy the potentially big contingency bonanza. (There are those cases where "apples become oranges" and the firm actually did enough work to justify that 33 percent contingency rate--but more on that later). Being paid for tasks as the lawyers complete them helps to even-out firm cash flows and reduces the firm's risk. Law firms also set their own prices and, because their results will determine whether they receive your business in the future, firms can staff matters for optimum efficiency and success. …