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14Feb 2017

Franchisors Beware: New Accounting Rules Will Significantly Impact Revenue Recognition, Creating Great Risk for Your Business Model

SRA Accounts Rules software & service support for law firms

In a little noticed change to the generally accepted accounting principles formally approved a year ago

this week, the Financial Accounting Standards Board and the International Accounting Standards Board

jointly issued ASC 606, Revenue from Contracts with Customers: Identifying Performance Obligations and

Licensing (Topic 606), also known as ASU 2104-9. ASC 606 provides new guidance for franchisors and

their auditors, requiring them to evaluate the services the franchisor provides for the initial franchise

fees and multi-unit development fees more carefully. This will affect how revenue can be recognized on

the audited financial statements disclosed in their franchise disclosure documents. This rule change will

become effective for audited financial statements issued after December 15, 2017 for publicly traded

companies and for audited financial statements issued after December 15, 2018 for all other franchisors.

The net effect of the new interpretation is that most franchisors will be required to recognize a

significant portion of the revenue generated from the payment of initial franchise fees and multi-unit

development fees over the life of the franchise agreement or the multi-unit development agreement,

rather than recognizing the revenue in the year in which the first franchised location opens for business.

For many franchisors, the revenue reduction could be quite dramatic. For example, if the term of the

franchise agreement is ten years, the first-year revenue from each franchise sale could be reduced by as

much as ninety percent. In the case of multi-unit development agreements, the franchisor will now be

required to recognize the development fee revenue as each location opens, rather than the day the first

franchised location opens under the terms of the multi-unit agreement.

This new interpretation of the revenue recognition rule will have several significant impacts on

franchisors. First, it will dramatically reduce the financial statement income that a franchisor will be able

to report from initial franchise sales in first year, while at the same time increasing short-term and long-

term future liabilities on the balance sheet. This could effectively reduce or eliminate the profitability of

most growing franchise systems that rely on franchise sales for a significant portion of their revenue

during any calendar year. This could potentially make such franchise systems less attractive to

prospective franchisees and current franchisees looking to expand.

In addition to the reduction in revenue, the resulting increases in short-term and long-term liabilities will

materially impact the franchisor’s balance sheet. In many cases, this could lead some registration states

to impose financial assurance requirements on more franchisors seeking franchise initial registration or

renewal. Depending upon the financial assurance option chosen by the franchisor, these requirements

can significantly increase operating costs or deprive emerging and high-growth franchisors of the

franchise fee payments they need to continue to grow and support the franchise system.

Finally, once a franchisor adopts this accounting approach, auditors will likely require that the franchisor

restate its financial statements for the prior two years. In many cases, these restated financial

statements will make the franchisor look financially weaker. This could open the door for franchisees

who are unhappy with their relationship to sue franchisors for rescission of their franchise agreements

under the theory that they were misled about the state of the franchisor’s financial position. This could

give any franchisee who purchased a franchise during the two-year period prior to the adoption of the

new accounting rule with a “get out of jail” free card merely based on the change to the accounting rule.

Most franchisors are now in the midst of their 2016 audits. However, it is not too early for franchisors

to begin discussions with their auditors and legal advisors regarding the implications of this rule in the

coming years. It is critical that franchisors seek the advice of accountants, attorneys and other advisors

who understand the interplay between this new interpretation and the way these new rules will play

out in the real world. By analyzing the way in which the revenue is defined and described in the

franchise agreement and the multi-unit agreement carefully, it may be possible to reduce the impact of

this new rule on the franchisor’s revenue. But franchisors cannot afford to ignore this development or

“kick the can down the road.” The new implementation deadlines are right around the corner.

By: William A. Hoppe, CPA

Kevin P. Hein, Esq.

Alexius, LLC

February 13, 2017

9Feb 2017

The 2017 Georgetown Report And The Sunset Of The Traditional Law Firm Model

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The Center for the Study of the Legal Profession at Georgetown University Law Center and Thomson Reuters Legal Executive Institute recently released their 2017 Report on the State of the Legal Industry. ‘The Georgetown Report,’ as it’s commonly referred to, confirms that corporate legal buyers are directing more work away from large law firms, electing to take it in-house or to legal service providers (read: alternatives sources to the traditional law firm partnership model). The Report provides a broad range of data confirming weaknesses in the traditional model: flat demand for law firm services in a market with growing demand; shrinking leverage (one of the cornerstones of the BigLaw model); reduced realization; intense competition; and the failure of most law firms to innovate in a market demanding it. The Report also cites growing market segmentation among law firms with about 20 pulling away from the pack once collectively called ‘the AmLaw 200’ and later ‘AmLaw 100.’  It also notes that clients are increasingly  sending work “down market” to smaller firms with specific expertise and lower rates.

The Report’s headline grabber is ‘the death of traditional billable hour pricing’ over the past decade and ‘the widespread client insistence on budgets (with caps) for both transactional and litigation matters.’ This conclusion overlooks an even bigger item– many of those matters are no longer assigned to law firms in the first instance. Example: Shell Oil has formed a global in-house litigation team for the bulk of the company’s largest litigation cases and recently handled a  multi-billion dollar corporate portfolio divesture in-house.

The eye-popping profit-per-partner (PPP) numbers that persist for many firms—something not specifically mentioned in the Georgetown Report– create a false-positive image of their fiscal health. High PPP has been achieved principally by internal cost slashing including staff cuts, reducing real estate overhead, and other measures. It also involves thinning the equity ranks and jettisoning ‘service’ partners who are highly valuable to clients but a potential drag on PPP. The Report notes that firm internal cost cutting has gone as far as it can go, suggesting that PPP at most firms will begin to dip. That will only fuel the lateral frenzy and add to the long-term instability of most firms. PPP was long the glue that bound firms together. Now, it is a vulnerability for all but the fiscally strongest in a Darwinian ‘survival of the fittest’ marketplace.

The Georgetown Report also cites, ‘erosion of the traditional law firm franchise,’ a euphemism for ‘clients no longer need large law firms to handle many legal tasks.’ Erosion of leverage–equity partners atop a pyramid of other lawyers billing lots of hours at high and non-discounted rates, and ‘market segmentation’—a few elite firms distancing themselves from the pack– are additional trends cited by the Report and supported by its data. The inescapable conclusion is that most large firms are confronting an existential crisis that demands an aggressive response lest they experience a collective ‘Kodak moment.’ So far, most firms have been at best reactive and at worst static to the rapidly changing market. That’s one reason why in-house legal departments and service providers now account for nearly half of total legal spend.

 There’s More to It Than That

There are other, more fundamental and systemic reasons why legal buyers are turning away from traditional law firms. For a long time, firms monopolized the supply side of legal expertise when that was the only element of legal delivery. Consumers effectively had no viable, scalable, and ‘safe’ alternative supply sources. Also, legal fees were a trifling line item on the corporate budget. That’s changed, of course– especially during the past decade. Legal delivery is now a three-legged stool supported by legal, IT, and process expertise. Law firms remain strong on legal expertise but that’s just part of the equation. Plus, the dramatic rise in their cost has far outpaced other goods and services at a time when legal expense—like virtually every other line item—is closely scrutinized in a business climate that demands ‘better, faster, cheaper.’ And consider that the urban myth that ‘work performed by law firms is bespoke’ has been debunked. Disaggregation—the creation of a legal supply chain—is now standard fare as buyers commonly engage more than one source for individual matters or portfolios that were once handled start-to-finish by law firms.

Corporate legal departments and service providers have stepped in to fill the law firm vacuum. They tend to be more innovative than law firms, utilizing technology and process far more effectively than firms that remain loathe to provide a meaningful seat at the management to anyone but (rainmaker) lawyers. Corporate legal departments and service providers, in contrast, commonly function as corporations, not fiefdoms. Their DNA more closely resembles clients than law firms do, and they accord technologists, process experts, and others essential to the legal delivery commensurate status and rewards.

There are several other systemic challenges confronting traditional law firms–minimal capital invested in research and development; an economic model that rewards inefficiency more than efficiency; limited understanding of the increasingly complex business of multinational clients—especially contrasted with in-house counsel; and a failure to appreciate that “legal” problems are—from the client perspective—“business challenges”

Why Don’t Law Firms Retrofit Their Model? 

 The Georgetown data confirms that the traditional law firm model no longer dominates the legal marketplace, nor does it align well with its direction. This begs the question: ‘why don’t firms retrofit their model?’ Simple answer: there exists an economic conflict between aging equity partners ‘running the table’ and the next generation that is beginning to appreciate its vulnerability. Translation: don’t expect the old guard at law firms to morph into innovators, especially where to do so would require them to be the largest investors in a model with no residual equity. The absence of real residual equity value at law firms is yet another nail in its coffin. Contrast this, for example, with senior in-house counsel that have a very significant financial interest in the long-term success of the enterprise—even after they retire.

In-House Legal Departments and Service Providers Have Limitations, Too

In-house legal departments are more palliative than cure for the vacuum left by law firms. While they continue to expand in size, influence, and portfolios, their cost is rapidly escalating, too. There is also an inherent conflict in the dual role in-house counsel is asked to serve—defenders as well as business partners of the company. This is not to say that equipoise cannot be achieved, but there is risk, too. Outside counsel can serve a valuable role in mitigating this potential risk factor–but there is no longer need for the entire traditional firm model to achieve this. Firm lawyers can be cherry picked to serve this purpose.

Likewise, service providers bring a great deal to the table, but they too have limitations—especially in the U.S. where the current regulatory scheme prohibits joint ownership between lawyers and anyone other than lawyers. Service providers, on their own, cannot ‘engage in the practice of law’ even though they perform many of the same functions as law firms. Apart from U.S. regulatory hurdles—for which there are workarounds—is the ‘stigma’ many top lawyers feel for taking their talents anywhere other than law firms, corporate legal departments,  government, or public interest groups . This will change over time, but it’s a tough sell for legal service providers to attract elite legal talent to complement their IT, process, and stable of other experts that are the ingredients in the legal delivery stew.

Wanted: A Safe, Scalable, Cost-Effective and Integrated Delivery Model 

What’s missing in the current legal landscape is a safe, scalable, cost-effective, legal delivery model that integrates the legal supply chain. There are many different structures and models that would accomplish this objective– the most likely being a Clearspire ‘two company model’ where a law firm enters into a bundled services agreement with a legal service provider. Another iteration might involve a corporate legal department breaking off and rebranding itself as a law firm that is pared with legal operations capability, either in-house or via an established outside service provider. Additional elite legal talent would be readily available because there will soon be a diaspora of lawyers looking for a new model and a new home that aligns better with their interests as well as their clients’.

Conclusion

The Georgetown Report confirms where the market is. The more interesting question is where it’s headed. Doubtless, new delivery models will soon appear that better align the interests of the three principal stakeholders in legal delivery: (1) lawyers, paraprofessionals, and other experts that perform the work; (2) the delivery entity that bundles it; and (3) clients. My bet is that a new legal delivery paradigm will emerge that will transform the fraying legal guild into a 21st century model that will benefit clients, lawyers, and society. Stay tuned….

This post was originally featured on Forbes.com.

17Jan 2017

Denver Business Journal – It’s what Alexius doesn’t do that helps clients save

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Featured in Law Quarterly, Denver Business Journal, January 13-19, 2017

At the Denver-based legal services firm Alexius they have an unusual opening line.

“Let us help you figure out what you don’t need a lawyer for,” said Kevin Hein, who was a big law attorney for 20 years and now is a partner at Alexius – a company that aims to bring outsourced legal and financial services to complex business transactions.

The four partners at Alexius – three of whom are lawyers – are careful to say that their company is not a law firm. And it’s not an e-discovery firm. They don’t litigate and they don’t bill by the hour.

They are lawyers, paralegals and financial professionals who see themselves at the intersection of law and business. They specialize in operational compliance – contracts, transaction analysis and regulatory compliance.

And they think they are the first in metro Denver to do this business model.

“We recognize that the value clients want from a lawyer is not merely how well you know the statute. It’s really how is your knowledge and understanding in my industry?” Hein said.

The partners – one who is a certified public accountant – took a page from the New York-based Axiom Law, a firm that began providing legal and financial services to Fortune 500 companies in 2010, but also says it is not a law firm.

Its founder Mark Harris in 2013 told Bloomberg Law — which described the firm as a legal disrupter — that it’s difficult to label the firm because it’s a whole new category. Sometimes they are the provider of the whole transaction and sometimes they partner with big law, which may unbundle services.

“I saw a story about Axiom – it was the first time I became aware of this alternative model,” Hein said.

The key, he said, is that their Denver company is offering predictable, fixed-fee billing. In some cases their cost is from 30 percent to 60 percent less than the total project cost at a big law firm, Hein said.

“The law firm billable hour model does not lend itself to efficiency,” he said. “It’s really the exact opposite. There’s a lot of pressure for every lawyer to find enough time to put on the bill everyday, to make their hours.”

At his last Denver firm, his hourly rate was $600.

In recent years, some Colorado lawyers and firms have ditched the billable hours model and started offering alternative fee schedules. The Colorado Bar Association in November launched its “modern law practice initiative” to spread the word about alternative funding models – that is to offer such things as al la carte services, also called unbundled legal services; charge flat, fixed fees; pay hourly rates but set up a bonus if the case goes the client’s way; or bill by the hour and cap the total fees.

Alexius goes further. Its target market is small and mid-market businesses – those that may not be large enough for in-house counsel, but also cannot afford big law hourly rates, said Andy Elson, a partner in the company and attorney who spent 25 years working in telecom industry as general counsel and in regulatory compliance.

“Part of the differentiator for us, we are not just attorneys,” he said. “We can source a project that has a legal aspect to it. We look at the project and decide 20 percent has a legal aspect, 30 percent has more IP, and the other 30 percent might be financial analysis.”

Some businesses think they have to hire a big law firm because it gives them credibility, he said. That might be true in some areas.

“But that doesn’t mean everything has to be done by the law firm,” he said.

Alexius has partnered with big law to do some of the legwork for a client while the law firm attorney then closes the deal.

“We do a lot of M&A (mergers and acquisitions) support,” Hein said. “The big shining document that matters in the M&A transaction is the purchase agreement. But there is a ton of background work that goes underneath it – schedules, closing documents, diligence — that stuff does not have to be done in a law firm.”

The partners at Alexius don’t know if they will transform the legal landscape. However, the company is finding a market. It opened in 2013 and has worked with more than 150 clients.

“It’s been a very positive response,” Elson said. “We are giving them the opportunity to understand legal in a different light.”

Monica Mendoza covers banking and financial services, legal services, retail, the economy and economic development, and sports business. Phone: 303-803-9230.

9Jan 2017

Alexius Featured in Law Week Colorado

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‘New Law ‘ businesses still growing post-recession

 BY DOUG CHARTIER LAW WEEK COLORADO

In addition to traditional law firms assisting client companies with legal matters, there’s a growing sector of businesses that help companies figure out when a law firm is even necessary.

Such consulting businesses, most of which are not law firms, are growing in popularity among companies for their work as legal project managers. For traditional law firms, companies like Axiom Law and Thomson Reuters Legal Managed Services are becoming referral sources that can also help insulate them from the less desirable aspects of client services, like billing complexities and midnight phone calls.

Alexius is a local example of a “managed legal service provider,” or a non-law firm that consults businesses on how to approach the legal components of a business matter.

A company might need guidance on a project like making an acquisition or instituting a compliance program, but instead of sending the issue to a private law firm on the outset, it could hire a managed legal services provider like Alexius to come up with a project plan that might help save on costs. The company could then determine whether an issue should be outsourced to a law firm, or if it could instead handle it in-house or with less-expensive non-attorneys, such as IT or accounting professionals.

“We help clients first and foremost identify their legal needs and determine the best way to source those legal needs,: said Alexius’ chief development and strategy officer, Kevin Hein. Sometimes Alexius will insource the legal needs to its in-house attorneys or outsource them to select private firm attorneys, and it has tech and financial experts that could also lend insight on a matter if needed.

Hein spent 20 years practicing in the Denver offices of large firms such as Faegre Baker Daniels and Snell & Wilmer, and other members of Alexius’ leadership worked in Big Law or a s general counsel. This allows the company to “understand the challenges” of making legal services cost-effective “both from a delivery perspective and a consumer perspective,” Hein said.

Managed legal services providers and other “new Law” businesses have been reporting fast growth in recent years.

Clutch Group, a 500-employee legal process outsourcer, claimed to have 100 percent revenue growth year over year in 2014 and 2015, according to a Legal 500 report. Pangea3 opened its doors with 330 employees and five years later (and after being acquired by Thomson Reuters) has around 1,000, according to the same report.

The rise of alternative legal service providers comes out of a “perfect storm” of economic factors, according to Mark Lassiter, founder and manager of Lex Projex, a legal project management service based in Tempe, Arizona. The legal profession has been seeing what he calls the “commoditization” of law with websites such as LegalZoom and Rocket Lawyer becoming mainstream, which was enabled not just by technology but also post-recession client demand for value.

When Lassiter started practicing law more than 30 years ago, law firms were assumed to be the “one-stop shop” for four major categories of work: counsel or advice; advocacy; processes (such as serving subpoenas or taking depositions); and delivering content (such as written work product).

But after the recession tightened clients’ purse strings, companies became more discriminating of what legal services they were willing to pay lawyers for, and they began to seek those four elements of legal service “cafeteria-style.” Law firms and other providers began offering those services a la carte, like paperwork filing for business formation or e-discovery.

“We’re seeing the fracturing of law, and we’re seeing the legal work become unbundled,” Lassiter said.

At the same time, corporations are pulling more legal work in-house and “are saving a fortune by doing that,” Lassiter said, which creates even less demand for the traditional law firm. The emergence of e-discovery vendors and similar alternative legal services providers was going to happen eventually, but a confluence of economic factors only hastened the process.

“The recession was a catalyst to impel these changes to happen faster,” Lassiter said.

Of New Law’s managed legal services providers, Axiom Law is perhaps the most successful example. Since its founding in 2000, Axiom has grown to more than 2000 employees, roughly half being attorneys, according to the company’s website.

But not all of the experiments yielded successful business results. Clearspire Law, seen as one of New Law’s standard bearers when it was founded in 2010, closed its doors in 2014 but sold the collaborative software platform that allowed it to function.

Denver’s own Alexius most closely follow the Axiom model. Hein traced the inspiration to form Alexius back to when he’d read an ABA Journal interview with Axiom founder Mark Harris in 2013. Hein, who was a partner at Faegre Baker Daniels at the time, said he felt the stress of the increasing costs on legal services and was intrigued by what Axiom was doing to disrupt the legal profession’s economics.

Over a golf game he and Andy Elson, an in-house counsel veteran who would become Alexius’ chief client services and innovation officer, discussed what they saw as “a significant opportunity:” Axiom was mostly serving the big players and Fortune 100 companies, but many of those larger corporations are growing more sophisticated legal departments and reducing their need to look outside even for what Axiom does. The opportunity was in catering to the small- and medium-sized businesses, which is where Alexius now mostly focuses its services.

Hein said that many companies are reluctant to send a potential matter to a law firm as a first step because of how costly it might be for the firm just to look at it. He added that it’s also in the law firm’s best interest to discover something billable for it to do, regardless of whether that legal work is the most cost-effective approach to the company’s problem.

If you go first to a law firm, they’re going to find the legal issues,” Hein said. “I think that’s one of the reasons why clients have become frustrated over the years.

Another limitation of the traditional law firm, Elson said, is that in the initial review of the company’s issue, a law firm is less likely to provide business- or tech-savvy input from non-attorneys in addition to the legal analysis. In the traditional law firm, those two camps tend to be segregated, but managed legal services providers like Alexius have those camps working together, he added.

But the hybrid attorney/non-attorney leadership often means that managed legal services providers have to shed the title of “law firm.” Rule 5.4 of the ABA Model Rules of Professional Conduct, which aims to protect the lawyer’s independence, largely prohibits non-attorney ownership of a law firm or legal fee sharing with non-attorneys.

While there are some alternative legal services providers that till fall under the category of law firm, many avoid the label and insist their business function doesn’t constitute the practice of law. This is true of Alexius, whose CEO and co-founder, William Hoppe, was previously a certified public accountant and fraud examiner and is not an attorney. Hein said that Alexius doesn’t provide legal opinions and doesn’t act as a legal advocate for clients.

The rise of New Law has created some consternation among traditional law firms that are concerned about losing market share to the emerging providers.

Unlike websites and companies that directly deliver legal services a la carte, managed legal services providers might be more of an additional player in the corporate client-law firm relationship than a competitor. When Alexius outsources to law firms, it negotiates pricing on behalf of the customer, and Elson said the firms “appreciate it because it creates less conflict around the bill.”

We’re not here to displace the law firm” Elson said.

The managed legal services model isn’t foreign to many companies, as they have seen similar consulting services for the accounting and IT realm. U.S. legal marketplaces appear to be embracing the model, and if anything, Colorado’s legal and business community is especially experimental and innovative, according to Hein.

“What I’ve seen in the (Colorado) marketplace is more of a willingness to understand something that’s new.”

http://lawweekcolorado.com/2017/01/managed-legal-services-gaining-traction/

6Jan 2017

Alexius Featured in Franchise Times

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Alexius Aims to Upend Traditional Legal Billing

5Jan 2017

Sooner Than You Think! When Do Law Firms Need to Take Alternative Legal Providers Seriously?

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t’s now been eight long years since the beginning of what amounted to the financial crisis and the ensuing countless predictions of the demise of big law firms. But nothing like it happened. Looking back, you can only conclude that law — as practiced by the big firms — is a stable business.

The perpetual rise in firms’ revenue and income reversed briefly as demand dropped by 10% to 15% over an 18-month period between the middle of 2008 and the end of 2009. Rates — the equivalent of prices — showed softness as a result of lawyers rushing to offer discounts to their good clients and prospective ones. Lawyers also entered into alternative fee arrangements without much of an idea of how to manage them commercially. And since law firms uniformly reacted by shedding excess supply, i.e. firing underproductive lawyers, their realized rates trended downward only by a few percentage points.

Many legal pundits suggested that firms faced existential threats from dropping demand as General Counsels and Corporate Legal departments demanded “more for less”, while technology-assisted disrupters and alternative service providers ate away at the law firms’ share of legal spend.

And yet, firms’ rates have recovered, rising year-over-year since 2010: demand is stable, and firms have figured out other ways to grow revenue and profit, albeit at a slower pace than before. Some firms, especially in the UK, have decided to compete with technology and alternative providers by offering their own solutions. But most firms have done, frankly, nothing beyond adding some fig-leaf “fixes”.

The Threat at the Doorstep

So why should law firms take alternative providers seriously now?

Well, unless law firms integrate alternative delivery (including technology) robustly, they may be facing an existential threat after all. And that threat could be arriving on their doorstep sooner than you think.

Currently, alternative delivery in the US is estimated at less than 1% of the total market. Europe is probably a bit lower; the rest of the world is lower still.

The alternative players, from first movers who became industry leaders like Axiom Law and Pangea3 (now Thomson Reuters Legal Managed Services) to the many, many tech-focused legal market ventures that have seen the light of day in the past few years, are said to be growing at 20% annually.

Still, you may ask: what’s the big deal? Growing a less-than 1% share at 20% every year still doesn’t get you to even 1/20th of market share in a decade, right? And that doesn’t even factor in that over the next 10 years, law firms will have figured out how to compete with the alternative providers through their own, captive means.

All true, and yet this view ignores three factors which all lead to a very different outcome by the year 2020:

  1. We project a linear development when, in fact, it is more likely to be exponential. Today’s less than 1% market share represents the bottom of the S-curve. Money, hungry for returns, has discovered the legal market and made its first killings. That sight attracts more money. And all that capital will get better and better at finding profitable revenue within legal services. You should expect growth more in the 50% per annum or even higher range. The math quickly becomes scary.
  2. We don’t account for the displacement effect of revenue earned by the alternative players. Law firms in the aggregate have been growing revenue at around 2% to 3% annually since 2010 (excluding revenue changes from acquisitions and divestitures). If one dollar earned by an alternative provider means a dollar lost to law firms, the rise of the alternatives would only stop total revenue by all law firms from growing in about 10 years. But a dollar earned by the alternatives displaces approximately three dollars lost in law firm revenue. If the displacement effect is at a factor of three, then total law firm revenue stops growing six years from now.
  3. Finally, we are also forgetting that law firms implode because they don’t make enough money to keep partners happy. The partnership business model of every law firm today requires growth: stagnation and/or shrinkage tanks profitability, risking key partner defections. Of course, firms can manage a bit of revenue shrinkage from one year to the next if they react early and take action by cutting costs. But an unexpected shortfall of revenue by 3% translates to a 7% to 10% shortfall in distributable profit and almost certainly will also translate into the end of that firm. It doesn’t require a huge revenue decline for fickle partnerships to bite the dust.

And still, you might say: Meh, I am still not convinced that law firms must collaborate with alternative delivery providers now. And you are right in that a few will never be threatened because of what they do. But the group is quite small while the number of firms who think they are part of the group is a lot larger.

Of course, every firm does a good amount of work that is only tangentially affected. The mistake, however, is to look only at that work and conclude that the firm is doing fine. Today, 25% to 50% of the revenue of most large law firms is already squarely under attack. And that portion will only grow over time.

It is smart to face this reality and embrace alternative providers and technology, and to proactively show clients how to integrate both of those factors to achieve better, faster and cheaper delivery of legal services overall. That offers the best chance for most large law firms to survive and thrive in this market.

By:
Global Director
Legal Managed Services, Thomson Reuters

http://legalexecutiveinstitute.com/law-firms-need-take-alternative-legal-providers-seriously/

20Dec 2016

ALEXIUS – MEETING THE DEMANDS BY BUSINESS FOR AFFORDABLE LEGAL SERVICES.

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**FOR IMMEDIATE RELEASE**

ALEXIUS – MEETING THE DEMANDS BY BUSINESS FOR AFFORDABLE LEGAL SERVICES.

Denver, Colorado – DECEMBER 19, 2016 – ALEXIUS, LLC. is a Denver-based alternative legal services provider that is changing the legal landscape in Colorado and around the country by offering small-to-mid size companies predictable and affordable legal services through a managed services delivery model.

Deloitte’s June 2016 research study on “Future Trends for Legal Services” confirms that customers are neither pleased with, nor tethered to, the incumbent law firm partnership model. They are looking for alternatives and are increasingly viewing those alternatives as an imperative rather than an option. Deloitte’s findings reveal that demand for legal services is growing, purchasing patterns are changing, demand for non-traditional legal services is increasing and legal expertise alone is insufficient; clients want it combined with industry, commercial, and IT expertise. This explains why clients are increasingly “voting with their feet” and looking beyond established law firms to outsource work or, in some instances, to collaborate with.

Formed in November 2013. The company was the brainchild of seasoned legal and financial principals who had been significant purchasers and consumers of legal services and frustrated by the lack of value, billing predictability, and waste that is endemic among most large and medium-sized law firms. Similar approaches have been proven successful in the legal arena, but the most established players only offer these services to large, Fortune 500 companies. The goal of the Alexius team is to offer a similar value proposition to the many small to mid-sized companies that have limited or no options when it comes to alternative legal service providers.

We knew we could transform the legal landscape by adopting the proven value delivery method of “managed services,” so prevalent in IT, accounting, customer service and operations management, in order to provide higher quality legal services at a much-reduced cost.” Kevin Hein, Chief Development and Strategy Officer, Alexius.

Buyers have changed the rules of engagement—literally and figuratively—for procuring legal services, which has affected the delivery of legal services, once based exclusively on selling legal expertise by the hour. Now, legal delivery involves legal expertise, technology, and business process. Law firms have been slow to adapt to IT and process, and they are starting to feel the consequences by loosing market share alternative legal service providers such as Axiom Law, Vista Law and Alexius.

“The Deloitte survey shines a light on where legal delivery is headed. Demand for services is robust, but satisfaction with the incumbent delivery model is low. This disconnect underscores the opportunity for disruption. Who will prevail? Might be wise to follow the money.” Mark A. Cohen, CEO of Legalmosaic and Professor of Law at Georgetown University Law Center.

About Alexius, LLC.

Alexius is a managed legal services company that assists companies with their operational compliance issues by leveraging proficiencies in project assessment, staffing, management and technology. The company is not a law firm but a high-value resource delivering legal solutions to executive management and the in-house legal department. (www.alexius.co)

14Dec 2016

A Recipe For Affordable Legal Representation

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My wife is a great cook and watches “The Cooking Channel” for new recipes. I’m fascinated by her ability to translate the TV chefs’ recipes into delicious meals at home. It made me wonder: is there a recipe for affordable legal representation? Approximately 90% of Americans as well as a majority of small businesses cannot afford a lawyer–even when the need is acute. This is often referred to as “the access to justice crisis.” The human and societal toll is immense. How can a society based upon the rule of law operate this way?

A recent New York Times article “In Louisiana, the Poor Lack Legal Defense” revealed that the access to justice crisis also bleeds into the criminal process. Many criminal defendants—especially in poor, high-crime areas– go unrepresented. For those wondering, “Doesn’t the Constitution guarantee the right to counsel for one accused of a crime?” the answer is yes—theoretically. Funding constraints, unrepresented accused sitting in jail cells like so many planes stacked up in the fog with no open runways, and not enough pro bono lawyers to go around have vitiated the Sixth Amendment guarantee of counsel. What’s happening to our justice system and what is the legal profession doing to address it?

We Have The Ingredients To Resolve The Problem

The ingredients for an access to justice recipe are available: (1) an enormous pool of new clients that can pay for legal services, just not at current rates; (2) a surfeit of unemployed and underemployed attorneys; (3) senior lawyers that could participate and serve as mentors for inexperienced counsel; (4) technology; (5) access to legal sources, including documents; and (6) new legal delivery models that reduce cost, promote efficiency, and enhance ease-of-access to lawyers. What’s needed is a recipe to combine these ingredients.

How will these ingredients be blended and who will do it? Simple answer: it takes a village. And that ‘village’ refers to three key stakeholders in the legal ecosystem: (1) law schools, (2) legal providers, and (3) regulatory bodies. Each will play a role, and all must act collaboratively to resolve the challenge.

Law schools must prepare graduates to be practice ready. Students should graduate knowing how to interview and represent a client, for example. They should also understand how to utilize technology and project management in delivering legal service; ‘being a lawyer’ is not just about legal expertise anymore. It’s about combining legal, technological, and process management expertise to solve personal or business challenges.

Legal providers, likewise, can “do good and do well” by structuring legal delivery models to be more accessible, flexible, efficient, client-centric, and cost effective than the traditional partnership model. LegalZoom is an example of a legal services provider that is doing just that. They provide consumers with a range of legal service options including: self-help (documents) to limited attorney consulting (subscription services with panel counsel) to attorney-client engagements (where LegalZoom receives no fee and does not participate in the engagement). LegalZoom—with more than 3.5 million individual customers and 1million small businesses –has begun to make a dent in the access to justice crisis. Its success should be a clarion call to others and an indication of the marketplace’s receptivity to creative solutions.

Regulatory bodies—notably State Bars and the American Bar Association—should take a hard look at how well (or poorly) self-regulation has served the public. The access to justice crisis is a blight on their record and a reminder of their need to take aggressive steps to ensure that an appropriate balance between protecting the public and preventing the public from securing legal representation is achieved. Note to regulators: you are failing.

Conclusion

The late Justice Lewis Powell, Jr. noted that: ‘Equal justice under law is not merely a caption on the facade of the Supreme Court building; it is perhaps the most inspiring ideal of our society. It is one of the ends for which our entire legal system exists. It is fundamental that justice should be the same, in substance and availability, without regard to economic status.’

Now—as never before—technological tools exist to facilitate ready access not only to legal sources (e.g. documents, case law, statutes, etc.) but also to lawyers. Likewise, online courts that unclog court dockets are already operating in Canada and other parts of the world. This is especially effective for “small claims” matters where pro se litigants may not require legal representation at the proceeding. And on the subject of activism by courts, why not make available a free online document library (including basic pleadings geared to ‘retail’ legal matters) for the public. No doubt, an entrepreneurial company would step in to provide legal consulting services on an economical, online basis.

Not all matters have the same value for a client, nor do any two require the same amount of “touch points” with lawyers. Process, technology, and legal oversight—combined with creative new models—are the recipe for taking on the access to justice crisis. What constitutes ‘legal representation’ and the direct involvement of lawyers in that process is an issue worthy of further exploration in this context.

The legal profession has the means and opportunity to resolve the access to justice crisis. Failure to do so would undermine the rule of law and trivialize the legal profession. 

Source: http://legalmosaic.com/2016/10/28/a-recipe-for-affordable-legal-representation/#

15Nov 2016

Ways Franchisors Can Reduce Outside Legal Fees in 2017

Legal-fees 1

Franchising is a regulated business. Regulatory compliance requires knowledge and skills that most members of a franchisor’s in-house team do not have. Failing to comply with state and federal regulatory requirements can have expensive and time consuming consequences for any franchise system. As a result, like it or not, operating in a regulated environment requires the assistance of lawyers and law firms.

While most people don’t like lawyers in general, but often proclaim to “love” their own lawyer, the business community uniformly hates the expense and unpredictability that outside legal fees wreak on a franchise company’s expense management and profitability.

The good news is that times are changing and, in many ways, the purchase of legal services is becoming a “buyer’s market.” The total demand for legal services experienced by outside law firms has not grown since 2007 and, as a result, many of these firms are more willing to “cut deals” with clients to secure new work or maintain existing client relationships. If you know how to play the game, you can both substantially reduce the cost of procuring outside legal services and develop a relationship that provides far more predictability to your budgeting process. With all that in mind, this article will outline the top ten steps a franchise company can take now to better control its outside legal spending in 2017.

  1. Use monthly retainer agreements

One of the best ways to reduce your fees and build predictability into your budgeting cycle is to move away from the hourly billing model and require that your firm bill you on a monthly retainer basis. To maximize efficiency, you should agree on the scope of services and the total amount you are willing to pay for those services over the course of the upcoming year. You then divide that amount by twelve and that becomes the monthly retainer amount. Your firm should understand that your needs for legal services will fluctuate month by month but, in the end, the service requirements should even out and both parties should be happy with the outcome at the end of the year. Any services required outside of the retainer agreement should be billed according to a separate fee agreement for those services.

  1. Employ Project Fees

A second key strategy for specific project work is to agree upon a fixed fee for the project prior to commencing the work. Project fees are an excellent way to control costs for a one-off project or a larger project that can be planned out and structured by the firm. Project fees can be used for any discreet project, from drafting a simple document to negotiating a lease, to completing a financing or merger project. The key is to request the project fee up front and to agree upon the scope and total cost before the project begins.

  1. Employ Success Fees

A twist on the project fee and a nod to the plaintiffs’ bar, which has long employed contingency fees, is the growing use of success fees by franchisors. Under this arrangement, the client and the lawyer agree upon the desired outcome in advance. The client then agrees to pay a base line fee to encourage the lawyer to take on the project, but the big incentive is the agreed upon fee payable to the firm if the lawyer successfully achieves the client’s goals. This type of arrangement can be employed in both transactional and litigation contexts. In the transactional space, the fee could be paid as a reward for completing a deal or successfully negotiating a resolution to a client problem. In the litigation world, success fees could be paid if summary judgment is granted or denied (depending upon the desired outcome), a favorable settlement is reached, or the lawyer otherwise secures a resounding victory.

  1. Negotiate a Discount

As crazy as it may sound, because demand for legal services has flattened, lawyers are much more willing to discuss discounts off of their “rack” or standard hourly rate. It is quite acceptable to ask for a discount off of that rate, often as high as ten or fifteen percent (be aware that the best clients in big firms can see discounts as high as twenty five percent or greater). One note of caution. Lawyers in large firm often have two “rack” rates: a standard rate and a premium rate which they apply to certain, specialized work or in certain markets accustomed to higher rates. Therefore, be sure the discount you receive is off the standard rate and not the higher premium rate.

  1. Request a Blended Rate

Most engagements performed by firms are staffed by a team of lawyers and paralegals. Each team member is billed out at a unique rate based upon that person’s educational degree, years of experience and status in the firm. One key strategy used by many larger clients is to ask the firm to have all work performed at a rate that is a blend of the various individual rates charged for the team members. On the one hand, this approach can work to your advantage if most of the work on your file is performed by senior members of the team. On the other hand, it can work to your detriment if the firm shifts a disproportionate share of the work to more junior members of the team. In such instances, you will end up paying an effectively higher hourly rate to have work performed less efficiently by less experienced team members.

  1. Employ Fee Caps and Collars

A “fee cap” is an upper limit on the amount that a firm can charge for a project. Unlike a project fee, which is a set fee that will be paid by the client regardless of the time invested by the firm, a fee cap allows the client to reap the benefit of very efficient lawyers who charge less than anticipated, while eliminating the risk that the cost of a matter will exceed the maximum amount the client is willing to pay for the project. In contrast, a “collar” is designed to limit the exposure a law firm has to a fee cap when the time invested by the firm far exceeds the amount budgeted. Collars effectively “stop the loss” experienced by the firm, and such arrangements are often times a requirement in order to induce the firm to agree to a reasonable fee cap. With all that said, the key for you is to ensure that, should the amount of recorded time exceed the collar threshold, the firm does not get to recapture all of the revenue beyond the fee cap.

  1. Require Your Firm to Prepare and Adhere to a Phased Budget

The law firm model is designed to shift the risk around legal fees away from the firm and entirely onto the client. However, if you require your firm to prepare and adhere to a budget, you can effectively shift that risk back to the firm. The key to implementing this strategy effectively for larger projects or disputes is to require your firm to break the engagement into phases and then build a budget for each phase. This is particularly helpful for litigation matters and multiphase transactional projects (i.e., mergers and acquisitions projects). By having a budget for each phase, you will have a better understanding of the costs you will incur as you move deeper into the project. Furthermore, as you come to the end of each phase, this approach gives you the opportunity to terminate the project or pivot in a different direction. Employing this strategy also requires firm attorneys to think through the process in advance and to manage each phase in your best interest. An added benefit is that this approach allows you to evaluate competing bids from multiple firms. Finally, creating and adhering to a phased budget for a project enables you to hold your firm accountable and to determine where the weak links are in the firm’s service and billing practices.

  1. Hire the Right Lawyer and Firm for the Job

When looking to engage a law firm for any specific legal problem or service, the firm with the “right fit” generally has the following characteristics: (1) Legal expertise in the issues facing your company; (2) Direct and extensive experience in your industry or marketplace, (3) Keen insight into the business opportunities or challenges you face; and (4) Strategies and recommendations for capitalizing on the opportunities and minimizing the risks associated with the challenges you confront every day. In addition to these four characteristics, there are two other factors that underlie a successful relationship. First, there must be a direct and tangible correlation between the fees charged by the firm for your project and the value provided to your company. In franchising, there are a number of excellent firms to consider, but many offer fee structures that simply do not provide enough value to a new or emerging franchisor. In fact, some of these firms are too expensive for even the largest of franchise systems. Second, and this factor can never be underestimated, you have to like and trust your key advisors at the firm. Nothing matters more to ensuring success than your ability to trust and enjoy working with the team that advises you on a regular basis.

  1. Reject Lawyers with Limited Experience and Expertise

This is a corollary to the topic addressed above. As a client you should know that most law firms often employ the “next man up” strategy when staffing client matters, which means they will always use internal resources first even if those resources do not deliver an exact match to the client’s needs. As a result, unsuspecting clients often find that junior lawyers and less experienced lawyers are learning their craft on the client’s dime and therefore add the least value to the client engagement. These lawyers are also the least efficient and require more senior lawyer supervision and review, which is also done on the client’s dime. The truth is that most large companies have policies prohibiting the use of first and second year lawyers on their files; so should you. In addition, never forget that junior lawyers have the most pressure to bill significant amounts of time in order to preserve their jobs. And finally, junior lawyers are the most overpaid based on their skill sets, as evidenced by the extreme and outrageous raises announced earlier this summer by more than 100 of the largest law firms in the country.

  1. Demand Collaboration with Alternative Legal Service Providers

It is axiomatic that law firms like to do everything in house and see every issue faced by a client as solely or predominantly a “legal” issue. This approach gives them both more control of each project and enhances their ability to bill the client. However, even the most basic legal projects can be disaggregated, or broken down, into smaller, more manageable pieces. Only in rare instances should the law firm provide the full spectrum of services on any given client project. Using alternative legal service providers as part of the team ensures that the right advisor is handling the right portion of each project. In addition to significant cost savings, companies like Axiom Law and Alexius excel at project management and the “blocking and tackling” legal work that firms cannot handle very efficiently. In the franchise world, this work includes regulatory compliance and registration filings, agreement preparation and documentation, intellectual property matters, and even many phases of a merger project (from due diligence all the way through the preparation of disclosure schedules and closing documents). Most importantly, alternative legal service providers are generally structured as traditional businesses, not run as law firms, which means that they offer fixed fee or project billings, avoid the inefficiencies and expenses associated with the billable hour model, invest in technology to enhance efficiency, better align their interests with those of the client, and deliver true value to the client in relation to the fees charged and the services delivered.

Mark Cohen, a professor at the Georgetown University Law Center and the owner of Legal Mosaic, had this to say in a recent blog post. “Service providers have grown in number and market share because clients realize many ‘legal’ tasks do not require law firms. Clients – not law firms – determine which challenges are ”legal” and require the specialized expertise and high-value legal judgment law firms provide. And for most everything else, legal service providers are increasingly the choice. . . . It comes as no surprise, then, that well-capitalized service providers – not law firms – are transforming the delivery of legal services. Not only is their structure different from law firms, but so is their DNA. It is linked to the business community it serves and, so, correlates service cost to client value.” (emphasis added)

Conclusion

Various developments in the marketplace for legal services are shifting the balance of power between law firms and legal service consumers. Although complying with the franchising industry’s regulatory environment still presents many challenges to franchisors, significant opportunities are emerging for franchisors to do so more efficiently and cost effectively as long as they are well-informed and strategic with respect to how, and from whom, they purchase legal services. Employing one or more of these strategies now will ensure that you reap the benefit of meaningful cost savings in 2017.

Author:

Kevin P. Hein, Chief Development and Strategy Officer, Alexius, LLC

Article Featured by the National Franchise Institute Reduce Outside Legal Fees

 

25Oct 2016

4 Reasons Solo And Small Firm Lawyers Can, And Often Do, Participate In Pro Bono Work (And Debunking Other Pro Bono Myths)

Need a Lawyer ?

When it is suggested that some attorneys refrain from participating because the areas of need are incompatible with their own breadth of expertise, a critical point is being missed. The most effective pro bono work is both referred to the private bar by experienced legal aid organizations and supervised by expert legal services attorneys. They are specialists, they work regularly with novices, they leverage their skills and background by providing oversight, guidance and mentoring. Combining the willingness of a good lawyer to help and the expertise of legal aid lawyers overwhelmed with cases and desperately in need of assistance, is an effective teaming of skills and resources. Small firm practitioners need not worry about never having handled an eviction defense case or a foster benefits appeal. They will get all the assistance they need and their participation will have a meaningful impact on the lives of the client they volunteer to serve.

It is a fallacy to assume that small firm lawyers are not in a financial position to engage in pro bono work “because every hour spent doing pro bono work is an hour that could have been spent billing existing clients or developing business.” True, small firms and solo practitioners have less ability to share their work responsibilities, juggle their matters, and rely on others than do lawyers in large firms, and that certainly may impact their ready willingness to handle pro bono matters, but that is an incomplete picture. Every attorney finds time to do the things that are most important to them. If they can create time in their busy schedules to work-out or cook healthy meals, they can find at least some time to help indigent clients. Each hour spent is not necessarily an hour that would otherwise have been devoted to a paying client. If it is important enough, lawyers will stay a little later or arrive a little earlier than they otherwise would have. The correlation of hours is highly suspect.

Other than having less money, and perhaps less experience with the legal system, most pro bono clients treat their attorneys as do any other type of client. They do not suck dry the time of their attorneys just because they are not paying for it. Good client intake, with help from an expert legal aid organization, more often than not yields clients who are grateful, who understand they otherwise never would have been able to access the high-quality legal representation they are being given. They are as respectful of time and effort as are commercial clients, no more and no less.

Most commercial clients are proud that their attorneys are engaged in the community and doing meaningful pro bono work. Lawyers proudly, and rightly, market their pro bono successes, often to their commercial clients who, just as often, take note. Clients are rarely resentful that the poor got free services for completely different types of cases while the commercial clients may have paid a hefty fee. Apples generally are not contemptuous of oranges.

Lawyers who provide brief service and advice to cold-call prospective clients who simply cannot afford to hire them indeed are engaged in legitimate pro bono work. Any contrary indication is the result of misunderstanding. Advising low-income would-be clients, and helping them navigate a legal issue or procedure, is a valuable service that when performed by a solo practitioner is every bit the pro bono assistance that a legal aid organization or a big firm would give.

While IOLTA funding for legal aid organizations across the country has fallen dramatically due to diminished interest rates, a combination of state bars, local governments, philanthropists, and legal aid organizations themselves have launched life-saving campaigns to try to make up for at least some portion of those lost funds. In California, for instance, new filing fees have been tapped for legal aid support, the legislature has been lobbied for more general-fund assistance, educational efforts have increased awareness of the impact and economic advantages of funding legal aid organizations, pilot project funding for the Shriver Civil Right to Counsel Act has been made permanent, campaigns have been launched to ensure that lawyers put their trust accounts in the highest-bearing interest rate banks available, and state bar dues bills have included new opportunities by which the private bar can provide support. Increased foundation fund-raising, and solicitation of more support from both the law firm and local business communities have yielded successes. True, these measures do not make up for the precipitous drop in interest rates, but those who care about the delivery of legal services to the poor have not sat idly by. A call to action is warranted, indeed, but there are platforms already are in place from which additional efforts can grow.

Some lawyers may be concerned about being unable to separate the truly needy who present meritorious cases worthy of attorney time and heart from those who are milking the system. But to allay those concerns, potential pro bono volunteers need look for comfort no further away than their local legal aid organizations. The strength of pro bono volunteers is built directly on the shoulders of our expert, full-time, fully dedicated legal services attorneys whose organizations and knowledge distinguish the fair from the unfair. Lawyers with the desire to fulfill our profession’s highest calling and provide access to justice for the indigent should direct their efforts to working in concert with their local experts. They will find professional intake staff who are skilled at evaluating cases for both pro bono eligibility and substantive merit. They will find lawyers whose job it is to supervise and lend outstanding and long-cultivated knowledge about the particular subject matters at issue. And with greater funding, greater numbers of those experts can be hired, and greater numbers of well-screened, well-supervised pro bono engagements will be the result. Private bar attorneys who do not rely on legal aid groups for pro bono referrals are missing the most effective, efficient and significant opportunities to touch the lives of those in need in the most meaningful of ways.

Finally, regardless of misperceptions and in addition to the pro bono work of major law firm lawyers, who annually contribute collectively as many as 5 million hours of representation of the poor, there are many thousands of lawyers working alone or in small firms who diligently serve indigent clients. They work with legal services lawyers, they do intake, they handle small cases, they team with others to handle larger engagements, they attend clinics, they work through bar programs, they volunteer through their churches, mosques and synagogues, they help low-income friends, and more. In other words, these lawyers are, and always have been, a vital part of the system of delivery of legal services to the poor. They do not minimize pro bono work nor are their pro bono services themselves minimized. They do what they can, they answer the profession’s highest calling, likely in the same numbers and percentages as other attorneys. They are to be thanked.


David A. Lash serves as Managing Counsel for Pro Bono and Public Interest Services at O’Melveny & Myers LLP. He can be reached at dlash@omm.com. The opinions expressed are his alone.

http://abovethelaw.com/2016/10/4-reasons-solo-and-small-firm-lawyers-can-and-often-do-participate-in-pro-bono-work-and-debunking-other-pro-bono-myths/

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