Beta, fixed-fee arrangements with law firms, and some beta-blockers that you better understand to abate beta

If you ask a law firm to propose a set fee to handle a future stream of your legal services, if they take into account the range of the possible mixes of those services, if they conjure up all the exceptional matters and cases they might handle, they will inflate their fee to cover themselves from volatility. Their fear of beta, the degree of flux of the future, drives up their fee, “just in case” (See my post of May 16, 2006: law firms also worry that clients will over-reach if they get a fixed fee.).

Contrariwise, to the degree you can shrink the firm’s perceived beta, the fee you negotiate will shrink (See my post of April 17, 2006: beta of a group of cases; April 27, 2006: beta and levels of risk; May 17, 2006: beta in the stock market as a concept; Feb. 19, 2007: standard deviations as measure of volatility; and May 8, 2007: alpha and beta figures for outside counsel rate increases.).

One way to abate beta is to state assumptions. Propose based on “No more than one SuperFund investigation during the two years” (See my post of Oct. 31, 2005: state boundary conditions.),

Another way is to increase the amount of work, the portfolio, so they can spread the risks across more matters (See my post of June 2, 2010: portfolio and risk notions with 7 references.).

Third, collars on the fees serve as beta blockers (See my post of Dec. 7, 2005: collars to prevent injustice; and Jan. 6, 2010: a wide collar with HP.).

Fourth, agree on performance milestones (See my post of Feb. 16, 2006: performance milestones.).

Fifth, study the actual fees incurred and compare the accumulated totals to the ultimate fixed fee amount. A mid-course correction serves everyone better than a rough patch at the end.

As a sixth ameliorative, gather statistics on the frequency of events that would distort the fixed fee. Historical data from you matter management system has great value here. Real data helps with collars, assumptions, probability calculations, and negotiations.

Seventh, don’t drive too hard a bargain. The winner’s curse should not doom the firm that takes on your work (See my post of Jan. 14, 2007: auctions and the winner’s curse.).

And, lest we forget, deal trustingly and in good faith with firms as well-meaning, hard-working professionals, unless proven otherwise.