Who Killed the Billable Hour?
Alternative legal fee arrangements.
January 11, 2010
Who killed the billable hour for law firms? The answer is … no one yet. But companies, including CPA firms, are beginning to take advantage of alternative fee arrangements.
Lawyers, like many CPAs and other professionals, often charge by the hour. But as corporations cut their legal budgets and clients seek to otherwise lower costs, alternative fee arrangements are becoming more prevalent. What follows is a discussion of these alternatives and how CPA firms and other companies can take advantage of them.
The Changing Landscape of Legal Fees
The billable hour has been around for decades. But companies are cutting budgets across the board. And these same companies are demanding more predictability in budgeting. While this may be easy when figuring out the cost of producing or buying a widget, it can be a tall order with litigation, where many factors, including the opposing party and the court, may be uncontrollable.
For these reasons, the billable hour is not always consistent with the client’s goals. As a result, law firm clients are looking, and often demanding, alternative fee arrangements. Most of these arrangements try to better align the client’s goals with the attorney’s, and shift some risk (along with a corresponding potential reward) to the attorney.
Alternatives to the Billable Hour
So what are the alternatives to the billable hour? The most common arrangement already in place is the contingency-fee agreement, whereby the client pays nothing and the attorney obtains a percentage of any judgment or settlement (sometimes the client will pay for out-of-pocket costs). If there is no recovery, the client still pays nothing, and the attorney receives nothing. This has long been the territory of personal injury lawyers. But attorneys representing corporations in business litigation are now also coming into the picture. Securities fraud, insurance coverage, and contract disputes, among others, are now also the subject matter of lawsuits that attorneys for corporate plaintiffs are willing to take on a contingency-fee basis.
A hybrid arrangement is partial-contingency, whereby the client pays a reduced hourly rate and the lawyer receives a percentage of the recovery, albeit a lower percentage than what would be typical for a straight contingency case. Or, the lawyer might receive some other success fee based on the outcome, including staggered fees tied to different results.
Flat fees are yet another option: the lawyer agrees to handle the engagement for a fixed amount. This may work best where a company has repeat work of a specific kind — perhaps routine enforcement of non-compete clauses for a CPA firm, or defending mandatory arbitrations for a brokerage firm’s customer disputes. These or similar arrangements can help place a limit on the upper end of attorneys’ fees. Where a company has this type of repeat litigation, volume discounts should also be explored.
Blended rates are also a derivation of the straight billable hour. Rather than paying different billable rates for each lawyer working on a matter, the firm agrees to charge a single rate for all lawyers, whether it be the senior partner or junior associate. Hourly billing might also be modified so that the client pays a set amount every month, irrespective of the actual invoice amount. This allows more consistency for the client on a month-to-month basis, with a reconciliation of any over- or under-payment at the end of the year or the lawsuit. Indeed, some clients now place more priority on adhering to a set budget than the actual cost of litigation.
Use of Alternative Fee Arrangements
The foregoing are only examples. Alternative fee arrangements are limited only by the client’s and attorney’s creativity. Most of these alternatives are designed, from a cost perspective, to align the client’s interests with the attorney’s. Because while an attorney is required to act in the client’s best interest, the biggest complaint about the billable hour is that it can reward inefficiency — the longer something takes, the more hours that are billed by the law firm (although one would hope that most lawyers take a long-term view and recognize that, over time, clients will prefer and continue to give work to lawyers who can get the best result in the most efficient manner). On the other hand, some clients prefer the simplicity of the billable hour, which is one reason it became the standard method of billing years ago. To work, all of these approaches will require mutual trust on the part of lawyer and client.
Alternative fee arrangements can benefit companies big and small. And it is not limited only to plaintiffs. While these arrangements may be more common for plaintiffs, who are seeking to recover money or other relief, they can be used by defendants as well. For example, a corporate defendant threatened with millions of dollars in potential damages may arrange a fee agreement with incentives based on how much money they save, or if they can resolve the matter below a certain dollar amount.
Clients will ultimately determine whether alternative fee arrangements become a standard practice. Either way, it is almost certain that these arrangements will become more prevalent. This may eventually impact litigation support providers as well, who like attorneys, may be forced to reexamine billing methods. This sea of change will be welcomed by some, and feared by others. But opportunities exist for clients, lawyers and other service providers to better align their interests, and ultimately, their fortunes.
The billable hour is not the only way. Alternative fees can provide a useful arrangement for managing legal expenses. And when used properly, they can be a win-win for client and counsel. Next time your firm or company is involved in litigation, be sure to consider these options.
Jason M. Rosenthal, JD, is a partner with Schopf & Weiss LLP, a national business litigation firm based in Chicago that has been using alternative fee arrangements for several years. For more information, please contact him at 312-701-9300.