Billable Hour Alternatives
The billable hour has long been a staple of the legal profession. But as companies watch their balance sheets more closely, local lawyers say their clients are increasingly hesitant to pay fees that can exceed $500 per hour.
“Our clients are much more sophisticated consumers of legal services now than they’ve ever been,” says Andy Ritten, a partner in Faegre & Benson, LLP’s corporate practice group. “They’re saying: Why is the billable hour the be all and end all?”
Many local firms say that it isn’t—and all indications point to a permanent shift toward alternative fee arrangements, although the types of arrangements vary by firm and by practice area.
“There are as many alternative fee arrangements as there are clients and lawyers,” says Pierce McNally, a senior attorney at Minneapolis-based Gray Plant Mooty whose practice areas include business law and entrepreneurial services.
One common arrangement is some variation of a flat fee. Minneapolis-based Bowman and Brooke, LLP, which handles litigation defense, primarily for product manufacturers, has had a flat fee arrangement—an annual retainer that covers a number of cases—with one of its largest clients for more than five years, says founding partner Richard Bowman.
There’s definitely some risk involved, Bowman explains, but the firm cautiously weighed its fixed fee arrangement before offering it to clients, to create a cost structure that would be reasonable for the client and the firm. In its first flat-fee arrangement with one of its largest clients, the firm charged hourly rates for the first three months of a case. After the attorneys were familiar with the details of the work, they offered the client a flat fee to finish the case.
Minneapolis-based Faegre & Benson has also offered various flat fee arrangements. In the transactional practice area, flat fees have been offered in exchange for a certain volume of work.
Take a client who wants to pay $40,000 for the firm to represent it in acquiring another company, even though the law firm determines that the representation would likely cost $80,000 under an hourly billing structure.
“We’ll say, if you can give us a steady diet of this type of work—say six deals over the next year—then we’ll do it,” Ritten explains. Under such an arrangement, the firm becomes more efficient with each subsequent transaction—thus allowing it to later recover from some of the monetary losses on the initial deals. However, the firm would only enter into such an agreement if each acquisition was guaranteed to be substantially similar. For example, an agreement may specify that the client is a lead investor in all of the corporations being acquired, and a banker or broker is involved.
“Both sides lay out with great specificity what is expected when alternative fee arrangements are entered into,” says McNally, whose firm also has offered flat fee arrangements.
Some of Gray Plant Mooty’s arrangements have involved a fixed fee minimum and maximum. For certain types of representation in which it’s difficult to gauge what to expect, the firm may not be comfortable deviating too much from the hourly rate but might offer the client a range with a cap.
Faegre & Benson has also offered some clients discounts on “rack rates”—percentage reductions for a certain amount of work that’s performed within a specified period of time, typically a year. For example, the firm might agree to provide a certain discount if a company sends it $500,000 worth of work within a 12-month period, a slightly higher percentage discount for $750,000 worth of work, and so on.
Some discounts and flat fees take the form of an annual contract, another common type of alternative fee arrangement.
Bowman says his firm has arranged a flat fee with some corporations to handle a specific type of recurring litigation over the course of a year. For example, an auto manufacturer might ask for an annual contract to handle suits involving roll-over accident cases.
Under such arrangements, the firm’s expertise grows and each successive lawsuit takes less time because the firm goes in with greater knowledge and must perform less research—creating a win-win situation for both parties.
But there are still unknowns that create a certain amount of risk. “What you don’t know is how many cases you will settle or get rid of during the year,” Bowman says. “Will your case load double or triple? If the plaintiff’s lawyers get busy advertising, there could be a sudden spike in claims.”
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Most attorneys agree that alternative fee arrangements do involve some trial and error. Sometimes they work in the firm’s favor; sometimes they work in the client’s favor.
Fortunately, there are several “relief valves” for both firms and clients when one party incurs a loss, Bowman says. It’s not uncommon for clients to give a bonus in cases where an alternative fee arrangement didn’t cover all the work that the law firm performed. Monetary relief for either party also can be built into the next fixed-fee arrangement or annual contract.
“There are win-wins to be had here provided that both sides recognize that the other side is running a business and . . . that either side is entitled to a fair margin or a fair return on investment,” Ritten says.
Attorneys say that the majority of alternative fee arrangements, and the most complex types of such arrangements, are made with clients with whom there is a high-trust relationship. Each side needs to feel confident that there will be some reprieve if things don’t go as planned.
Little data is available regarding the prevalence of alternative fee arrangements, but Bowman estimates that about a quarter of his firm’s annual revenue comes from them. At Faegre & Benson, 35 percent of annual revenue comes from non-hourly rates; five years ago, it was 25 percent.
Unquestionably, alternative fee arrangements will grow in prevalence, Ritten says, and firms will continue to explore which arrangements work best for which types of work.
Faegre & Benson has assembled a group within the firm that’s charged with learning some of the possibilities for alternative fee arrangements and investigating fee structures for each practice area that the firm can offer for future cases.
“Have we taken losses on these deals? Yep,” Ritten says. “Have we ended up scoring real well on these deals? Yep. Are we expert at it yet? Nope. We’re learning all the time.”