Hourly Billing Loses Ground as Pressure for Flat Fees, Other Breaks Outlives Recession
By JENNIFER SMITH, Wall Street Journal
The recession is over, but clients who won concessions on their legal bills when law firms were scrambling for business still are calling the shots when it comes to paying by the hour.
Exhibit A: the steady spread of flat fees and other alternative fee arrangements as companies continue to press their outside lawyers for options besides traditional hourly billing. Once a relative novelty, such demands have become routine.
“For us, it’s no longer a necessity just because of the recession,” said Don H. Liu, general counsel for Xerox Corp.XRX -0.38% “It’s now part of the normal process.”
Critics, including many in-house lawyers, have long argued that charging by the hour creates incentives for law firms to drag matters out, and can lead to sticker shock when clients get the final bill. The power balance changed during the downturn, allowing companies to demand price breaks from law firms.
Now, even as business recovers, law firms are doing more work for set prices, or under agreements that pay lawyers more if their client prevails, than they were during the recession.
At large law firms, the percentage of revenue from alternative-billing arrangements is expected to hit 13.4% this year, nearly double what it was in 2008, according to a Citi Private Bank survey of managing partners from 40 U.S. firms.
The shift hasn’t happened overnight, nor has it always been easy for law firms, which now have to come up with a price that works for the client but still makes money for the firm. To help, some firms have invested in accounting software or set up programs to crunch numbers from past cases to show how much time and effort certain types of cases involve.
“It’s a learning process, and it takes awhile,” said Jack Allender, head of the tax department at Fulbright & Jaworski LLP and a member of the firm’s alternative fee committee. “Hourly was easy. You just went to work in the morning, worked on your matter, and went home.…We’re trying to work with our clients and make them happy. But it is more of a burden on the lawyers.”
To be sure, the billable hour is far from dead. Most law firms continue to charge by the hour, and some in-house lawyers remain as uncomfortable with the idea of alternative-fee arrangements as the outside firms they engage.
Even corporate general counsels who embrace alternative billing say it isn’t suitable for all matters, particularly for critical “bet the company” cases, in which outcomes are more important than price.
But the number of companies seeking novel arrangements is on the rise and expected to grow further. In 2011, 61% of U.S. general counsel in a Fulbright & Jaworski survey of 405 companies said they used alternative-fee arrangements, up from 48% in 2009.
The rise of alternative fee arrangements speaks to a deeper change in the relationship between law firms and their clients.
Many companies now seek much more detail about how law firms plan to execute the work. Should one partner—not three—attend a deposition? Will routine legal work, such as document review, be outsourced to cheaper contract lawyers?
Some lawyers chafe at the extra scrutiny, and many grumble among themselves about the increasingly detailed requests for proposals from companies seeking bids for legal work. But others have seized on alternative billing as a way to stand out from the competition.
Lawyer Eido Walny uses flat fees for about 90% of the business at his small estate-planning firm in Fox Point, Wis.
Mr. Walny said it helps him compete against larger law firms, and it also helps his relationships with clients, who know they won’t be charged for a quick phone call.
These days even some of the most elite, and profitable, U.S. law firms offer some form of alternative pricing for more routine work—if only to keep valued clients happy. “We might do it for pieces of litigation—for a motion to dismiss,” said a managing partner at one prominent Wall Street firm, where alternative-fee arrangements now account for 10% to 15% of revenue, compared with 1% to 5% a few years back.
Before hourly billing became standard practice in the 1970s, many lawyers charged their clients a set fee per assignment, or issued intermittent one-line bills “for services rendered.”
Keeping track of time lawyers spent on a matter—and charging accordingly—made for more detailed bills that, according to some minds at the time, provided greater accountability to clients.
But, as rates rose in the early 2000s, some in-house lawyers at large companies who wanted to save on legal bills began to ask law firms to work for flat fees, or to share some of the risks of litigation by working on contingency or under deals offering bonuses for favorable outcomes.
The recession gave clients more leverage, and the popularity of alternative billing took off. In recent years financial institutions and other big corporate clients have jumped on the bandwagon.
The approach has paid off at GlaxoSmithKline PLC. GSK -0.66% Alternative-billing arrangements now account for 63% of the more than $100 million the company spends each year on outside law firms, compared with 3% back in 2008.
“It has saved us tens of millions of dollars,” said Dan Troy, the company’s general counsel.
Write to Jennifer Smith at firstname.lastname@example.org