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Timing Key to Alternative Billing

By Audrey Rubin

Everyone’s talking about it: alternative fees. The legal press reports weekly on the issue. In addition to my first and second Lawdragon columns, a recent Corporate Counsel survey shows that "The Bell is Tolling for The Billable Hour" and another article in that publication quotes the Qwest general counsel as describing alternative-fee arrangements as a “colossal train wreck.”

But what actually is it? And how radical is it?

Fixed fees? This is probably the form of alternative fees representing the most change. But even fixed fees aren’t totally new: Bond counsel, workers’ compensation counsel, estate planning lawyers, attorneys in smaller real estate deals, and others have been charging fixed fees all along.

In areas of least predictability e.g., litigation, and large transactions, fixed fees cause firms and clients the most concern. Both sides fear that they will not be able to adequately estimate the cost of the product, and that one side will lose a lot.

But the fact is that clients and firms can set fixed fees based on existing information. When fixed fees are set in stages, after jointly establishing a client’s goals and how the firm will deliver its services, they can markedly enhance client relationships. The article Seven Sigma discusses Seyfarth Shaw’s success at using alternative-fee arrangements to win clients.

Over a year ago it was reported that two thirds of the Am Law 200 firms had fixed-fee deals in their pipelines. Yet there remains huge push-back from clients and law firms to the fixed fee approach.

Caps? When hourly rates include a cap, they aren’t alternative at all: They’re just regular old hourly charging with the possibility of an end “discount” if the firm has not properly assessed or closely managed the project.

Discounts? Discounted rates aren’t alternative billing either: They’re a mechanism for clients to feel that they are saving money off of market rates, when, under this scenario, the charges are still hourly, and may have been artificially inflated in order to then discount them. It’s like a department store raising its prices just before the Labor Day sale, in preparation for discounting the prices a week later.

Quantity Discounts? Some clients negotiate a larger discount to the hourly rate based on the amount of work they give to the firm. This is still a blend of hourly billing with discounts, simply adjusted according to volume.

Value Billing? If the success premium or hold back is based on a flat fee, then this method is virtually a flat fee plan with a terrific marketing spin. If the client holds back or pays a bonus based on hourly rate invoices, then this is a well-phrased version of the billable hour. For those who claim value billing aligns the interests of the clients and the outside counsel, I say so does any plan other than straight hourly billing.

So what really is alternative billing? Real alternative billing requires an up-front investment by inside and outside counsel to set expectations and understand costs of delivering the service. Anything other than that – anything based on the selling of time as opposed to the selling of a desired product – may be heralded as alternative and new, but in fact is just a modified version of the same old billable hour practice.

About the author: Audrey Rubin is the president of Rubin Solutions, Ltd. Rubin Solutions specializes in implementing profitability improvement methods at firms. “We will – without a doubt – make you more profitable.”

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