CREATIVE BILLING ARRANGEMENTS
by Joel A. Rose
I. Description of Alternative Billing Methods
- Discount for Volume Work/Reduced Hourly Rates
- According to recent surveys, discounted hourly rates for volume or routine work is the most common “alternative.”
- Outside counsel provides a percentage discount based on the volume of work provided by the client. They may agree to a sliding scale with a greater discount as the volume of work increases.
- To maintain profitability while discounting its usual rates, a firm must be sure that it has an efficient practice management structure and that it periodically reviews the arrangements to make sure that it is still able to make money at the discounted rates.
- Aetna uses this method frequently in employment law and employee benefits and problem loan matters. Outside counsel reduce their rates (approximately 15%) in exchange for volume. Aetna also develops a budget and cap for each matter and limits the number of firms assigned to those matters.
- Reduced Hourly Rates with an Incentive Bonus
- The firm significantly reduces its standard rates, but has the potential to receive a bonus based on satisfactorily achieving a pre-established result or resolving the matter within a specific time frame.
- For example, an Aetna surety bond case involving a coverage dispute centered on which of two fixed amounts Aetna had to pay $27 million or $54 million. The firm agreed to a reduced hourly rate to create shared risks and a bonus of 2% of the disputed amount. The encouraged settlement, from which the firm was to receive 5% of the amount saved in settlement, capped at the value of the bonus for successful litigation.
- In another example, a client wanted to negotiate termination of lease, but could not pay the firm’s standard rates. The firm agreed to reduced hourly rates and a bonus which was a percentage of the amount saved over the life of the lease (if successful in the negotiations).
- Another firm worked on a deal in the early stages agreed to charge reduced rates for the work if the deal did not go through, but premium if the deal did go forward.
- Fixed Fee for a Project
- Inside and outside counsel agree on the charges for specified matters. This method tends to reward firms that are well organized and delegate appropriately.
- For example, Aetna uses this method on relatively simple cases from the property/casualty claim company as well as for foreclosures and loan modifications.
- Fixed Fee for all Work in an Area
- For example, a firm handled all of a client’s employment litigation in one year for a fixed fee. The fee was based on an analysis of the client’s historical costs for litigation in that area.
- Fixed Fee for Expert System
- For example, a firm developed a software program for drafting construction loan documents for a client. The “development hours” for developing the program were preserved in a special account. The client is charged a $1500 transaction fee each time the document assembly program is used.
- Budget/Fixed Fee for Various Stages of the Work
- Outside and inside counsel agree on a budget for each stage of a lawsuit. At pre-established checkpoints, they compare the budget with the actual fees billed. Credits and debits are recorded based on the firm’s recorded billable hours, i.e., whether fees were under or over the established budget. At the end of the matter, the firm would be eligible to receive an added payment if the completed work were under budget or might have to reduce the bill if more hours were expended than originally anticipated.
- This method usually includes regular meetings with representatives from both inside and outside counsel as well as a representative from the corporate department for which the work is being done. These meetings provide an opportunity to adjust the budget estimate depending upon how fees up to that point compare to the original estimate.
- Generally, this method requires task based billing.
- Unit Pricing
- This is similar to budgeting for various stages of a case. However, payment is triggered by the completion of discrete tasks rather than by stages of the proceedings. For instance, the pre-trial work may be broken down into such categories as filing answers, taking depositions and answering interrogatories. The client pays a separate set fee for the completion of each task, regardless of how long the task takes.
- Blended Hourly Rate
- All lawyers and paralegals are billed at the same rate. This method is most appropriate for long-standing relationships where the client trusts the firm to delegate work to the appropriate expertise level regardless of standard billing rates.
- It is most appropriate for matters that require lawyers at various levels.
- Hourly Rate, Plus a Premium
- The firm and client agree on the hourly rates that the firm will charge for a particular matter. Then, depending upon the results, the firm receives a premium to reward it for providing the client with greater value than the normal hourly rates indicate.
- Per Diem Basis
- The firm is paid for the number of days spent on a project rather than by the hour. This approach is most appropriate for larger assignments that demand extensive effort by several individuals. The firm might charge a blended daily rate or daily rates for each individual involved in the project.
- Capped Fee
- The client contracts with the firm for a “not to exceed” fee on a particular project. The firm charges its standard hourly rates, but if the final fee exceeds the cap set at the beginning, the firm does not realize its full fees.
- Range of Charges
- The law firm and client agree to a range of charges depending upon the results of the case. For example, the firm might charge 125% of its normal rate for a successful result, but only 80% for lack of success. This requires both parties to define success and could lead to an adversarial relationship between the firm and its client.
- Reduced Hourly Rates and Contingency
- The firm charges a reduced hourly rate, with a bonus based on result. For example, if both the client and firm agree that a $2.5 million payment would be a good result in a defense, they would receive a percentage of any amount less than $2.5 million.
- Combination of Hourly Rates and a Fixed Fee
- The firm charges its standard hourly rates until the nature and scope of the problem are defined. At that point, a fixed fee is set for the remainder of the work.
- Hourly Rate for Defense Work and a Contingency Arrangement for a Cross-Complaint
- The firm charges its standard hourly rates for defense-related work and an agreed upon contingency for cross-complaint work.
- Much of the work required to defend an action is also needed to prosecute the cross-complaint. Consequently, it is difficult to determine how to apportion the time worked for purposes of computing the hourly billing charges.
- Hourly Rate for Plaintiff’s Work up to a Certain Amount and a Contingency Arrangement Thereafter
- The firm charges its standard rates until it reaches a certain pre-established limit. From that point forward, the firm receives a percentage of the reward.
- Reverse Contingency Fee
- The firm is compensated based upon a percentage of the money saved by the client as a result of the firm’s work. The fee is computed by comparing the client’s potential exposure with the final results. The client pays the firm a predetermined percentage of that difference.
- Dedicated or “Rented” Lawyer
- The firm assigns a full-time lawyer to the client for a fixed term. This method is generally used to meet temporary staffing needs.
- For example, Aetna used this arrangement when it experienced a surge in problem real estate loans. Aetna paid the firm the lawyer’s salary, plus a premium for benefits.
- Pure Value-Billing
- This method can be highly profitable to firms that perform unusually risky or high-stakes work. It is typically used for specialized matters and reflects the expertise required to address complex cases. This method requires outside counsel to trust the client’s ability to assess and value the results highly enough to provide fair compensation.
- The mechanism for setting the fee must be clearly specified before work begins. Among the factors considered in value-billing are the time and labor involved, the difficulty and complexity of the matter, the level of skill required, preclusion of other employment, customary fees in similar work, the amount of money involved, the results, and the experience and reputation of counsel. The client and firm consider these factors to compute the fee based on the value of the services the client receives.
- Provisions for binding arbitration should be established at the outset in case there is a dispute as to the value of the results. Unfortunately, this could set the firm in an adversarial position with its client over the value of the work, which could impair long standing relationships.
- Piece of the Action
- This method is extremely risky and requires the firm to “get in bed” with its client. It is most appropriate when there are new opportunities such as start-up companies or unknown artists or entertainers.
- This method can lead to significant conflicts of interest between the client and the lawyer. The law firm may lose sight of its need to provide the best legal advice, if that advice could result in a lower financial reward to the firm.
- Some firms have structured these arrangements to receive some other form of payment for part of their efforts and take a piece of the action as final payment.
- Contractual Retainer Agreement
- The firm charges a flat monthly or annual fee to cover certain types of routine services or advice. In order to avoid confusion, the firm and client must be very clear about what services will be covered under the retainer and what services, if any, could result in additional charges. Although the firm takes a gamble with this type of arrangement, it permits the client to receive more “preventative” advice without worrying about the costs involved.
- For example, Wachovia Bank as contracted with a few large law firms in an arrangement that allows bank officers to call any lawyer at the firm and get two hours of advice for a set monthly fee.
- Lodestar Formula
- Several courts use this mathematically based approach to set allowable fees. It uses a multiplier and relies on hourly rates and other pertinent factors.
- Use of this approach necessitates agreement by the parties on the factors to be considered before the work begins. Reasonableness with respect to time spent and expenses are the key to this method.
II. How to Determine Which Alternatives are Right for You and Your Clients
- The types of billing methods that are most appropriate for your firm will depend on the type of law you practice and your clients.
- Analyze your practice to determine which methods are most appropriate.
- Kinds of legal work
- Although exact breakdown depends on the firm’s practice, there are basically three kinds of legal work:
- Unique services (5%)
- Reputation/Brand Loyalty (20%)
- Bread and Butter & Routine Commodity Work (75%)
- The alternative billing methods that are appropriate will depend on your practice.
- Determine whether your current accounting and timekeeping systems will allow you to prepare budgets or determine the costs of legal services or parts of services.
- Survey your clients regarding their needs and preferences.
- Understand what your clients regard as the strengths and weaknesses of your current billing systems and fees.
- Understand “pricing” as it relates to value as perceived by your clients.
- How to Launch the Project
- Inventory the firm and select clients for prior “alternatives” and successes.
- Select a test group of lawyers, departments, clients.
- Analyze the processes, matters, functions that go into delivery of services and break into components.
- Talk to clients.
- Analyze components for inefficiencies, problems, opportunities.
- Re-engineer the components and the process for efficiency and productivity. For example:
- Reassign responsibilities
- Eliminate functions
- Use technology
- Develop a system
- Develop a pricing plan based upon client preferences or competitor pricing. Make sure that your accounting and billing system can support the alternatives.
- Test with clients.
- Revise strategies based upon tests.
- Keep track of results.
©1999-2017 Joel A. Rose & Associates