Modify Fees to Meet Competition, Client Demands

by Joel A. Rose

More privately and publicly owned businesses are "shopping around" to retain high quality attorneys in smaller and midsized firms — who are not necessarily the most expensive — as an alternative to referring all of their legal work requiring outside assistance to their "traditional" larger firms.

Cost-conscious clients are less loyal to established firm relationships. In addition to retaining individual attorneys in different firms to perform specific legal work, it is common for business and corporate clients to negotiate fees, seek volume discounts and for certain types of matters, to propose flat fees and contingency/risk forms of billing.

Privately owned businesses, with and without in-house counsel, and publicly owned corporations, have legal matters that are suitable to be performed by smaller and midsized firms that may be billed using alternative billing methods. These matters are usually of a repetitive nature, or largely standardized, that lend themselves to a flat fee per transaction, or a flat fee per time measurement such as monthly or quarterly.

Client incentives: Many smaller and midsize firms are offering financial and nonfinancial incentives to bond their relationship with existing clients and to foster new relationships with potential clients.

Examples of incentives offered to existing clients include: a day at the client's business location without charge to learn about the nature of the client's business; sharing of firm form agreement files with staff attorneys without charge; presentations on current legal trends to business staff where appropriate; training for members of the in-house legal staff when presentations are being offered to firm personnel.

Where the firm is "betting" on future engagements, incentives offered selectively to potential clients may include free or discounted services, with the expectation that full-rate charges will be provided at a later date; attendance at corporate meetings without charge in return for future representation when the company or a new subsidiary organization is formed.

Hourly billing: Three variations of hourly billing include percentage discounts, reduced hourly rates and blended hourly rates.

Percentage discounts ~ discounts on standard hourly rates based upon the volume of all or selected types of work performed ~ are the most frequently applied alternative. To obtain a greater volume of legal work from particular clients, more firms are offering volume discounts on fees, based upon an overall level of fees charged for services performed. These frequently take the form of stepped-up discounts.

Further, many firms that serve clients who can refer third parties to the law firm offer discounted rates for work performed for the client's account and, with the client's knowledge, add a surcharge to the fees for work performed for third parties.

Reduced hourly rates are another option. Many firms agree to reduce their standard hourly rates with the understanding that a standard or pro rata performance bonus will be received in the event of a successful conclusion or upon concluding the matter within a specified time.

The amount of the bonus is based upon a formula, which relates to a predetermined gain or loss in terms of dollars or assets, or savings of payments for the client derived from completion of the matter within a given time. Other firms may charge their standard rates if the transaction closes and sharply discount these rates if the deal craters.

A third option is blended hourly rates. With the blended rate, a client is billed the same hourly rate whether the work is performed by a partner or an associate. As such, this arrangement is suitable in those established relationships where the client can trust the firm to assign work to the attorney who possesses the appropriate expertise to perform the work.

To implement the above variations of hourly rates and to maintain or increase the level of profitability, lawyer management must analyze the organization and management of each of its practice areas to ensure that quality legal services will be provided in a timely, efficient and cost-effective manner. To accomplish this, partners must select which clients and practice areas to make available for alternative billing arrangements and to invest their time to manage each practice area.

Attorneys, paralegals and administrative personnel must be trained and substantive practice areas systematized and automated to the extent possible.

Fixed-fee billing: Under the fixed-fee arrangement the firm and the client agree upon the fees to be paid for all of a client's work, or all of a client's work in a particular practice area, or for particular elements or tasks, or for various phases of work. Fixed fees are frequently determined for specific discrete repetitive jobs where what is being done and the time it will take to perform this work is reasonably predictable from historical experience.

Clients prefer this arrangement because their total legal fee for this work is certain. It is easy to budget in advance. Legal costs may be reduced if the fixed fee is less than the historical cost paid by the client for similar legal services. The risk of unexpected or unanticipated events in whole or in part and the burden of managing the work for efficiency and cost containment is shifted from the client to the firm. Further, the fixed-fee arrangement assures involvement of input by the client in projecting the cost of legal fees for services to be rendered and in determining what will be the strategic performance choices and when they will be carried out.

The above advantages notwithstanding, a fixed-fee arrangement may limit for the client the choice of firms willing to represent that client. This is especially true in a "seller's market" or on a legal market having considerable uncertainty. Also, setting of a fee-cap may result in the unwillingness of a firm to undertake marginally unprofitable work that may be important in achieving the result desired by the client. Corner cutting can be avoided by a re-opener provision that encourages a firm to identify, discuss and then pursue additional work with the client's approval.

Fixed-fee billing, properly structured, offers many advantages to the firm:

First, it assures regular work and cash flow, provided the client is willing to pay some portion of the fixed fee in installments.

Second, it allows the firm to become an approved provider of legal services for that client.

Third, many firms consider the fixed-fee arrangement as being a "reward" to those long-term, loyal, high volume clients so as to keep them happy with your firm.

Fourth, a fixed-fee arrangement that is fair to the client and the firm permits the firm to employ other attorneys and staff and to acquire technology and other services with less risk to the firm.

Fifth, the firm may have an opportunity to negotiate for other "premium work" from the client if favorable results are achieved.

Sixth, the fixed-fee arrangement increases for the firm the opportunities for positive communications with the client without the inhibition of a "running meter."

The fixed-fee arrangement requires a specific and detailed definition of the work to be performed and a careful estimate of the hours needed to complete the job under this arrangement. Firms that enter into this arrangement must be careful about what is excluded from the contract and what is included. Considerable thought must be given to determine how "extras" will be billed.

Unit prices and "capped fees": Unit pricing, a variation of the fixed-fee arrangement, is usually determined for various tasks or phases of a matter, with payment being made upon the successful completion of the agreed upon task or phase. Payment for each is usually a set amount, regardless of how long it takes to complete.

A "capped fee" is a modified form of a fixed fee. Under this arrangement, the client and the firm agree that the fees to perform specific work will not exceed a certain dollar figure. The firm may charge its standard hourly rates however, beyond a certain maximum limit, the client will not pay more money.

Contingent arrangement: A contingent arrangement is when the firm is paid upon results achieved. This arrangement is usually in combination with some other billing arrangement. Examples are: Reduced hourly rates with a bonus based upon results achieved; and Standard hourly rates charged up to a specified time/dollar value and a contingency arrangement thereafter that dollar value has been reached.

The type of legal work performed for your clients, the nature of your client base, the competitive environment in which your firm practices and the client's perception of the value of the legal work performed will be critical factors in determining two things: Whether your firm should volunteer; or React to external pressures for alternative billing arrangements from your clients or as the result of competitive pressures created by other firms. Your partners' responses to the following questions will offer valuable insight about the firm's willingness and ability to "accept and live with" one or more types of alternative billing arrangements.

(1) What is your firm's attitude/commitment toward alternative billing arrangements?

(2) Do your partners possess the necessary skills to implement alternative billing arrangements?

(3) Are there existing or potential clients that your firm may better retain, attract and serve by being willing to agree to alternative billing arrangements?

(4) Do your competitors' firms offer alternative billing arrangements?

(5) In which practice areas is it possible/appropriate to offer alternative billing arrangements?

(6) Does your firm have a plan to develop the necessary skills to implement alternative billing arrangements with specific clients?

If your partners' responses to most of the above questions are of a positive nature, and if consensus is reached among the partners to implement one or more alternative billing arrangements, the following should be considered to develop appropriate strategies for selecting and managing the most appropriate arrangements that will be satisfactory for the firm and its clients.

(1) Analyze your practice in order to select which clients and/or which practice areas you will propose to make available alternative billing arrangements.

(2) Select which form, or forms, of alternative billing arrangements your firm will make available, and what percentage of your firm's legal work you will handle under alternative billing arrangements.

(3) Determine whether your firm's accounting and bookkeeping systems will enable you to prepare budgets or determine the costs of legal services or segments of services.

(4) Survey your clients regarding their needs and preferences.

(5) Analyze the method of processing each aspect of the substantive work to be performed by each attorney and administrative personnel to ensure that the most efficient and cost-effective processes are being utilized. This may result in reassigning responsibilities, eliminating or replacing functions, introducing or upgrading technology and improving the methods for producing or managing the work to be performed.

(6) Develop internal procedures for the acceptance of new work to be billed on an alternative billing basis.

(7) Experiment in the preparation of a pricing plan that considers the client's preferences or competitor pricing.

Making the changes necessary to successfully implement an alternative billing system as a replacement for an hourly rate billing system will involve and likely require significant changes in other systems including your evaluation, compensation, training and the practice/work management systems.

Test the tentative arrangement with your client and revise your plans based upon the results. Variations of hourly billings, fixed-fee billing, contingent fee arrangements and other forms of "alternative billing" are no longer merely isolated experiences. They are becoming increasingly more commonplace. An alternative billing system cannot succeed unless there is built-in flexibility to deal with unanticipated or extraordinary events. You will have to work harder to keep making what you are now earning unless you begin to work smarter and take advantage of the opportunities inherent in at least some types of alternative billing.

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