Recent news articles and opinion pieces have cast doubt on the viability of the "billable hour" as the leading model of compensation for legal services. As the story goes, budget cuts and increased scrutiny from senior management have prompted some in-house legal teams to re-examine the billable hour model, which has long been criticized for improperly incentivizing attorneys to bill hours rather than efficiently resolve matters. At the same time, law firms--competing for a more limited pool of potential business--have become increasingly willing to collaborate with clients in devising alternative billing methods.
Regardless of how the billable hour fares when the global economy recovers, in many situations, alternative billing arrangements will remain a valuable tool for companies looking to reduce legal costs and gain cost certainty without sacrificing results.
The biggest challenge, however, for attorneys and clients alike is learning how to value legal services and determine fees in a manner that leaves both parties comfortable with the arrangement. Lawyers are often concerned they will underestimate the amount of work it ultimately takes to complete a project, while clients may be concerned that fixed-price work will be performed by less experienced attorneys who bill at lower rates to begin with. These concerns will likely subside as we become more accustomed to innovative pricing models.
One area in which alternative billing methods have been successful is labor and employment law, where certain types of litigation and other matters are relatively predictable and can be handled efficiently by lawyers with specialized expertise in areas such as wage and hour, benefits and disability discrimination law.
Although alternative fee structures are limited only by the imagination and flexibility of a law firm and its clients, some examples in the labor and employment context include:
Flat or capped fees for specific projects: Lawyers and clients can work together to craft flat or capped fee arrangements for specific types of litigation or particular litigation tasks, such as drafting a position statement, as well as other matters, such as management training programs, policy review and development, affirmative action plan preparation, labor arbitrations and human resources audits.
Under a flat-fee arrangement, the client pays a certain amount regardless of actual hourly billings. With capped fees, clients are billed on an hourly or other basis up to a certain amount of money; if billings are below the capped amount, the client typically gets to keep the money. Another possibility is to set a capped amount and then somehow allocate the money saved between the two parties if billings are under the cap.
In addition to per-project fees, monthly or even yearly retainer fees can be negotiated in advance for a particular scope of work.
National or regional employment counsel model: Under this model, one firm handles all single-plaintiff litigation and other matters in a specific region or across the country for a predetermined yearly flat or capped fee. Single-provider relationships can provide tremendous value to corporate clients because attorneys become increasingly efficient as they gain knowledge about the company, its culture and its practices.
Results-based fees: Results-based fees are also designed to incentivize attorneys to achieve positive results regardless of how many hours they spend on a matter. A results-based approach would allow the attorney to receive specific benefits for achieving predetermined results, such as winning a motion for summary judgment or settling a case early on in a litigation at a lower than expected cost.
Money spent on alternative billing arrangements has totaled $13.1 billion this year, versus $8.6 billion in the like period of 2008, according to a recent Wall Street Journal article. The article also notes that BTI Consulting Group Inc., the company that conducted the survey, said that respondents reported average cost savings of 15 percent from alternative billing arrangements. Given these results, it seems safe to assume that attorneys and clients alike should be thinking about innovative approaches to valuing legal services.