2010 will be the year of the flat-fee arrangement

Extracted By Larry Bodine, Esq. of Glen Ellyn, (Chicago) IL, a business developer with 18 years experience who helps exclusively law firms attract and keep more clients. He conducts business development training through Apollo Business Development. He can be reached at 630.942.0977 and Lbodine [at] Lawmarketing [dot] com.

Here are the facts: Fifty-five percent of law departments have used or plan to use alternative billing with outside counsel, according to a Hildebrandt survey of 231 law departments released last week. (27 percent are considering nonhourly arrangements; 18 percent say they aren't.)

In a tie with contingency fees, fixed or flat fees are the most popular form of alternative billing (see chart below), according to the Incisive Legal Intelligence 2009 Billing Rates and Practices Survey.

Earlier this year, Karen Johnson-McKewan of Orrick, Herrington & Sutcliffe struck a deal with client Levi Strauss & Co. that is Orrick's broadest alternative fee arrangement ever, according to Law.com.

Orrick will handle all of Levi Strauss' legal work worldwide in exchange for a fixed yearly fee paid in monthly increments. Where Orrick doesn't have an office, the law firm itself will retain and pay outside counsel.

Already, 116 Orrick timekeepers in seven countries have worked on matters for the San Francisco-based apparel maker. "The only way to make it work is to be open and flexible with the issues as they come up," Johnson-McKewan told Law.com. "The core principle that we're operating with here is that we're trusting each other. We all are committed to doing whatever we can to make it work. We know there will be bits and pieces where it may not." 

Alternative fee billing has been a buzzword for decades, but many say this recession has finally given the trend some teeth. "Very rarely do lawyers ask their clients, 'What is the approach you want me to take? Here are two options: I can treat this like it's the most important case in the world, put 10 people on it and it will cost X. Or I can do it differently,'" said David Fries, a nonpracticing lawyer and a member of Orrick's management team. "It's understanding the objective of the clients, and that involves deep dialogue. This is something customers and suppliers do in the rest of the business world."

Fries, who works mainly out of Minneapolis, as well as New York and San Francisco, sees at least a dozen alternative fee proposals pass across his desk each day.  "Virtually every type of transactional work, we are able to do with some type of fixed-fee," he says. "We have a limited number of extremely broad, all-encompassing relationships."

Trust builds trust

Mark Chandler, the general counsel at Cisco Systems Inc., has been a vocal proponent of exploring ways to increase law firm efficiency.

"One interesting phenomenon when we started asking for bids for fixed fees: The lowest bids we got were from firms that worked with us before and knew us and had a trust relationship -- they knew that my policy was to protect the firms' profitability," Chandler said. "If something unexpected came up, I would make sure they were covered. I'm interested in efficiency of operations."

Alternative fee arrangements take a little more time to negotiate, and involve building a different kind of relationship with a client, he said.

"The trust level is so low between clients and lawyers that if the firm is proposing it, it must be bad for the client," Chandler says. "The issue there is, first find the client. The client has to want it."

Many firms see alternative billing as the wave of the future. A few firms have even sprouted up whose business plans are based solely on fixed fees or alternative billing, including Boston-based employment boutique Shepherd Law Group and Chicago-based litigation firm Valorem Law Group.

At many large firms, alternative billing arrangements are now an increasingly significant portion of revenue.

• At Cooley Godward Kronish, it's 5 percent to 10 percent of revenue, and the firm has aggressively pursued such arrangements in practices where it makes sense, such as commercial and patent litigation.

• Orrick says 25 percent of its revenue comes from alternative billing arrangements.

• Crowell & Moring says alternative billing -- which includes holdbacks, flat fees, blended rates, contingencies and success fees -- accounts for 30 percent of revenue. Neither firm counts volume-based discounts toward those figures. Holdbacks are when a percentage of the engagement fee is not paid upfront, but held until the matter concludes and is sometimes paid at the client's discretion.

• Peter Denwood, a partner at Baker & McKenzie who does a lot of fixed-fee arrangements as part of his international corporate reorganization practice says that clients feel free to call more often under a fixed fee deal, which can be "good and bad," but hourly billing requires more administrative time.

• Robert Mittelstaedt, head of Jones Day's San Francisco office, said the firm has used alternative fee arrangements for years where they make sense. "Fixed fees work well on transactions or cases where there's a track record of how much work will be required. Blended fee arrangements work well especially on matters where clients want more associate than partner time," Mittelstaedt told Law.com

Robert Lipstein, an antitrust lawyer and chairman of Crowell's finance committee, said he encourages the firm's partners to discuss alternative fee arrangements with every engagement. The firm says it uses alternative billing arrangements for all the work it gets from some clients, including DuPont.

"In the last three years in particular," Lipstein said, "we have gone from having clients approach us and having a couple of conversations about it, to this becoming very widespread throughout the firm and us taking the conversation to the clients." 

Clients want predictability

Proponents of alternative fee arrangements say they motivate law firms to be more efficient by sharing some of the risk of the engagement. Clients often save money or receive a better "value" if some of the fee is tied to the matter concluding quickly or in their favor. Proponents say law firms can increase or maintain their profit margin while also saving the client money. And, because such arrangements usually give the outside lawyer a greater understanding of a client's business and goals, it creates a smoother relationship between lawyers and their clients.

While the billable hour is still the norm, alternative fee arrangements are gaining ground. "What clients want is some predictability and certainty regarding their costs. They don't like surprises," said ACC President Frederick Krebs. "The firms that get ahead of this will have a tremendous advantage."