Businesses are trying to control their legal costs by getting law firms to offer alternatives to their traditional billable hours, and lawyers are responding with new compensation models, like quoting flat fees for routine matters and then billing by the hour for litigation, which can be highly unpredictable. A good alternative billing arrangement has to meet the test of any successful negotiation, lawyers said: it must to fair to both sides, helping clients forecast their legal fees without exposing lawyers to unreasonable financial risk.
"If you are handling a business transaction, a real estate transaction, you can pretty much forecast what has to be done, and that might be susceptible to a flat-fee arrangement," said Angelo J. Genova of Newark-based Genova, Burns, Giantomasi and Webster. "But in a litigation where you really can't assess an outcome from a judge or an issue that might have to be pursued stemming from discovery, lawyers attempt to mitigate the risk by billing by the hour."
Genova said his firm is also exploring project-based billing: "We estimate the cost to do the project, then work within that budget." And the firm reviews bills and makes courtesy adjustments to clients where warranted "in an effort to ensure that our fees are reasonable, and fall within the pale of what is rational given the work that has to be performed."
Alternative billing arrangements "are designed to address the rising cost of legal representation, but ultimately, real alternative billing is about practice management and case management by the lawyers," Genova said. "The lawyer who is committed to ensuring that fees are reasonable is going to devote the attention to manage the time and energy of lawyers involved in the case, and do only what is critical and necessary to ensure the client's agenda, and do it as efficiently as possible."
Billable hours have become a scapegoat, but the real issue is "managing cases and putting in place business paradigms and teams within law firms to ensure that the work is done efficiently," Genova said.
Philip R. Sellinger heads the New Jersey office of the international law firm Greenberg Traurig, which has developed software "which allows us to price our services in the most cost-effective manner possible. We can break down each of the items in the project by task, and it allows us to project the cost of our services on a very specific and focused level." He said that by accurately projecting costs, the firm can staff each matter properly and "not find ourselves in a situation where we are off base."
He said the firm's command of technology "sets us apart in the sense that we think our ability to price properly put us in the position that we can assure clients the same quality of service," regardless of the type of billing model that is used. He said alternative billing can be a challenge for law firms "that do not have the ability to know precisely what their costs are, and then find themselves in situations where they have misbid projects, and that leads to an undesirable outcome."
Sellinger said what he hears from clients is "they are very concerned that when they do alternative billing, the law firm may submit a bid that is completely unrealistic and does not allow them to staff a matter to provide the quality of service" the client expects. He said clients "want predictability, they want consistent quality and they want value."
Edward B. Deutsch, managing partner of McElroy, Deutsch, Mulvaney & Carpenter in Morristown, is a big believer in alternative billing, which he said protects clients from unpleasant surprises and motivates law firms to be more efficient. "By going to alternative fees, it forces you in the beginning of the matter to really evaluate how efficient you can be. It makes you ask: How is this case going to progress? How can we get it settled quickly, and if we have to try it, how long is that going to take? And it gives the client a real legitimate framework of the costs going forward."
Deutsch said that for several Fortune 100 companies, his firm does all the litigation in a certain field in a regional area for a set amount of money. "If we're able to do excellent work and very efficiently, we get rewarded for that, and the client is protected by a cap on the fee structure."
Sometimes small-business clients are "interested in having an estimated fee or a capped fee in a matter, so they know where it is going and it is not this never-ending problem," said Deutsch. "We build into that a lot of 'what ifs.' What if the other side is unbelievably litigious or is very difficult to deal with? Sometimes we have to sit down with the client and say 'This is not going the way anybody planned and we have to readjust this.' And most clients are very willing to do it."
Deutsch said that after decades in the legal profession, "Most good lawyers kind of know what a case is going to cost, so you're not really pulling something out of the air." He sees alternative billing as the way of the future: "Clients want to know up front what it's going to cost."
Peter R. Spirgel is managing partner of Flaster Greenberg in Cherry Hill, which he said has been offering alternative fee arrangements for years. "We have clients who have very predictable legal needs who say: 'You handle all of the work in this area for a fixed fee.'"
In some cases, the firm tracks the attorneys' hours "and there is an adjustment, so neither side gets a windfall." But even without an adjustment, it makes sense for a law firm to track the hours worked during a flat-fee project, Spirgel said. At year-end, the law firm might want to renegotiate the deal if the amount of work it performed exceeded the flat fee. "How could you rationally say that unless you kept track of the time?"
For one business client that often gets hit with lawsuits, Spirgel's firm offers a combination flat fee and "negative contingency" model. For example, if the company is sued for $100,000 and Flaster Greenberg is able to settle the case for $33,000, the firm receives a portion of the savings.
Spirgel said that for alternative fee arrangements to work, "both parties have to be sensitive to the needs of the other. If the client has a need for budgetary certainty, it would be foolish for the lawyer to ignore that. This is a competitive environment, and some other lawyer will offer a fee arrangement that addresses that need."
Spirgel said one client is being charged a reduced hourly fee, with contingent compensation based on the outcome of the litigation. On another matter, the law firm is charging an hourly rate up to a certain cap; once the cap is reached, a hybrid fee arrangement kicks in, and some of the risk is shifted to the firm.
"The bottom line is that lawyers who insist on being inflexible in how they structure their billing are going to put themselves at a competitive disadvantage."
E-mail to: firstname.lastname@example.org