By H. Ward Classen
The Daily Record Newswire
Alternative fee arrangements are the latest effort by law firms to demonstrate their client-centric approach to addressing the financial pressures on in house counsel to reduce outside legal costs.
Alternative fee arrangements refer to billing models such as contingency fee agreements, fixed prices for a discrete project, blended rates and value billing, as opposed to the traditional means of law firm billing on an hourly basis for services rendered.
The question arises, however, as to whether alternative fee arrangements actually reduce a client’s legal costs. At first glance, alternative fee arrangements would appear to do so. A blended rate forces the outside firm to better manage the mix of associates and partners assigned to a matter to ensure it is handled in the most cost-efficient manner possible. Contingency agreements and fixed-price agreements transfer a portion of the client’s risk associated with legal fees to the outside attorney.
However, alternative fees also introduce a new set of incentives and problems. Everyone recognizes that hourly rates incent firms to pile on the hours. No client believes that to be beneficial. However, in blended-rate and fixed-price arrangements, the firm’s new incentive is to have as much work as possible done by the lowest-billing attorneys. Is that good?
Maybe. No one wants to see a senior partner cite-checking briefs or sitting in a document warehouse in Omaha. But presumably you hired that senior partner for her expertise, experience, and judgment. Unless there’s something truly compelling about your matter, she’s probably going to be spending most of her time with other clients who are paying her full retail rate.
Alternative fee mechanisms also do not necessarily reduce legal costs. For example, most firms that represent corporate clients are unwilling to take a matter on contingency without a minimum level of compensation and a significant upside in the event they prevail. If the firm does prevail, the client’s costs may exceed its costs if the attorney had been retained on a time and expense basis.
Similarly, most firms understandably include a financial cushion when providing a fixed price to reduce their risk. In addition, if the number of hours needed to complete a project is less than the quoted fixed price, the firm receives a potential financial gain and the client may have paid more than if it had been billed on an hourly basis.
Some alternative fee arrangements may allow a client to budget its legal spend with greater accuracy by allowing the client to fix its costs. Doing so reduces the potential for a “surprise” and thus allows corporate counsel to avoiding being in the unpleasant position of exceeding their budget for outside counsel fees. While successful budgeting is an important aspect of managing a corporate legal department, it does not equate to reducing legal costs.
Law firms are for-profit entities managed by some of the smartest individuals in our society. Almost all are hesitant to assume those risks that rightfully belong to the client. They will only do so if it is in their financial interest to accept such risks. Although the current financial downturn provides an incentive for many firms to consider alternative fee arrangements, it is unclear whether their desire to do so will continue when the economy recovers.
Alternative fees are definitely worthy of consideration by both inside and outside counsel and can truly be win-win in some cases. But clients need to carefully analyze the incentives and unintended consequences of each arrangement. The key for most in-house counsel is to find outside counsel that they trust to provide top quality service at reasonable fees that are consistent with the impact of the matter on the company’s operations. With clear communications and that sort of trust, most fee arrangements work pretty well.
H. Ward Classen is deputy general counsel of Computer Sciences Corp. The views expressed herein are those of Mr. Classen and not those of Computer Sciences Corp.
