Attorneys going alternative with fee arrangements

Maria Clark, The Daily Record Newswire

The billable hour model is not going anywhere anytime soon in the legal industry. However, more law firms are embracing alternative fee arrangements in order to stay competitive.

William Howard, a shareholder with Baker Donelson in New Orleans and Baton Rouge, said the firm began investing in more resources towards AFAs around five years ago after seeing a marked increase in interest from clients.

"The demand was driven largely by clients who wanted more certainty in their legal budgeting," Howard said. "A successful (AFA) begins with a mutually understood scope of work and how much risk each side wants to tolerate. Some significant clients won't do work any other way."

AFAs, which include blended rates, fixed fees, capped fees, and contingency fees, have been used by many law firms for decades.

They are different from the more traditional billable hour model, where attorneys charge and counsel by the hour.

A recent survey conducted by Altman and Weil, a management and consulting services firm, showed that over 48 percent of the 304 U.S. law firms surveyed increased their amount of non-hourly based billing last year. Only eight percent of respondents said they do not offer any type of alternative billing method.

All of the law firms surveyed employ over 50 attorneys.

Despite their growing popularity, especially as a cost-saving measure during the most recent recession, AFAs remain a minor part of the total fees generated by law firms surveyed by Altman and Weil last year. AFAs made up between 6 and 10 percent of all revenue generated among those law firms.

Even among firms that have accepted creative methods of charging legal fees, successful AFAs require substantial planning and coordination between attorneys and clients.

"There is risk involved on both sides. Clients are looking for the best value and law firms, like any business, want to generate a profit," said Charles Adams, a partner with Adams and Reese in New Orleans. "Many people still have the mindset that an alternative fee arrangement is a euphemism for discounts."

He estimates that, firm-wide, there has been an increase of between 5 to 10 percent in the use of AFAs over the last few years. He noted that much of the increase was generated by client demand during the recession.

"It's rare that we will enter into an alternative fee arrangement with new clients, unless it's an area where we have a lot of familiarity or if it's a generic transaction," he said. "We look at several factors including the scope of the project, the volume of work, and the length of the relationship with client before deciding on the best type of fee arrangement."

When AFAs began growing in popularity many in the industry raised concern that by stepping away from the traditional billable hour model law firms were going to lose money.

William Hines, managing partner for Jones Walker, said that although there is more risk involved with the new models of payment there can also occasionally be more reward depending on the fee arrangement.

He notes that with the speed of legal research and document discovery lawyers are no longer "spending months going through paper documents locked away in a room."

"Big companies no longer want to pay by the billable hour, they now want to pay for a result outcome," he said. "It makes lawyers used to billing by the hour nervous, but either you get with it or get left behind."

AFAs can vary depending on the scope of the project. Law firms have to learn to estimate the cost of legal services before a project begins. They can start out by researching previous similar cases to get a good estimate of the costs of those types of services. Firms also can get the best value out of these arrangements by aligning resources to help with budgeting either through outsourcing or from within the firm, according to Steve Boutwell, the director of client services with Kean Miller in Baton Rouge.

Boutwell says that when setting up an AFA the firm looks at what parts of the case are going to be handled through vendors and third parties as opposed to being handled by the firm.

"You better have a clear mutual meeting of the mind with client," he said.

Published: Wed, Sep 17, 2014