Is the Billable Hour Dead?
Controlling Legal Costs in a Tough Economy
Carl W. Barton
January 23, 2012
Sales and profits in most businesses have suffered the recession squeeze over the past 18 months, and legal budgets are no exception. Consequently, the economy is spawning questions about the demise of the billable hour and is producing heated discussions about the alternative billing methods that may replace it. Not surprisingly, recent studies indicate that nearly 80 percent of general counsel and chief legal officers would like to see alternative fee arrangements increased as a percentage of their legal budgets.
Increased Interest in a Familiar Concept
The concept of alternative billing arrangements has been around for several decades. But in the past year there has been increasing pressure to reconsider this topic. This issue has come to the forefront not only because of the downturn in the economy, but also because of the Association of Corporate Counsel’s “Value Challenge,” a recent national survey of corporate counsel designed to reconnect the value of legal services to the cost paid for them. In fact, 43 percent of in-house legal departments spent at least 10 percent of their budgets on non-hourly-rate arrangements in 2009, according to an Altman Weil study
Has the billable hour, in fact, become obsolete? What are some of the possible alternative billings arrangements, and when do they make the most sense?
Fixed or Flat Fees
In a fixed fee or flat fee arrangement, the outside law firm agrees to perform a discrete project for a fixed amount of legal fees. Fixed fee arrangements seem to work best for standard, uncontested matters such as preparing corporate documents, mergers and acquisition transactions, venture funding transactions, non-judicial foreclosures, uncontested receiverships, preparation of employee benefit plan documents, conducting corporate compliance audits, preparation and negotiation of leases, and preparation of certain motions and briefs.
The key to a successful fixed fee arrangement is a clear and careful definition and understanding of the specific scope of the project to be performed.
While most litigation is not well suited to a fixed fee arrangement, contingent fee arrangements are often used in litigation and also may occur in some large transactional matters. One approach involves paying a reduced hourly rate, plus an additional fee that is contingent on a successful outcome. The company and its lawyers must carefully define what constitutes a successful outcome at the outset of the engagement.
Hourly Fee Caps
With an hourly fee cap, once the maximum cap in fees is reached, the law firm works at its own expense. Most law firms are reluctant to accept this type of engagement, unless there is a safety valve that triggers renegotiation of the billing arrangement once the fee cap is reached.
There are a variety of alternatives that represent some sort of discount to a law firm’s hourly billing rates. To receive volume-based discounts to a firm’s standard hourly billing rates, some businesses are willing to consolidate most or all of their legal work with a single firm. Simply put, the more work the law firm does, the larger the discount becomes.
Blended Billing Rates
Another discounted approach is a blended billing rate, fixing a relatively low hourly rate for specific types of projects, whether a senior partner or a younger lawyer performs the work. With this approach, the company receives expert legal services in discrete projects for less than standard hourly rates. Law firms with the bench strength and expertise offer these types of billing arrangements in certain regulatory, labor and employment, mining, and real estate projects.
General counsel who seeks more predictability in their legal fees over the course of a year may like monthly retainers. This arrangement has worked successfully for years with legislative or lobbying work, and some companies currently pay for their public securities, employee benefits, and general corporate work using this billing arrangement. Again, the company and its law firm must carefully define the scope of work to be performed to avoid misunderstandings and disputes.
Notwithstanding such alternative billing models, many businesses still need and want to pay their lawyers at standard hourly billing rates for some types of work. “Bet the company” litigation, loan workouts of company debt, and complex financing are some areas in which most chief legal officers do not believe they should or can afford to skimp on legal fees or compromise on the lawyers or law firms they engage.
The current economic crisis may serve as a catalyst for changing the delivery of legal services, but the billable hour is not dead yet. Well-managed businesses will likely not adopt a single billing arrangement for all of its legal work. Instead, the greatest benefits from, and lowest cost for legal services will come from a combination of billing arrangements with an outside law firm, including the payment of standard hourly billing rates.
arl Barton is a partner at Holland & Hart. He can be reached at CBarton@hollandhart.com