September 1, 2012

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Mixing It Up

Legal Billing Takes a Turn for the Non-traditional

Di Lewis

September 1, 2012

For the past 50 years, hourly rates have been the bastion of legal billing. Now, alternative billing models are shaking things up for some attorneys.

Non-traditional billing has allowed some clients to create hybrid models or flat fees, giving them more control over how much they pay. A few clients have asked that lawyers with less experience not work on their case. Others are sticking with hourly rates, but have begun receiving more estimates and continual updates throughout the life of a relationship with a firm.

How this may change a law firm or attorney’s relationship with a client is up in the air. Both parties are gaining some things, while letting others go.

A Changing Landscape
While clients who demand alternative billing may have gotten a boost from the poor economy, practices are already evolving. Where billing practices end up is still to be seen. “Clients are finding every means to cut costs,” says Mark Gaylord, partner at Ballard Spahr. He says with fewer people filing lawsuits during the recession, there was less work to go around and law firms were becoming more creative in billing structures.

Though hourly billing has been the standard, it doesn’t give the client as much control as they might want over the final cost, says Gretta Spendlove, Durham Jones & Pinegar shareholder. “Both lawyers and their clients want a billing system that is fair and predictable,” she says. “Variations of billing systems will no doubt continue as long as lawyers and clients keep trying to balance those needs for fairness and predictability.”

The problem is that what creates a predictable income for the lawyer (billing by the hour) often does not create a predictable charge for the client. While billing structures had already started changing, tighter budgets and the need for foreseeable costs pushed lawyers into alternative billing faster than they would have otherwise gone, Gaylord says.

In addition to providing more certainty for clients, flat fees and other models require the lawyer and client to “spend more time planning their objectives and the resources needed to accomplish their ‘end game,’” says Jason Robinson, shareholder at Babcock Scott & Babcock.

Clients are becoming savvier when figuring out the value of an attorney’s services, Gaylord says. They’re also forcing firms into fiercer competition than before by looking around in the market and comparing attorneys. Large clients can use the amount of business they offer as an incentive to discount fees.

Choices, Choices
“Change is coming, but a lot of us are still predominantly working on the hourly rate,” says Spendlove, who still largely bills hourly. “But the extent to which you see these new billing rates depends an awful lot on what type of law you practice.”

In this attempt to make billing more predictable from both sides, attorneys are coming up with a variety of solutions. The type of law or specific project is generally what determines the fee structure.

Robinson has learned some projects better lend themselves to alternative billing. Generally projects where the lawyer can estimate how much time and resources will be needed to complete something will make the best projects for a flat fee.

“For example, we can sometimes estimate how long it will take to prepare a contract, a state construction registry filing or a mechanic’s lien. These are good areas for flat-fee billing,” he says.

Along with a standard flat fee for a project, some firms have used flat hourly fees for any lawyer working on a project. So the hourly rate may be a significant discount from the partner’s fee, but still gives both parties some consistency, Gaylord says. Or rather than a flat amount like $25,000 for a specific project, a lawyer could charge a flat percentage, like 1 percent of a $10 million deal.

Different forms of hybrid fees are also coming into use, he says. Whether a mix between flat and hourly, flat and contingency, or many other combinations, the hybrid models have become more common as a way of compromising between both parties. Gaylord says he’s seen people charge a discounted hourly rate, but depending on the outcome the client will pay the normal rate or even a higher rate.

“The options are in some respects endless,” he says. “And as clients become more educated about how the practice works and more educated about what their needs are, they’ll ask for more options in how we get paid.”

While contingent fees have never been common outside a few select legal niches like personal injury, Robinson says he’s found they do have a place in some construction collection matters. By deciding on a case-by-case basis whether it will work, he says they can create a positive outcome for both with the attorney getting a higher fee and the client only paying if money is collected.

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