Alternative billing can offer certainty in down economy

Law firms that are experimenting with alternative billing options say that the key to surviving the free-falling stock market is to abolish the billable hour.
“The economy may be why we’re getting an uptick in business,” said Christopher Marston, CEO of Exemplar Law Partners in Boston, a four-year-old corporate boutique firm that charges all its clients a single, negotiated rate for legal work.
According to Marston, over the course of four months recently his firm attracted 20 percent more clients with its flat-fee pricing model, some of whom fled firms that subscribe to the more traditional hourly billing format.
“People are scrambling to find certainty in something,” he said. “Isolating the economic factors, it seems that when the news really focuses on how bad it’s out there, what I’m hearing from our customers is that they value the certainty and the transparency in the model. That’s why they’re here.”
Exemplar was the only firm interviewed by New England In-House that directly attributed its rise in business — and profits — to the shaky economy. But other firms with established alternative billing schemes also credited their flat rates with their ability to fare well in the current climate.
‘Wave of the future’
Last January, Jackson Lewis, a national employment firm with offices in Boston, was one of a handful of large law firms to publically announce an alternative billing arrangement.
The pharmaceutical giant Pfizer had hired the firm to handle all its employment matters in exchange for a capped yearly fee. The deal, which attracted much attention at the time, was based on a mutual desire of the firm and the client to lower costs and lock in business, said Kevin Lauri, who manages Jackson Lewis’ relationship with Pfizer.
“Obviously, the economy is impacting all of our clients,” said Lauri, who is based in the firm’s New York office. “As far as our relationship with Pfizer, we’re all cognizant of Pfizer’s emphasis on trying to reduce costs. A lot of the things we’ve put in place to drive down costs are coming to fruition now. I do think that our arrangement is working well.”
Integral to the success of the firm’s business arrangement with Pfizer, Lauri said, is the capped fee. “If we are under the cap, we get the benefit of the additional savings. Over the cap — Jackson Lewis will bear that risk. So, obviously, Jackson Lewis has an incentive to drive down costs.”
Some of the ways the firm has reduced costs are by coordinating document reviews across its nationwide offices and by using templates approved by Pfizer lawyers. While Lauri said that he knows of no other large firm following Jackson Lewis’ example, the firm is confident it has made a wise business decision.
“This is a partnership,” Lauri said. “It’s good for Pfizer, and it’s good for Jackson Lewis. It’s a mutually beneficial relationship. We see alternative billing arrangements as a wave of the future. We wanted to work with Pfizer to create something that would be comfortable for them and comfortable for us. And we’ve found it to be successful.”
‘Tipping point’
Like Exemplar, the Shepherd Law Group, an employment boutique in Boston, charges an upfront price for its legal services. And, like Exemplar, the firm claims it is enjoying a distinct rise in business despite the economic downturn.
“Of the larger clients, those types that are used to using big firms that we’ve picked up, I can’t point to them and say, ‘It’s the economy,’” said N. Jay Shepherd, the firm’s president. “[But,] I do think a large part of it is a desire to control legal costs.”
Over the past two years, Shepherd said, the firm has “definitely” seen a shift in business.
“We’re doing work for companies that are much larger — Adobe Systems, Samsonite, Costco — and those are the only ones where it’s been public,” he said. “Larger companies that wouldn’t have considered us before are now saying, ‘We can get the value and know what it’s going to cost us.’”
But Shepherd doesn’t attribute his firm’s solid client base entirely to its billing model. Employment law tends to be a steady practice area during periods of recession, he said.
For clients, though, a flat rate offered upfront is only going to become more attractive as the market slides, he added.
“I think the pressure is going to accelerate. The Wall Street Journal article on the thousand-bucks-an-hour fee — I think that was the first tipping point,” Shepherd said. “All these Wall Street law firms, when the dust settles, all their clients are going to be gone. I think it’s going to make the market more competitive, and as it becomes more dire some firms are going to say, ‘What about dropping hourly billing?’”
‘A lot harder’
Adopting a flat-rate billing model isn’t necessary easy, however.
“There’s definitely risk,” conceded Marston. “You could be terribly inefficient at doing something. But the risk that presents a greater hit to the returns of a firm is not knowing how to scope properly. ‘Out of scope’ is when you have defined the boundaries of the work product you’re doing, and then you allow the project to go outside of the boundaries.”
To address this uncertainty, Marston’s firm creates very specific base-rate agreements with its clients, in which it “puts a chain around the project,” he said. The firm also encourages clients to pay extra if they believe they have received additional value — something, he claimed, clients have done.
“We simply have a conversation at the end of the month where we ask, ‘What was that worth to you?’” Marston said.
Shepherd’s firm does not issue such “blank invoices,” which makes it even more critical that he and his colleagues accurately estimate the cost of a case.
“We have definitely taken a bath on cases where we say, ‘Here’s the price,’ and then later realize that we should have charged more,” he said. “Our take on it is that we’ll learn from it. And the next time, we won’t make a similar mistake. There’s no question that, from a firm’s point of view, value pricing is a lot harder.”
That may explain why the billable hour it is more prevalent than ever, according to a survey recently released by the Association of Corporate Counsel.
The ACC reported that, despite the publicity about alternatives to hourly fees, “the percentage of in-house counsel who do not use alternatives to hourly-based fees is gradually increasing, indicating that billing by the hour is becoming even more entrenched.”
The report, which surveyed in-house counsel across the country before the economy took a dive last fall, also found that hourly rates charged by outside law firms are on the rise.
The ACC itself is aggressively trying to curb the fees law firms charge their corporate clients with its new Value Challenge program. In its survey report, the ACC stated that “resistance within companies to alternative fees is relatively small,” while “resistance of law firms to alternative fees is much greater.”
Both Marston and Shepherd said they expect that, with the faltering economy’s help, alternative fee structures will soon become a popular option for lawyers and law firms.
“I consult to law firms internally on value pricing, and they all logically get it, but they’re just too scared to make any changes,” Marston said. NEIH