Implementing an Alternative Billing Program

Significant changes have occurred within the legal profession over the last decade. Law firms are experiencing the same wrenching changes that their corporate and business clients have endured. Today, lawyers practice in a buyer's market. Lawyers and most of the services they offer are plentiful. Buyers of legal services have a wide range of choices.

Corporate counsel are exercising increased bargaining power about fees and terms of employment of outside law firms. They are employing qualified lawyers, who are not necessarily the most expensive, to perform legal work in a quality, efficient and cost-effective manner, as opposed to referring all legal work requiring outside assistance to their 'traditional' law firm. Also, smaller businesses without outside counsel, and individuals as well, find it advantageous to 'shop' for lawyers. In fact, lawyers who solicit and utilize other marketing techniques and alternative billing arrangements may find many disenchanted clients of other law firms receptive to the idea of changing lawyers.

Law firms can no longer ignore the competition of the marketplace when establishing billing rates and fees. Several variations and combinations of three basic billing systems, hourly billing, fixed fee billing and contingent fee billing, follow.

Variations of Hourly Billing

Law firms structure hourly billing arrangements to take into account the marketing aspects of their charges by deviating from straight, hourly rate charges. Three variations of hourly billing include: 1) Percentage discounts; 2) Reduced hourly rates; and 3) Blended hourly rates.

Percentage Discounts

A discount on standard hourly rates based upon the volume of all or selected types of work performed is the most frequently applied alternative. To obtain a greater volume of legal work from particular clients, more firms are offering volume discounts on fees based upon an overall level of fees charged for services performed. These frequently take the form of stepped-up discounts, i.e., fees that exceed a certain amount may be discounted by some percentage, and fees that exceed a higher amount may be discounted at a higher percentage. Further, many firms that serve clients who can refer third parties to the law firm, i.e., financial institutions, offer discounted rates for work performed for the client's account, and with the client's knowledge, add a surcharge to the fees for work performed for third parties.

Reduced Hourly Rates

Many law firms agree to reduce their standard hourly rates with the understanding that a standard or pro rata performance bonus will be received in the event of a successful conclusion or upon concluding the matter within a specified time. The amount of the bonus is based upon a formula that relates to a predetermined gain or loss in terms of dollars or assets, or savings of payments for the client, derived from completion of the matter within a given time. Other law firms may charge their standard rates if the transaction closes, and sharply discount these rates if the deal craters.

Blended Hourly Rates

With a blended rate, a client is billed the same hourly rate whether the work is performed by a partner or an associate. As such, this arrangement is suitable in those established relationships where the client can trust the law firm to assign work to the attorney who possesses the appropriate expertise to perform the work.

To implement the above variations of hourly rates and to maintain or increase the level of profitability, a firm's lawyer management must analyze the organization and management of each of its practice areas to insure that quality legal services will be provided in a timely, efficient and cost-effective manner. To accomplish this, partners must select which clients and practice areas for which to make alternative billing arrangements, and invest their time to manage each practice area. Attorneys, paralegals and administrative personnel must be trained and substantive practice areas systematized and automated, to the extent possible, to make these hourly rate variations practical.

Fixed Fee Arrangement

Under the fixed fee arrangement, the law firm and the client agree upon the fees to be paid for all of a client's work, or all of a client's work in a particular practice area or for particular elements or tasks, or for various phases of work. Fixed fees are frequently determined for specific discrete repetitive jobs where what is being done and the time it will take to perform this work is reasonably predictable from historical experience.

Clients prefer this arrangement because their total legal fee for this work is certain. It is easy to budget in advance. Legal costs may be reduced if the fixed fee is less than the historical cost paid by the client for similar legal services. The risk of unexpected or unanticipated events in whole or in part, and the burden of managing the work for efficiency and cost containment, is shifted from the client to the law firm. Further, the fixed fee arrangement assures involvement or input from the client in projecting the cost of legal fees for services to be rendered and in determining what the strategic performance choices will be and when they will be carried out.

The above advantages notwithstanding, a fixed fee arrangement may limit for the client the choice of law firms willing to represent that client. This is especially true in a 'seller's market' or in a legal market having considerable uncertainty. Also, setting of a fee cap may result in the unwillingness of a law firm to undertake marginally unprofitable work, which may be important in achieving the result desired by the client. Corner cutting can be avoided by a re-opener provision that encourages a law firm to identify, discuss and then pursue additional work with the client's approval.

Fixed fee billing, when properly structured, offers many advantages to the law firm. First, it assures regular work and cash flow, provided the client is willing to pay some portion of the fixed fee in installments. Second, it allows the firm to become an approved provider of legal services for that client. If a long-term relationship can be established and the firm becomes an integral part of the 'client's legal team,' that firm may have a competitive advantage over other law firms. Third, many law firms consider the fixed fee arrangement as being a 'reward' to those long-term, loyal, high-volume clients to keep them happy with the firm and encourage client retention. This is preferable to clients being tempted to look to other firms to provide similar services. Fourth, a fixed fee arrangement that is fair to the client and the law firm permits the firm to employ other attorneys and staff and to acquire technology and other services with less risk to the law firm. Fifth, the law firm may have an opportunity to negotiate for other 'premium work' from the client if favorable results are achieved.

If the firm is assuming at least a part of the risk of unexpected and unanticipated events, and of undesired results or outcome, it should be able to seek a share of the 'upside' in the form of a premium for a better than anticipated result. Sixth, the fixed fee arrangement increases for the firm the opportunities for positive communications with the client without the inhibition of a 'running meter.' This is especially important when the firm is interested in determining its client's objectives and evaluating what will be the legal services and strategies for performing them.

The fixed fee arrangement requires a specific and detailed definition of the work to be performed and a careful estimate of the hours needed to complete the job under this arrangement. Firms that enter into this arrangement must be careful about what is excluded from the contract and what is included. Considerable thought must be given to determine how 'extras' will be billed.

Unit pricing, a variation of the fixed fee arrangement, is usually determined for various tasks or phases of a matter, with payment being made upon the successful completion of the agreed-upon task or phase. Payment for each is usually a set amount, regardless of how long it takes to complete.

A 'capped fee' is another modified form of a fixed fee. Under this arrangement, the client and the law firm agree that the fees to perform specific work will not exceed a certain dollar figure. The firm may charge its standard hourly rates. However, beyond a certain maximum limit, the client will not pay more money.

Contingent Arrangement: Under a contingent arrangement, the law firm is paid upon results achieved. This arrangement is usually in combination with some other billing arrangement. Examples are: 1) reduced hourly rates with a bonus based upon results achieved; and 2) standard hourly rates charged up to a specified time dollar value and a contingency arrangement thereafter that dollar value has been reached.

Determining Alternative Billing System(s) for Your Firm and Your Clients

The type of legal work performed for your clients, the nature of your client base, the competitive environment in which your firm practices and your clients' perception of the value of the legal work performed will be critical factors in determining whether your firm should: 1) volunteer; or 2) react to external pressures for alternative billing arrangements from your clients or as the result of competitive pressures created by other law firms. Your partners' responses to the following questions will offer valuable insight about your firm's willingness and ability to 'accept and live with' one or more types of alternative billing arrangements.

1. What is your firm's attitude/commitment towards alternative billing arrangements? Welcome or fear? Are your partners willing to take some risk or are they risk-averse? How big a risk are they willing to take?

2. Do your partners possess the necessary skills to implement alternative billing arrangements? Is there a member of your firm who possesses the ability and skill to estimate accurately the cost of providing particular types of legal services and the fees to be charged in order to earn a fair profit?

3. Are there existing or potential clients that your firm may better retain, attract and serve by being willing to agree to alternative billing arrangements?

4. Are there clients whose loyalty should be rewarded?

5. Will alternative billing arrangements be productive as marketing tools to retain existing and attract potential clients?

6. Do your competitors' law firms offer alternative billing arrangements? In which practice areas is it possible/appropriate to offer alternative billing arrangements, i.e., volume or repetitive jobs? Others?

7. Does your firm have a plan to develop the necessary lawyers' skills to implement alternative billing arrangements with specific clients? Are you willing to commit sufficient time and money to develop training programs for lawyers and administrative personnel for organizing and systematizing specific practice areas? Are you committed to managing these practice areas as a professional business organization? Are you willing to test or experiment with alternative billing arrangements with existing clients who may be equally interested in determining the desirability/usefulness of alternative billing arrangements?

If your partners' responses to most of the above questions are of a positive nature, and if consensus is reached among the partners to implement one or more alternative billing arrangements, the following should be considered to develop appropriate strategies for selecting and managing the most appropriate arrangements that will be satisfactory for the firm and its clients.

• Analyze your practice in order to select which clients and/or which practice areas you will propose to make available alternative billing arrangements.
• Select which form or forms of alternative billing arrangements your firm will make available and what percentage of your firm's legal work you will handle under alternative billing arrangements.
• Determine whether your firm's accounting and bookkeeping systems will enable you to prepare budgets or determine the costs of legal services or segments of services.
• Survey your clients regarding their needs and preferences. Make certain you understand what aspects of your present time and billing system your clients like or dislike and their reasons.
• Understand what your clients perceive as 'value received' for dollars expended for legal services.
• What are your clients' expectations from outside counsel? Assess the extent to which these expectations are being satisfied ' and make corrective changes, as required.
• Select which attorney(s) in your firm will be able to serve as 'estimators' and managers of work, being conscious of efficiency and providing to clients the values discussed above. They will have to learn how to estimate the amount of time required to complete a particular job or phase of work in order to evaluate the performance level of the individual performing the assignment or phase of the assignment.
• Analyze the method of processing each aspect of the substantive work to be performed by each attorney and administrative personnel to insure that the most efficient and cost-effective processes are being utilized. This may result in reassigning responsibilities, eliminating or replacing functions, introducing or upgrading technology and improving the methods for producing or managing the work to be performed. The results of this analysis will directly affect the productivity of the individual and the profitability of the matter being produced.
• Develop internal procedures for the acceptance of new work to be billed on an alternative-billing basis. This decision can no longer be made by the 'intake' lawyer alone.
• Experiment by preparing of a pricing plan that considers the client's preferences or competitor pricing. It is critical that your timekeeping and accounting systems can support the alternative billing arrangements. Most law firms' lawyer evaluation and compensation systems are focused largely on the number of billable/fee producing hours worked per lawyer, a few focus adequately on efficiency, productivity and the creation of 'value for clients.' Making the changes necessary to successfully implement an alternative billing system as a replacement for an hourly rate billing system will involve and likely will require significant changes in other systems including your evaluation, compensation, training and the practice/work management systems. Test the tentative arrangement with your client and revise your plans based upon tests.

Conclusion

Variations of hourly billings, fixed fee billing, contingent fee arrangements and other forms of 'alternative billing' are no longer merely isolated experiences. They are becoming increasingly more commonplace. An alternative billing system cannot be completely successful unless there is built-in flexibility to deal with unanticipated or extraordinary events. You will have to work harder to keep making what you are now earning unless you begin to work smarter and take advantage of the opportunities inherent in at least some types of alternative billing.

Significant changes have occurred within the legal profession over the last decade. Law firms are experiencing the same wrenching changes that their corporate and business clients have endured. Today, lawyers practice in a buyer's market. Lawyers and most of the services they offer are plentiful. Buyers of legal services have a wide range of choices.

Corporate counsel are exercising increased bargaining power about fees and terms of employment of outside law firms. They are employing qualified lawyers, who are not necessarily the most expensive, to perform legal work in a quality, efficient and cost-effective manner, as opposed to referring all legal work requiring outside assistance to their 'traditional' law firm. Also, smaller businesses without outside counsel, and individuals as well, find it advantageous to 'shop' for lawyers. In fact, lawyers who solicit and utilize other marketing techniques and alternative billing arrangements may find many disenchanted clients of other law firms receptive to the idea of changing lawyers.

Law firms can no longer ignore the competition of the marketplace when establishing billing rates and fees. Several variations and combinations of three basic billing systems, hourly billing, fixed fee billing and contingent fee billing, follow.

Variations of Hourly Billing

Law firms structure hourly billing arrangements to take into account the marketing aspects of their charges by deviating from straight, hourly rate charges. Three variations of hourly billing include: 1) Percentage discounts; 2) Reduced hourly rates; and 3) Blended hourly rates.

Percentage Discounts

A discount on standard hourly rates based upon the volume of all or selected types of work performed is the most frequently applied alternative. To obtain a greater volume of legal work from particular clients, more firms are offering volume discounts on fees based upon an overall level of fees charged for services performed. These frequently take the form of stepped-up discounts, i.e., fees that exceed a certain amount may be discounted by some percentage, and fees that exceed a higher amount may be discounted at a higher percentage. Further, many firms that serve clients who can refer third parties to the law firm, i.e., financial institutions, offer discounted rates for work performed for the client's account, and with the client's knowledge, add a surcharge to the fees for work performed for third parties.

Reduced Hourly Rates

Many law firms agree to reduce their standard hourly rates with the understanding that a standard or pro rata performance bonus will be received in the event of a successful conclusion or upon concluding the matter within a specified time. The amount of the bonus is based upon a formula that relates to a predetermined gain or loss in terms of dollars or assets, or savings of payments for the client, derived from completion of the matter within a given time. Other law firms may charge their standard rates if the transaction closes, and sharply discount these rates if the deal craters.

Blended Hourly Rates

With a blended rate, a client is billed the same hourly rate whether the work is performed by a partner or an associate. As such, this arrangement is suitable in those established relationships where the client can trust the law firm to assign work to the attorney who possesses the appropriate expertise to perform the work.

To implement the above variations of hourly rates and to maintain or increase the level of profitability, a firm's lawyer management must analyze the organization and management of each of its practice areas to insure that quality legal services will be provided in a timely, efficient and cost-effective manner. To accomplish this, partners must select which clients and practice areas for which to make alternative billing arrangements, and invest their time to manage each practice area. Attorneys, paralegals and administrative personnel must be trained and substantive practice areas systematized and automated, to the extent possible, to make these hourly rate variations practical.

Fixed Fee Arrangement

Under the fixed fee arrangement, the law firm and the client agree upon the fees to be paid for all of a client's work, or all of a client's work in a particular practice area or for particular elements or tasks, or for various phases of work. Fixed fees are frequently determined for specific discrete repetitive jobs where what is being done and the time it will take to perform this work is reasonably predictable from historical experience.

Clients prefer this arrangement because their total legal fee for this work is certain. It is easy to budget in advance. Legal costs may be reduced if the fixed fee is less than the historical cost paid by the client for similar legal services. The risk of unexpected or unanticipated events in whole or in part, and the burden of managing the work for efficiency and cost containment, is shifted from the client to the law firm. Further, the fixed fee arrangement assures involvement or input from the client in projecting the cost of legal fees for services to be rendered and in determining what the strategic performance choices will be and when they will be carried out.

The above advantages notwithstanding, a fixed fee arrangement may limit for the client the choice of law firms willing to represent that client. This is especially true in a 'seller's market' or in a legal market having considerable uncertainty. Also, setting of a fee cap may result in the unwillingness of a law firm to undertake marginally unprofitable work, which may be important in achieving the result desired by the client. Corner cutting can be avoided by a re-opener provision that encourages a law firm to identify, discuss and then pursue additional work with the client's approval.

Fixed fee billing, when properly structured, offers many advantages to the law firm. First, it assures regular work and cash flow, provided the client is willing to pay some portion of the fixed fee in installments. Second, it allows the firm to become an approved provider of legal services for that client. If a long-term relationship can be established and the firm becomes an integral part of the 'client's legal team,' that firm may have a competitive advantage over other law firms. Third, many law firms consider the fixed fee arrangement as being a 'reward' to those long-term, loyal, high-volume clients to keep them happy with the firm and encourage client retention. This is preferable to clients being tempted to look to other firms to provide similar services. Fourth, a fixed fee arrangement that is fair to the client and the law firm permits the firm to employ other attorneys and staff and to acquire technology and other services with less risk to the law firm. Fifth, the law firm may have an opportunity to negotiate for other 'premium work' from the client if favorable results are achieved.

If the firm is assuming at least a part of the risk of unexpected and unanticipated events, and of undesired results or outcome, it should be able to seek a share of the 'upside' in the form of a premium for a better than anticipated result. Sixth, the fixed fee arrangement increases for the firm the opportunities for positive communications with the client without the inhibition of a 'running meter.' This is especially important when the firm is interested in determining its client's objectives and evaluating what will be the legal services and strategies for performing them.

The fixed fee arrangement requires a specific and detailed definition of the work to be performed and a careful estimate of the hours needed to complete the job under this arrangement. Firms that enter into this arrangement must be careful about what is excluded from the contract and what is included. Considerable thought must be given to determine how 'extras' will be billed.

Unit pricing, a variation of the fixed fee arrangement, is usually determined for various tasks or phases of a matter, with payment being made upon the successful completion of the agreed-upon task or phase. Payment for each is usually a set amount, regardless of how long it takes to complete.

A 'capped fee' is another modified form of a fixed fee. Under this arrangement, the client and the law firm agree that the fees to perform specific work will not exceed a certain dollar figure. The firm may charge its standard hourly rates. However, beyond a certain maximum limit, the client will not pay more money.

Contingent Arrangement: Under a contingent arrangement, the law firm is paid upon results achieved. This arrangement is usually in combination with some other billing arrangement. Examples are: 1) reduced hourly rates with a bonus based upon results achieved; and 2) standard hourly rates charged up to a specified time dollar value and a contingency arrangement thereafter that dollar value has been reached.

Determining Alternative Billing System(s) for Your Firm and Your Clients

The type of legal work performed for your clients, the nature of your client base, the competitive environment in which your firm practices and your clients' perception of the value of the legal work performed will be critical factors in determining whether your firm should: 1) volunteer; or 2) react to external pressures for alternative billing arrangements from your clients or as the result of competitive pressures created by other law firms. Your partners' responses to the following questions will offer valuable insight about your firm's willingness and ability to 'accept and live with' one or more types of alternative billing arrangements.

1. What is your firm's attitude/commitment towards alternative billing arrangements? Welcome or fear? Are your partners willing to take some risk or are they risk-averse? How big a risk are they willing to take?

2. Do your partners possess the necessary skills to implement alternative billing arrangements? Is there a member of your firm who possesses the ability and skill to estimate accurately the cost of providing particular types of legal services and the fees to be charged in order to earn a fair profit?

3. Are there existing or potential clients that your firm may better retain, attract and serve by being willing to agree to alternative billing arrangements?

4. Are there clients whose loyalty should be rewarded?

5. Will alternative billing arrangements be productive as marketing tools to retain existing and attract potential clients?

6. Do your competitors' law firms offer alternative billing arrangements? In which practice areas is it possible/appropriate to offer alternative billing arrangements, i.e., volume or repetitive jobs? Others?

7. Does your firm have a plan to develop the necessary lawyers' skills to implement alternative billing arrangements with specific clients? Are you willing to commit sufficient time and money to develop training programs for lawyers and administrative personnel for organizing and systematizing specific practice areas? Are you committed to managing these practice areas as a professional business organization? Are you willing to test or experiment with alternative billing arrangements with existing clients who may be equally interested in determining the desirability/usefulness of alternative billing arrangements?

If your partners' responses to most of the above questions are of a positive nature, and if consensus is reached among the partners to implement one or more alternative billing arrangements, the following should be considered to develop appropriate strategies for selecting and managing the most appropriate arrangements that will be satisfactory for the firm and its clients.

• Analyze your practice in order to select which clients and/or which practice areas you will propose to make available alternative billing arrangements.
• Select which form or forms of alternative billing arrangements your firm will make available and what percentage of your firm's legal work you will handle under alternative billing arrangements.
• Determine whether your firm's accounting and bookkeeping systems will enable you to prepare budgets or determine the costs of legal services or segments of services.
• Survey your clients regarding their needs and preferences. Make certain you understand what aspects of your present time and billing system your clients like or dislike and their reasons.
• Understand what your clients perceive as 'value received' for dollars expended for legal services.
• What are your clients' expectations from outside counsel? Assess the extent to which these expectations are being satisfied ' and make corrective changes, as required.
• Select which attorney(s) in your firm will be able to serve as 'estimators' and managers of work, being conscious of efficiency and providing to clients the values discussed above. They will have to learn how to estimate the amount of time required to complete a particular job or phase of work in order to evaluate the performance level of the individual performing the assignment or phase of the assignment.
• Analyze the method of processing each aspect of the substantive work to be performed by each attorney and administrative personnel to insure that the most efficient and cost-effective processes are being utilized. This may result in reassigning responsibilities, eliminating or replacing functions, introducing or upgrading technology and improving the methods for producing or managing the work to be performed. The results of this analysis will directly affect the productivity of the individual and the profitability of the matter being produced.
• Develop internal procedures for the acceptance of new work to be billed on an alternative-billing basis. This decision can no longer be made by the 'intake' lawyer alone.
• Experiment by preparing of a pricing plan that considers the client's preferences or competitor pricing. It is critical that your timekeeping and accounting systems can support the alternative billing arrangements. Most law firms' lawyer evaluation and compensation systems are focused largely on the number of billable/fee producing hours worked per lawyer, a few focus adequately on efficiency, productivity and the creation of 'value for clients.' Making the changes necessary to successfully implement an alternative billing system as a replacement for an hourly rate billing system will involve and likely will require significant changes in other systems including your evaluation, compensation, training and the practice/work management systems. Test the tentative arrangement with your client and revise your plans based upon tests.

Conclusion

Variations of hourly billings, fixed fee billing, contingent fee arrangements and other forms of 'alternative billing' are no longer merely isolated experiences. They are becoming increasingly more commonplace. An alternative billing system cannot be completely successful unless there is built-in flexibility to deal with unanticipated or extraordinary events. You will have to work harder to keep making what you are now earning unless you begin to work smarter and take advantage of the opportunities inherent in at least some types of alternative billing.