Smaller Firms' Message To Big Law on Alternative Fees: Join the Club

Microsoft's vow to make its outside lawyers bill nearly all their work under alternative fee arrangements caused a stir in August, given large law firms' traditional devotion to the billable hour. See, “Jittery Firms Put On Brave Face as Microsoft Targets Billable Hour,” The American Lawyer.

But for a growing number of mostly smaller firms, those anxieties highlight a Big Law business model they've already left behind.

“We're not afraid of this, and we are used to this and comfortable with this and we see there is a way to make money with this,” says Michael McGee, CEO of 225-lawyer Miller, Canfield, Paddock and Stone.

“I estimate that fully 55%-60% percent of our annual gross revenues are attributable to fixed-fee arrangements. That has been true for at least 25 years, and I suspect perhaps longer,” McGee says. His Detroit-based firm even has produced a two-page PDF that it sends to clients about various nontraditional fee arrangements that are available and how they work.

For decades, Miller Canfield had used alternative fee arrangements for much of its transactional work — which represents the lion's share of its revenues, McGee explains.

Over the past five years, the firm broadened that approach to its litigators, who now frequently handle matters on a fixed fee, sliding fixed fee, and, occasionally, contingency basis, he says.

He acknowledges the shift wasn't always easy: “The first couple of years we were more likely to lose money than to make money, but that was really our fault.”

Miller Canfield, ranked 183 by gross revenue among Am Law 200 firms, doesn't have the same market reach or ultra-elite branding as some of its competitors near the top of the Am Law 100, says McGee. That means it's “a price taker,” not “a price maker,” he says.

After McGee and the firm's finance professionals worked out when lower-paid lawyers or paralegals at the firms could handle tasks previously handled by more senior attorneys, that “drove us to the lowest price point,” he said. And that meant the firm could win business.

One of the hardest tasks of switching to alternative fee arrangements is getting partners, particularly senior litigators, to ignore the ego-satisfying comfort of high-dollar billable hourly rates.

“People will resist, but when you present them with cogent numbers about the cost of the production and what they deliver to the client they recognize there is more than one way to do that, and they respond positively,” McGee says.

Lawyers have to make a cultural switch. “They have not been trained or exposed to the idea that the work they do can undergo a great deal of financial analysis,” McGee says.

Since more of Miller Canfield's revenues come from transaction-related practices, for which it historically has accepted fixed fees, the cultural change was less dramatic than it might be for other firms, he says.

Litigators at his firm recognized that their colleagues who worked on lending and M&A matters, for instance, had accepted fixed fees and still made money, he says.

At some other firms, meanwhile, the litigators have been driving the move away from billable hours all along.

At some other firms, meanwhile, the litigators have been driving the move away from billable hours all along.

“We have been doing this exclusively” for 24 years since his firm's founding, says Jason Peltz, a partner at Chicago-based Bartlit Beck Herman Palenchar & Scott, where more than 95% of the firm's revenues come from clients with which the firm has fixed fee agreements.

Typically, those agreements also include a contingency component or success fee. That could be as little as 5% or as much as 50% of the total fees, Peltz says. The firm handles a wide variety of defense and plaintiffs-side litigation matters for corporate clients.

For the clients, such a model provides budget certainty — they know how much they are going to pay each month, Peltz says. It also provides clients the comfort of knowing that their lawyers share their incentive to win, he says. And it means that Bartlit Beck — which has a much larger ratio of partners to associates, 60-to-20, than is typical of more traditional law firms — tends to staff matters with more senior partners than its competitors, he says.

Whatever the assignment their firms are handling, both Peltz and McGee say agreeing upfront on the parameters of a billing arrangement is key.

“Negotiating the scope of the deliverable is the most important thing in a fixed or flat fee arrangement. You have to worry about mission creep,” says McGee. Experience improves firms' ability to hold their own in those negotiations, both lawyers say.

Neal Manne, a managing partner at Houston's Susman Godfrey, agrees. “We have been doing this a long time, and are very good at selecting good contingent fee cases and fixed fee cases,” Manne said in an email. “On fixed fee matters our aim is to strike a deal that is fair to the client, who never has to worry about escalating fees because it knows — and can budget for — exactly what it will pay each month.”

Manne says it's natural that alternative fee arrangements sometimes favor the client's bottom line more than the firm's, and vice versa. “Sometimes we come out ahead over the long haul and sometimes the client does. That is fine with us; we are not looking to gouge clients through fixed fee deals, we are trying to make them and us happy,” he says.

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Miriam Rozen covers the business of law for ALM with a focus on law firm-client relationships. Contact her at [email protected]; and on Twitter @MiriamRozen.