Law firms and legal organizations around the country are arguing whether the traditional “billable hour” can serve as both a measure of the firm’s productivity and profitability at the same time. Clients, often dealing with declining bottom lines, are just trying to control costs — and understand law firm charges. Several San Diego firms have concluded the best way to deal with the related issues is to negotiate a custom fee arrangement for litigation and sometimes for other traditionally hourly billed services.
Best Best & Krieger — one of California’s largest law firms with nearly 200 lawyers — opens the alternative fee arrangement discussion when the firm is engaged for litigation. Partner Jim Gilpin, who helped establish the San Diego office of BB&K 18 years ago, sees laying out budgets upfront as a way for companies to determine expertise as well as costs.
“If a law firm can provide you with a detailed analysis of what the matter will encompass and associated costs in a way that demonstrates more certainty, their expertise is going to be more evident,” he said.
Gilpin says budgeting for litigation should start with the client’s objective, then developing a strategy to meet those objectives based upon a cost benefit analysis.
“Decisions have to be made, such as how much is the client willing to spend to get the desired result?” he said. This requires good communication with a client about their desired outcome and adjustment of unrealistic expectations.
Fish & Richardson, which has 12 offices worldwide, holds a similar view. It hired Rob Brackett in San Diego as part of its growing number of professionals, meaning non-lawyers, who manage litigation alternative fee arrangements for clients. Brackett, who is Fish’s Client Services Contract Manager, leverages his strong financial background to oversee and recommend alternative fee arrangements, analyze the profitability of such agreements and predict pricing for clients.
In 2011, 62 percent of law firms surveyed were seeing an increase in the use of alternative billing methods. Brackett said his job is important as both the firm’s profitability and the clients receiving competitive fees hang in the balance.
Room for Adjustments
BB&K’s Gilpin stresses that such alternative fee agreements cannot be etched in stone. “As with anything, things change during the course of litigation, so as circumstances develop you must have additional discussions with clients, often regarding fees.” He likens litigation to building a home. During the home construction process, as with litigation, changes are made often due to additional ideas or new information, resulting in change orders and additional costs.
Gilpin views budgeting and fixed fee arrangements as creating incentives for lawyers to be more efficient and as a way to demonstrate value to the client. “Clients are getting more sophisticated and demanding value,” he says.
The pressure from clients to provide more value should not negatively impact the gross billings for San Diego law firms, according to Jeremy A. Roth, co-president and co-managing director of Littler Mendelson.
“It is clear that the San Diego legal market, at least from the corporate/business practice, will remain rather static in the coming year,” he said. “Growth in fees will be moderate at best, as clients remain vigilant in their efforts to capture efficiencies and to reduce legal spend.”
Brackett said this “upfront” negotiation of litigation fees has long been the case with many legal services such as contracts or employment agreements. With litigation, however, it is a relatively new concept and one that is being embraced by both lawyers and clients alike. Alternative fee arrangements will come to other areas of practice, the attorneys said.
Alternative Payment Plans
It already has come to Foley & Lardner, said Partner Nancy Stagg.
“Foley has been working with clients using a variety of alternative fee arrangements,” she said, “including volume discounts (such as increasing the percentage discount off standard hourly rates as the client’s billings increase over the life of a matter, or based on total annual billings in the case of multiple matters), flat fees (a flat fee for a particular matter or case), fixed fees (a fixed monthly fee for all work performed on a certain number of cases or for a certain type of case), blended hourly rates (one rate applied for all attorney timekeepers on a matter) or some combination of the above with ‘success fees’ built in for certain client-desired outcomes (ex. a bonus of $X if class certification is denied, if a summary judgment motion is successful, if a case is settled early or under budget, etc.).”
At Fish, the firm is looking at ways to offer a variety of ways to improve efficiency. Brackett works with a small group of attorneys to develop new methods of billing and manage the fees. Kurt Glitzenstein, who heads the firm’s alternative fee arrangement group, said the emphasis is on more than just competitive pricing. “What it really means is that it’s putting more obligation on the law firms to work efficiently, and there are many ways we strive to do that,” Glitzenstein said.
“Some clients have a lot of experience in negotiating alternative fees and are very comfortable in working with alternative fees and have their own ideas about what works for them,” said Foley’s Stagg, who primarily works in defending consumer class actions, unfair competition and false advertising allegations. “A lot of corporate law departments are requesting that alternative fees be included in any response to a Request For Proposal. But for many, I think it’s an area where they are collecting the information about what is being offered but not necessarily acting on it at the present time or using it to select counsel. It takes some time for both the client and the law firm to evaluate if the alternative fee structure being used works for that relationship. It’s very important to make sure both sides are communicating about what is included in the alternative fee and, more importantly, what is not.”
Bob Tyson, co-founder of La Jolla-based Tyson & Mendes, said that if a company is interested in an alternative fee arrangement, they should “just ask.” The arrangement must be beneficial to both parties, however. “One of the best incentives for a law firm to establish alternative or discounted fees is volume,” Tyson said, whose firm focuses solely on litigation work. “Companies with multiple litigation matters a year may find a law firm more willing to work with them in establishing alternative fee arrangements in exchange for giving the firm a bulk of its litigation work instead of distributing cases out to multiple law firms.”
Tyson has taken inspiration from famed trial lawyer David Boise, who represented Al Gore in the U.S. Supreme Court case Bush v. Gore. Boise is credited with revolutionizing the economics of law firms by building incentives into fee arrangements so value is based on results and not merely billable hours. Tyson & Mendes has embraced this concept and has established arrangements with some clients that include lower billable rates and a contingency based upon results.