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Alternative Fees: Hourly Billing in Drag?

Allison C. Shields, Esq.
President of Legal Ease Consulting, Inc
Special Guest Post

In a recent article from legalweek.com “Defining value in law firm billing: art or science?”, author Tim Bratton notes that despite all of the discussion about alternative fee arrangements, the focus of in-house counsel continues to be on billable hours as a standard for measuring ‘value,’ even while all involved seem to concede that time does not actually equate to value. He laments the continued conversation among in-house and outside counsel about alternative fees, claiming that

[M]ost if not all … fixed fee deals … are reverse engineered into an hourly rate, give or take a bit…. [and] the number I come up with in my own mind as representing ‘value’ is still based at least in part on my own assumptions of the blended hourly rate of the combined legal team on a project and the time I think it will take them to do the job in question.

Are all alternative fees really hourly billing in drag*?

The problem, as Bratton frames it, is that, “Value is not always an objective touch point,” and lawyers do not know a better way than hours to measure value. But the amount of time a task actually takes and the amount of time clients, in-house counsel or anyone else reviewing a bill perceives that it ‘should’ take may not be the same, either. Even on hourly cases, the bill (and what the client pays) is not always based upon the actual time spent.

It’s no wonder lawyers have difficulty proposing, implementing, or even understanding alternative fees and pricing strategies. Perhaps that is why Bratton ultimately concludes that the change needs to be driven by the client and that clients need to “ be clear in our own minds and clear with our advisers on what we really mean when we talk about value.”

Of course, if clients drive the change, more lawyers will embrace it. But lawyers can be a force for change, too, if all involved can get a better handle on value; not only the value of legal services themselves, but on the value of moving away from hourly billing. To be successful at making a change from the billable hour to alternative fee arrangements, lawyers should be clear about the benefits to their clients and the consequences for failing to make the change.

Alternative fees and unpredictability

Many who use alternative fees (and flat fees in particular) think that they work best for routine work. Bratton seems to agree in his article, saying that in his experience, alternative fee arrangements run into difficulty when projects “blow up quickly or change direction unexpectedly, such that a quote at the beginning of a project based on a number of assumptions can become meaningless.”

Bratton is not alone in perceiving that alternative fee arrangements become difficult when there is unpredictability, and as a result, hourly fees and time tracking become the fallback position for determining value.

But that doesn’t mean that all alternative fee arrangements are or have to be simply hourly billing disguised as something else.

Defining the scope of work

Sure, unforeseen issues arise, and as Bratton also points out, sometimes the lawyer needs to keep working without the benefit of a detailed discussion with the client while the emergency state lasts, particularly in the litigation context. But the lawyer should always be in contact with the client to discuss with the client (or at least advise them) what is happening and how to respond. And if there is a clear conversation in advance about what the assumptions and expectations are, what the scope of work based upon those assumptions entails, what work might fall outside of the original scope and what circumstances might create that work, there should be no issue when the ‘unforeseen’ actually does arise and no problem securing an additional fee.

While neither lawyer nor client may have been able to predict the specific circumstances in that individual case, based on past experience, lawyers and in-house counsel should have an idea what kinds of things might arise. If this is part of the discussion of scope of work and fees at the outset, an advance decision can be made about how to deal with any such emergencies should they occur during the course of the representation and how the fee will be adjusted. This eliminates negotiation while in the process of completing the work, or after it has already been completed.

Implementing alternative pricing arrangements isn’t easy – it takes time and effort on the part of the firm to understand the needs of the client, to develop a fee structure that makes sense for the firm and the client, and to adequately explain that system to the client based upon the client’s needs. The client needs to understand why it helps them to agree to alternative fee arrangements and to let the firm know what their needs are and what they value.

Originally Published in the Lawyerist.com


Allison C. Shields, Esq. is the President of Legal Ease Consulting, Inc., which provides productivity, practice management, marketing and business development coaching and consulting for lawyers and law firms. She is a frequent contributor to many legal publications and the co-author of LinkedIn in One Hour for Lawyers and Facebook in One Hour for Lawyers, published by the American Bar Association’s Law Practice Management Section. Her website, LawyerMeltdown, provides information for on legal practice management and marketing, and she is the author of the Legal Ease Blog. Contact her at Allison@LegalEaseConsulting.com.