Alternative fee arrangements gaining popularity among law firms

Is the billable hour, long a staple of the legal industry, going the way of the passenger pigeon, the woolly mammoth and the Pyrenean ibex, extinct species all?

Under intense client pressure to justify charges following the stock market crash of 2008, law firms took the first steps during the recession toward moving away from hourly charges by offering clients flat fees or by billing based on case outcomes.

Now, the flat-fee movement is gaining momentum, with many big firms employing staffs of MBAs, actuaries and other finance experts to price legal engagements and then to make sure lawyers assigned to these matters stay on budget.

Known in the legal industry as alternative fee arrangements, such pricing strategies typically involve a flat charge for all or a portion of a legal matter, depending on the type of engagement. Companies, for their part, are using some of the same bargaining and analytical techniques in seeking out legal services they have used to obtain parts, labor and raw materials. Much legal work is put out to bid, and company procurement officials often are brought into the process of deciding which law firms to hire.

According to a 2014 survey by Altman Weil, the Newtown Square-based legal consulting firm, nearly 90 percent of firms with 1,000 lawyers or more had increased the use of alternative fee arrangements in the preceding year.

"It has grown in scope and creativity so that you can take an entire portfolio of business and try to price that out over a number of years," said Barry Boise, a partner at Center City's Pepper Hamilton law firm who oversees these fee arrangements. "We have hundreds of these engagements at any given time, so they make up a significant portion of our case volume."

At Reed Smith - a 1,600-lawyer firm - a staff of 15 accountants, lawyers and MBAs helps partners pitch the law firm's services. Alternative fee arrangements now account for about 30 percent of the firm's revenue of $1.15 billion. If a client asks for a flat fee or charges based on case outcomes or some structure other than the billable hour, they project what the matter will cost and how it can be done profitably.

Someone from the staff is available on a 24-hour basis, seven days a week, to respond to client requests.

"I would say from a practitioner perspective, the last two or three years is really when it started to gain momentum," said Paul Jaskot, a mergers and acquisitions partner at Reed Smith and a member of the firm's executive committee who oversees fee arrangements.

Lawyers say several factors are driving the use of alternative fee arrangements. Most prominent is the financial pressure that corporate clients faced when the economy tanked during the recession. As in-house corporate legal departments came under pressure to justify legal spending, many slashed their lists of outside counsel, initiating fierce competition among law firms.

Then alternative fee arrangements became a way for some law firms to market themselves.

Mark Silow, the managing partner of Center city's Fox Rothschild, said the flat fee trend has as much to do with the demystification of legal services as with the financial pressures of the Great Recession.

A generation ago, many clients viewed legal services as a sacrosanct and somewhat inscrutable profession, and bills were rarely subject to much scrutiny. No more.

"Legal services have always straddled the line between being a profession and being a business," Silow said. "And it being a business, it was just a matter of time for the walls to come tumbling down. I think it is just the age we live in. It has happened to medicine, it has happened to media, it is happening in every aspect of business."

At Dechert, a global firm with headquarters in University City, about 20 percent of the law firm's annual revenue of $839 million is now accounted for by alternative fee arrangements. Colleen Nihill, the chief administrative officer of the firm, said clients like flat fees because they enable cost predictability.

"They [legal departments] were being told by the CEOs and their CFOs to get their legal spend under control," Nihill said. "For so long, [legal costs] operated in a black-box fashion. They were immune from budgets. So they were being asked to provide some predictability, and in order to do that they needed to partner with firms."

Even for such companies as Comcast, which limits its use of alternative fee arrangements to litigation and labor and employment matters and still relies heavily on hourly billing, scrutiny of legal spending has intensified. Art Block, the cable and Internet company's general counsel, said the company no longer accepts the inflation adjustments and added hourly increments for a lawyer's additional years of experience.

"We see the firms really acknowledging that the days when they could assign a percentage [increase] that met their business plans and profitability projections and the clients would just pay them are long gone," he said.

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