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Are Alternate Billing Arrangements The Answer?

Published by on November 11, 2008

Law.com has an article today called “Billing Gets Creative in Souring Economy:  Retainers, flat and ‘success’ fees in play.”  The article discusses the efforts of large corporations to reduce legal expenses with new alternative billing arrangements such as fixed fees, blended rates, fee caps and monthly retainers.  Apparently some corporations have met with success in […]

Law.com has an article today called “Billing Gets Creative in Souring Economy:  Retainers, flat and ‘success’ fees in play.”  The article discusses the efforts of large corporations to reduce legal expenses with new alternative billing arrangements such as fixed fees, blended rates, fee caps and monthly retainers.  Apparently some corporations have met with success in this effort — at least if success is measured by lower legal bills.

As part of our ongoing discussion about economic issues in the legal practice of employment law (recent posts here and here), I offer some brief thoughts on alternative billing arrangements in employment cases (and welcome comments) after the break.

The first issue with alternative billing arrangements in employment litigation is proper risk sharing between the law firm and client.  In the employment litigation field, different types of cases require different levels of work.  A hostile work environment case, for example, may involve numerous depositions of witnesses.  A reduction-in-force case may require the retention of a statistical expert, but have few witness depositions.  Each case presents its own specific needs relative to the proper evaluation and defense of the action.  Assigning a fixed fee to all “employment discrimination or harassment cases” involves too great a variance in risk.  In some cases, the law firm will have to perform significantly less than the negotiated amount.  In others, the proper defense of the case will require the expenditure of more effort.  Few clients have enough employment litigation matters to spread this risk evenly.

The second issue, which flows from the first, is that assigning a fixed fee to a case (or cases) places improper incentives on law firms.  The “AmLaw 100” profits per partner are a matter of public record (or at least public speculation) in a national publication.  Year after year, large firms manage to increase or maintain significant profits per partner.  And they do so despite implementing “alternate billing arrangements.”  How is that the case and how is that relevant to fixed fees?

Simply put, many decisions at large law firms are driven by the desire to maintain a certain level of profitability.  Associate salaries, billable hour requirements, which costs to pass thru to clients (and whether they get marked up) and even who to hire are decisions influenced by the bottom line.  In this economic reality — where a certain level of profitability has to be maintained — fixed fee cases give psychological incentives to the law firm that are directly contrary to the client’s best interest.

For example, the firm will have the incentive to assign the case to the least expensive attorney(s) available.  Some firms increase the profit margin on this kind of work by hiring contract attorneys at a significantly lower hourly wage than the expensive “big firm associates” we all read about.  Law firms do not advertise the distinction between the different “classes” of associates to the public, so the client may not have any idea which kind of associate is doing their work. 

There is also an incentive to the firm to do the least amount of work possible in order to maximize the number of profitable cases.  Yes, some cases will result in more work than the fixed fee.  But everything will be done to ensure that this is rare.  Again, is it in the best interest of the client for the driving motivator of the attorney to be doing the least amount of work possible?

Perhaps in the end, alternative billing arrangements are the only way for corporate America to rein in the outrageous hourly rates, associate salaries, and legal bills that we see today.  In the end, corporations that continue to hire institutional law firms to handle employment cases will pay one way or the other to maintain the profits per partner that their institutional attorneys have come to expect. 

In my opinion, fixed fee billing arrangements achieve cost savings by negatively impacting the core trust in the attorney client relationship.  They do so by placing perverse incentives on the attorney to staff cases inappropriately and to avoid doing work that may be necessary on a case in order to maintain a certain level of profitability.  The billable hour may not be the best system in the world, but it depends on client trust in the attorney and the attorney’s integrity in making sure that every matter is handled with the best interest of the client in mind.

Comments are welcome.

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