Clients are increasingly unhappy with the traditional economic model of law firm billing—the billable hour—and for good reason.  The billable hour runs contrary to fundamental needs and objectives of clients:

• They want to pay for results, not blocks of lawyer time.
• They want to be able to predict costs.
• In the event of a bad outcome, they want their lawyers to share the pain.

In recent years, the American Bar Association, the Association of Corporate Counsel (ACC), business leaders and even a U.S. Supreme Court justice have called for the demise of the billable hour, saying it rewards inefficiency and is driving up legal costs, according to a November 18, 2008 article in The National Law Journal (“Billing gets creative in souring economy”).

As part of it “Values Challenge” launched in late September 2008, the ACC is encouraging firms to jettison the billable hour model in favor of “value-based alternatives,” and has asked its members to carefully monitor corporate outside legal fees to determine whether alternatives to the billable hour become more common.

As part of our mission to serve as trusted advisors and business partners to each of our clients, Cypress, LLP is committed to exploring the full range of billing arrangements and working creatively to arrive at a solution that best serves the needs of the client.

The table below describes the basic alternative billing arrangements:  how they work, when to use them and their advantages and disadvantages.  We present it as a service to our clients prospective clients and as invitation to talk to us about how Cypress, LLP can help you with your legal matter.

• How It Works
  Client pays the law firm based on the results achieved. Payment is often expressed as a percentage of the recovery, settlement, or amount saved – i.e., a “contingency fee.”
• When to Use It
  When the law firm is highly confident of achieving a successful outcome due to legal expertise, careful screening of the matter and efficient staffing. When clients with valid claims are unable to pay for legal representation any other way.
• Advantages
  FOR THE CLIENT—The client only pays if there is a successful outcome.  The client who could not otherwise afford it is able to get legal representation for a valid claim.
  FOR THE LAW FIRM— The law firm gets maximum leverage on his expertise and efficient staffing of cases.
• Disadvantages
  FOR THE CLIENT—If the law firm achieves a successful result with very little effort, the client will pay much more than he would have paid on an hourly basis.
  FOR THE LAW FIRM—The law firm assumes the financial risk of an unsuccessful outcome.  Also, if the law firm achieves a successful result for the client with very little effort, the client may feel the law firm was overpaid.
• Combine It With
  Fixed or flat fees or straight hourly billing. For example, client and firm might agree to segment a litigation matter in such a way that law firm bills for the initial investigation phase on a fixed fee or straight hourly fee basis. Once the details of the matter become clearer, client and firm could agree to a contingency fee arrangement.

Fixed or Flat Fee

• How It Works
  For a set price, the law firm provides a specific service (e.g., preparing an agreement, conducting an initial investigation into a litigation matter). The parties should specify in sufficient detail what services will be performed for the fixed fee.
• When to Use It
  Routine or frequent work where costs are easy to predict. The fee agreement should include provisions to allow both the client and the law firm to revisit and revise the agreement should unforeseen circumstances arise.
• Advantages
  FOR THE CLIENT—No unhappy surprises in the legal bills – the client can budget legal costs with precision.
  FOR THE LAW FIRM—The law firm can leverage his expertise and is rewarded for efficient use of his time.
• Disadvantages
  FOR THE CLIENT—The law firm has no financial incentive to devote additional time or increased work quality to assure the best outcome to the client.  Unforeseen circumstances can lead to conflict with the law firm if additional or higher cost staffing is needed to meet the client’s objectives.
  FOR THE LAW FIRM—The law firm must fully understand the costs of performing the work or risk losing money on the engagement.
• Combine It With
  Combine with result-based fees for different stages of a matter.  Combine with performance bonuses for achieving client objectives (e.g., early settlement, high damages award, reducing transaction costs, meeting a closing deadline).

Capped Fee

• How It Works
  Client pays law firm up to a specified maximum amount, but no more. The parties should consider provisions to allow both the client and the lawyer to revisit and revise the agreement should unforeseen circumstances arise.
• When to Use It
  Routine or frequent work where costs are easy to predict.  Matters that involve a limited upside to the client.
• Advantages
  FOR THE CLIENT—Client is able to predict maximum costs and shift some financial risk to the law firm.FOR THE LAW FIRM—No financial advantage to the law firm—but can be a useful alternative to develop clients who must budget their legal engagements.
• Disadvantages
  FOR THE CLIENT—If the cap is set too low, a capped fee has the same disadvantages to the client as a fixed fee.FOR THE LAW FIRM—The law firm must fully understand the costs of performing the work or risk losing money on the engagement if the work required exceeds the basis for the capped amount.
• Combine It With
  Straight or discounted hourly billing with performance bonuses based for achieving client objectives (e.g., early settlement, high damages award, reducing transaction costs, meeting a closing deadline).

Retainer

• How It Works
  Client makes a deposit against charges for future services or client makes a deposit or nonrefundable payment in return for which the law firm guarantees its availability for a specific period of time and/or agrees to refrain from representing adverse parties.
• When to Use It
  When the client wants to outsource a continuous flow of work and budget-per-time is important to the client.  When clients want to ensure the law firm does not represent adverse or potentially conflicting parties.
• Advantages
  FOR THE CLIENT—The law firm will not be able to represent an adverse party.FOR THE LAW FIRM—Guarantees work flow and smoothes cash flow. Mitigates collection problems. Clients are more likely to seek legal help on a matter if they have already paid for it.
• Disadvantages
  FOR THE CLIENT—Client must pay upfront.  If the retainer agreement does not clearly specify the work to be done, the client may think too little work is being done.
  FOR THE LAW FIRM—Conversely, absent clear specifications in the retainer, the law firm may think too much work is being done for the money.
• Combine It With
  Can be used in combination with virtually any billing alternative.

Volume Discount

• How It Works
  The law firm reduces its hourly rates in return for client guaranteeing a certain volume of legal work.
• When to Use It
  High volume, routine matters where cost is a primary concern.
• Advantages
  FOR THE CLIENT—Client pays lower hourly rates.FOR THE LAW FIRM—Guarantees workflow. Reduced rates give client an incentive to send more work to the firm.
• Disadvantages
  FOR THE CLIENT—Still a billable hour method, so the incentive remains for the law firm to be less efficient and not seek early resolution.FOR THE LAW FIRM—A law firm with too many discounted matters in its client mix may have difficulties managing revenues against costs.  Other clients not receiving a discount may be offended when they hear about a discount given to a similar client.
• Combine It With
  Performance bonuses for achieving client objectives (e.g., early settlement, high damages award, reducing transaction costs, meeting a closing deadline).

Blended Hourly Rate

• How It Works
  All time is billed equally regardless of who works on the matter.
• When to Use It
  Routine or straightforward matters where it is relatively simple to predict the required tasks and the lawyers and staff needed to perform them.
• Advantages
  FOR THE CLIENT—Client pays lower hourly rates.FOR THE LAW FIRM—Easy to negotiate and administer. Encourages the law firm to delegate work to lower-cost providers.
• Disadvantages
  FOR THE CLIENT—Still a billable hour method, so the incentive remains for the law firm to be less efficient and not seek early resolution. Can result in over-use of less experienced and less efficient lawyers—which lowers work quality and increases hours.FOR THE LAW FIRM—Reduces profitability if the law firm does not manage the staffing mix on the matter.
• Combine It With
  Performance bonuses for achieving client objectives (e.g., early settlement, high damages award, reducing transaction costs, meeting a closing deadline).