If there is a key to alternative billing, it is not in the technical aspects of estimating costs or managing work process.  The real challenge is developing a trust relationship between lawyers and their clients that permits a change in the basis on which legal services are purchased.  However, the only way to create the necessary trust may require a bit of an incremental process.

Alternative Billing

If you bump around the legal profession long enough, everything old becomes new.  Case in point is alternative billing.  We are in the third …maybe fourth…  iteration of the alternative billing imperative.  Each time, the headlines screamed, “The Billable Hour is Dead: Clients Won’t Stand for Continued Hourly Billing!”  Now, I happen to be a fan of alternative billing.  I understand that it shifts the balance of risk from being wholly in the laps of the buyers of legal services and more under the influence of the law firms that can actually affect the efficiencies necessary to control that risk.

I also understand that, over the past decade (at least through 2007) law firms’ profits per partner rose by an average of 8.2 percent annually almost completely on the back of hourly rate increases.  Most observers would question whether these increases can reasonably be expected to continue in the current economic situation and with the increasingly tight-fistedness of most clients.  In fact, it would appear that the only way for law firms to continue anything approaching traditional profit growth out of their practices is to change the rules of the game.  That is, find a billing method where the clients don’t have a complete grasp of the competitive marketplace and that provides law firms with multiple levers with which to create profit opportunities.  Alternative billing – which in most peoples’ minds translates to Fixed Fee billing, allows firms to set price and adjust the cost of providing services.  Given that (a) the media is telling us that clients are demanding alternative fees and (b) that it can work in the favor of law firms, this whole thing should be a slam dunk.  Unfortunately, like in most things, the devil is in the details which, in this case, means execution.

Word is coming back, from both clients and law firms, that fixed fee billing isn’t working the way it ought to.  Clients are complaining that fixed fee pricing seems to be more expensive than what they were accustomed to paying under hourly rates.  It turns out that law firms are risk adverse (who would have thought?) and tend to put their thumb on the scale as they break out their component costs to come up with a fee.  If they add a couple of hours to every function for security, then put ten percent on top for unforeseen circumstances, and estimate the fee at full rack rates, the resultant bill doesn’t reflect the cost savings that clients were expecting.  At the same time, general counsels who must justify to their boards that they are squeezing all the fat out of the legal budget are asking for separate reports of hours worked for fixed rate engagements and running it though the regular audit process.  Not surprisingly, both sides are yelling “foul!”

Obviously, the problem is one of trust.  When I go to Best Buy to purchase a new television, the salesperson, the checkout person and the guy who sweeps the floor, all implore me to buy a service contract.  This immediately causes me to believe that a service contract is more to their advantage than mine.  And, if you ever actually read an appliance store service contract, it is equally apparently that they believe anyone who does buy a service contract clearly does so with the intent of someday attempting to use it for some evil purpose (like getting a new TV when their grandson throws a toy through the screen).  Of course, everyone understands that the solution to all this is communications and experience.  At some point I will appreciate that the amount being charged by Best Buy for a service contract is appropriate to the risk that something will go wrong with the TV and they will learn that I probably won’t attempt to pass off a hole in the TV screen about the size of a matchbook car as a manufacturing defect.

An Interim Step

It seems to me that there is a nice middle ground that permits law firms and clients alike to begin the transfer of some risk and start building trust.  It is nothing new – the blended rate.  In its purest form, a blended hourly rate charges all timekeepers on a case at the same rate.  The advantage to the law firm is that it provides them with the ability to manage their people and generate profit not only by the number of hours worked but also by managing the work force.  Under a blended rate, a paralegal or young associate may cost a fraction of a more senior lawyer but generates the same revenue.  From the clients’ point of view, they have a comparative number to negotiate on since they can go back to prior engagements and develop the historic blend rates of the law firms they use.  They also retain the ability to audit hours and look for areas of inefficiency.  What clients give up is some of their ability to dictate who does their work within the law firm, but, in exchange, they are bargaining for a lower overall rate.

If you and your clients have relationships that will permit you to work together on value billing systems, Godspeed.  But for many law firms and clients, the process is going to require a little trust building and an interim step of blended rates may help.