The Financial Crisis & Alternative Fees (Continued)

Well, there's nothing like a financial meltdown to spur some discussion in the legal community about moving to alternative fees.

A recent New York Times article with the headline "Law Firms Feel Strain of Layoffs and Cutbacks" noted that with some large law firms "desperate for business," they "are more willing to accept less profitable payment arrangements that do not reward the firms for simply assigning more lawyers to spend more time on a project."

The NYT article goes on to cite a recent study in which 32% of 600 corporate executives surveyed predicted significant changes in law firm billing practices over the next two years. Wow, only 32%?! So in the face of what is likely to be the worst financial crisis in this country since the 1981-82 recession, two-thirds of these corporate executives expect to continue to be billed by the hour for legal services just as they have always been? Where are their shareholders?

At least one corporate executive gets it. In the article, Ivan K. Fong, General Counsel of Cardinal Health in my hometown of Dublin, Ohio, is quoted as saying "rather than having hourly rates, we are increasingly negotiating flat fees or fixed fees, or success fees.” Ivan is also the current Chair of the Association of Corporate Counsel (ACC) which has launched a new legal fee initiative called the "ACC Value Challenge" (you can read more about that here and here). Ivan gets it. (FYI -- Cardinal is not a client of mine.)

Over in Business Week, Cravath's managing partner Evan R. Chesler offered some advice to clients on how to cut legal costs in this troubled economy. One of his tips -- hire a lawyer who already has too much work to do (on the assumption that he/she won't spend a lot of billable time on your matter) -- is somewhat humorous. But it's his last suggestion that is surprising, coming as it is from one of the most elite Wall Street mega-firms -- "try to work out fees that are not based on the billable hour:"

"The billable hour can be a terrible thing," says Chesler. In litigation, he explains, "it creates all the wrong incentives," feeding a system "where it's more profitable to lose than it is to win." That's because when a corporate defendant loses a case, the process generally drags on with mounting legal fees.

Companies, of course, have been railing against the billable hour for decades. But particularly in litigation, it has persisted as the primary way big firms bill for their services. Chesler acknowledges that there "has been a one-way conversation" for years, but says Cravath now "is trying more and more to come to alternative fee arrangements that make the billable hour irrelevant." Generally, this means charging flat fees to handle cases, often with "success fees" for extraordinary results.

Flat fees may not always save clients money, but they do offer something of major importance to businesses: a measure of predictability in budgeting expenses. While Chesler thinks Cravath could do well under such arrangements, switching away from charging by the hour "is not intended to be a windfall for anybody," he says. "This is about trying to put some rationality in the system and come up with a better way of dealing with each other."

Interesting comments.

That the current financial crisis has prompted more of a discussion of alternative fees, particularly on the client side of the equation, is at least one positive outcome of what is for many people, both in the legal profession and beyond, a very trying time.

However, as I've discussed in previous posts, for there to be a true change in our profession in how we bill for our services, it will not be enough that more clients turn to alternatives to the billable hour. It will be necessary for the law firms themselves to come to the conclusion that the billable hour must go. And instead of being scared into using alternative fee mechanisms simply because current economic conditions might demand it, firms need to passionately believe there is a better way. When this financial crisis ends -- and it will -- it will be interesting to see if the clients and the firms who turned to billable alternatives during the crisis will revert to the old ways or if they will continue to see true value in a new way of providing legal services to clients.