Local law firms look at ‘alternative billing’ as an efficient option

Flat-fee approach gains traction

The legal industry is not known for being cutting-edge.

Indeed, law firms typically take a measured approach regarding, for instance, hiring, merging, advertising and client billing.

But with the latter, a trend is emerging, rendering this sometimes-staid trade a bit more progressive than its past suggests.

The term used is “alternative billing,” sometimes referred to as “alternative fee arrangements” or AFAs, and the practice is becoming increasingly popular with local law firms and their clients as both focus on efficiencies. In essence, alternative billing means a fixed or flat rate is billed for legal services, as opposed to an hourly rate (some even go as far to describe contingency fee billing as alternative billing).

Many clients — and lawyers, for that matter — say firms become more efficient if they bill by the job and not by the hour.

“Clients want more certainty in their budgeting and fees,” said Charles Johnson, a practice group leader with Butler, Snow, O’Mara, Stevens and Cannada.

Johnson said Butler Snow’s health care group sees about 75 percent of its fees generated from non-hourly rate billing.

Firm-wide, Butler Snow projects about 40 percent of 2012 projected revenues will be via AFAs, Johnson said. In 2014, that number is expected to rise to 65 percent, he added.

A recent Bloomberg Law piece detailed the AFA trend among law firms. American Lawyer Media Legal Intelligence found that 62 percent of law firms nationwide increased their use of alternative fee arrangements during the past year. Overwhelmingly, the reason cited (91 percent of 194 firms survey) was to attract and maintain clients.

Some naysayers contend that alternative billing works fine for a business transaction that requires legal expertise but is not suitable for trial work and its often time-consuming nature.

Johnson counters by noting, “We are doing trial work with a fixed monthly fee.”

Ed Lanquist, managing shareholder with Waddey & Patterson, said about a third of the firm’s billing is alternative.

“We opened in 1992 and have been using [AFAs] since our inception,” he said.

Lanquist said Waddey & Patterson has found that for budgeting purposes, telling clients the exact cost upfront minimizes surprises on the back end of the process.

“They can budget accordingly,” he said.

On that theme, Butler Snow’s Johnson said many of the firm’s most dedicated clients, who tend to have a strong feel for long-range budgeting, like the AFAs approach.

“Understanding the need for predictability in budgeting, we approached many of our clients with a fixed fee first without them having to ask for a proposal,” he said. “For one global pharmaceutical company, we handle all their contract work — which totals about 4,000 contracts annually — for a fixed rate. To do that, we have to have the data, and an understanding of what their legal expenses have been, so we can adequately agree upon price and scope of work for those projects. In order for the client and the firm to both benefit, firms have to be efficient with project management.”

Teresa Walker, chief operating officer with Waller, said AFAs allow firms, for example, to know when a senior partner might be better suited (or not) for the work at hand. 

“Firms want the flexibility to adjust the staffing for each case at their discretion,” she said when asked the benefit of AFAs to a firm.

Walker said that if clients opt for alternative fee arrangements, firms can actually generate more substantive bodies of work with those clients than otherwise would be the case — while still providing them fair costs for services.

“We can offer the client a flat fee for each legal matter we do for them,” explained Walker, who estimated about 20 to 25 percent of Waller’s work is handled via AFAs. “If done and staffed correctly, it can increase the volume of the work we get, which can increase revenue and also minimize any unnecessary costs to the client.”

Walker said Waller, which began alternative billing about five years ago, is seeing a growing number of clients open to AFAs.

“People are still a little cautious about it, but certainly more and more corporate clients are asking for it,” she said.

Alternative billing is not limited to the straightforward flat fee.

For instance, a firm can do discovery on a flat fee and trial work on an hourly fee. As noted, some firms consider contingency fees a form of alternative billing. There is also the “collar” or fee cap approach. If legal work exceeds the fee originally agreed upon, the client will pay the balance.

In addition, some firms use an annual retainer for a portfolio of services. With this approach, the firm will handle the work for an agreed upon price (usually for a bulk of services).

Bill Ferrell, a Stites & Harbison associate attorney who focuses on intellectual property matters, said AFAs are an accepted practice for trademark registration and for patent clients.

“I would be surprised even if a firm had a policy that they didn’t use alternative fees that they would not make an exception,” Ferrell said.

“There is room to grow in handling litigation for flat fees,” he added. “As times goes by, that’s where we’ll see the most expansion — in flat fees.”