Author: Lori D. Brazier
Report to Legal Management, September 2002
The difficulty clients have with hourly-based billing is that it offers neither certainty nor predictability in legal fees and, more importantly, no incentive
for improved efficiency in the delivery of legal services.
Alternatives to hourly billing for legal professionals have been advocated for at least 10 years, but very few law firms, corporations or government departments have embraced them. General counsel, claims executives and others in senior management have no time to develop alternatives. Most do not know how to
design alternative pricing models for legal services. Very few companies or firms track legal fees in a way that allows for any analysis of how files are staffed, or how efficient the firm or the client have been in managing work flow within particular matters. Yet, general counsel and significant purchasers of legal services tell us that they will consider viable alternatives. Almost
all want the law firm to propose new arrangements.
Law firms are not typically drivers of change. Most change is client-initiated. Moreover, compensation systems for both partners and associates sustain hourly-based billing because they are largely or entirely production-driven. Even a well-intentioned
lawyer must reconcile client interests with the financial imperatives of the firm. In too many law firms, performance is measured only by the volume of hours billed.
The greatest obstacle to introducing pricing alternatives, however, is knowing where and how to begin. Few lawyers use project management tools to staff legal matters and to control work flow. Fewer still understand how the law firm can make money using alternative pricing models. Notwithstanding the barriers to change, opportunities do exist for the companies, government departments and law firms that are willing to innovate.
Benefits of Partnering
Longer term arrangements with law firms to provide legal services can generate significant benefits, but only when there exists an important mutual commitment to actively manage the relationship and to continuously improving processes.
Company benefits can include a greater focus by the law firm on service and turnaround times, the assurance of quality work performed by professionals who are committed to knowing and understanding the client's business, cost savings through increased efficiencies, and predictability over legal fees.
For a law firm, a long-term partnering arrangement carries the benefit of predictability about revenue. Receiving a bigger share of the company's legal work provides the law firm with the latitude to change its pricing model and its internal business processes. It can also generate a model for the delivery of legal services that can be applied to companies in a variety of industry sectors, generating opportunities to increase market share.
Prerequisites to Successful Partnering
Given the effort involved in creating and sustaining these types of arrangements, one must determine whether the volume of legal work that the company refers to law firms is sufficient to warrant a change in the business model. A few "winning conditions" must exist. The company must have an ongoing demand for legal services of defined types and complexities over a period of at least two, and preferably three, years. Annual
fixed fee arrangements typically require blocks of legal work with a value of $500,000 or more. However, there is precedent for negotiating fixed fee arrangements on specific matters requiring as little as 25 hours of legal work. In these cases, the company and law firm
agree upon a fee for each phase of the work, with change order provisions in the event of unforeseen developments.
Another key prerequisite for a successful arrangement is mutual trust. Partnering requires the client to abandon the micro-management of specific matters, and measurable commitment by the firm to achieve the client's business goals.
The capacity to gather and analyze relevant data is also critical. Without this, the client and the firm are unable to decide if the alternative approach to billing will deliver good financial value. The data (volumes, complexity, type of law, staffing profiles) are required in order to understand the true cost of legal services, to negotiate alternative fee structures, and to agree upon expectations from the law firm for service and results.
Partners in Practice
Although most legal services continue to be provided on a hourly basis, some insurers, banks and transportation companies have switched from paying for legal services based on the number of hours worked to purchasing a "package" of services for a flat fee, often paid in monthly installments.
The type and quality of services to be provided by the law firm is carefully articulated in the partnering agreement, with provisions for how the law firm will distribute the work to its lawyers and paralegals, and for how the types of tasks will be performed by the various levels of lawyers within the firm. A more comprehensive agreement stipulates how the firm will bill disbursements, provides for reporting on the status of the work, and for protocols to evaluate performance.
A more limited application of partnering calls for agreement on a case plan and budget for a particular matter, using task-based billing protocols. The budget forecasts the hours required to complete phases and tasks and defines how specific hours will be distributed among the professionals assigned to a given matter or file. The
final step is to agree on a fee for each major phase. For example, in litigation, there are five main phases - case assessment and development, pleadings and motions, discovery, trial / hearing and appeal. The firm bills the agreed fee, unless the client agrees that there has been a material change in circumstances that justifies a departure from the agreed case plan.
Technology is an integral component of every partnering relationship. It allows the client and the law firm to save time and money by reducing the reliance on paper, through electronic billing and payment, electronic communications and document exchange, process improvements and on-line reporting.
Web portals simplify information and document exchange, by providing on-line, real-time access to matter-specific information (status reports, viewing of reports and exhibits, hours worked) as well as to standard forms, precedents and other information useful to the client. Leading-edge portals also offer clients access to task-based billing data that, over time, will help fine-tune the cost of the various phases of a legal matter of like complexity. Access to this data also assists with timely management of reserves for litigation or other significant legal matters.
Legal business process automation software allows for streamlining of processes, notably for work intake and allocation, reporting and billing. The result for both the law firm and the client is a reduction of costs by making processes less labor-intensive. The law firm can map and automate processes to capture qualitative information and monitor and analyze results. It can incorporate a calendaring function to monitor action plans and ensure timely delivery of reports to the client, and generate other reports to allow a comparison of legal budgets to actual billings.
Benefits to Both Partners
The best partnering arrangements are healthy when they are focused on results and service, rather than on activity or production. They require regular users of legal services to plan ahead, and to be more actively involved in the use of best practices and professional resources. Law firm partners have to improve their business model by using new tools to plan, manage and report on work. Finally, a good partnering relationship will result in a better balance of qualitative and financial imperatives in a professional relationship.