What’s the alternative?

Mark Rigotti, the managing partner of Australia’s Freehills, argues that alternative billing arrangements are just that. They need not mean the end of hourly billing and structural overhaul.

Much has recently been written, including in this issue of Managing Partner, about moves away from lawyers charging hourly rates for their services and towards ‘alternative billing methods’ (ABMs).

This discussion has been taking place among both corporate counsel in the client community and managing partners and partners within the legal service community and law firm management. There is widespread criticism that hourly billing does not always provide value for money to clients. There are various, now well understood, arguments for this proposition (for example, that hourly billing does not create an incentive for efficiency). However, there is also a recognition that hourly billing is familiar and, for all its faults, easily understood. Consequently there are mixed messages about moving away from it.

The discussion also, occasionally at least, moves into a more holistic consideration of the issues, and in particular, of the way in which law firms are structured, build their financial plans and ultimately remunerate their fee-earners. Those who advocate a full move away from hourly rates and towards ABMs note that this would require a restructure to the way most law firms are currently set up. That only further heightens the anxiety surrounding the issue and the trepidation with which it is sometimes considered.

The discussion has largely centred on the binary outcomes of either retaining hourly rates or moving towards charging by methods other than hourly rates. Various industry participants see this as either an opportunity or as a threat. However, the outcomes are not binary and the real point is something different.

Ultimately, what is required are approaches that meet the commercial needs and goals of clients while recognising the business requirements of law firms. This may need the use of ABMs on occasion – although they are of various types – and at other times hourly rates might continue to be the most appropriate method.

Array of options

Some commentators see that this discussion should focus more on value, but it can be a difficult concept. After all, value is in the eye of the beholder. Rather than trying to really progress down that path to final agreement on what constitutes value and how much it is worth, I would suggest that there is scope for the development of sensible and mutually advantageous ways of billing that are not hourly charge-out rates without unduly penalising any single party.

The vast array of different types of ABMs provide some flexibility in achieving this more advantageous outcome.

For example, where a client has a need for certainty, one can respond to it through a range of different methods.

There could be a capped fee where the client is still charged on an hourly rate basis, but with the ultimate amount not permitted to exceed a pre-agreed capped amount. There are fixed fees, where the client is charged a fixed amount regardless of the amount of time required to complete the task. There is also a ‘take or pay’ arrangement, where the law firm is paid an agreed amount for a period (for example, a monthly amount on retainer) regardless of the amount of work that is sent to the law firm or the amount of time required by the law firm to produce that work over the relevant period.

Further, there is continuing evolution in the different types of ABMs that can provide clients and law firms with the flexibility to come up with mutually advantageous solutions. Capped fees, with a cap and collar; phased pricing; risk/reward/premium arrangements; blended rates; volume-based rebates; variable rates; and phased billing (often to match cash flow timings for the client) are all examples of what can be done.

The ABMs need to be understood. However, what is more important is to understand the client’s needs and then be able to engage in a dialogue to articulate that and reach an agreed understanding. Ideally there should be an honest and commercial, mutual development of an ABM that meets client needs while also recognising the law firm’s requirements.

There is a sense among some in the market that ABMs are just a blunt tool to drive down a client’s overall legal spend. Cost containment and reduction in legal spend are not new themes. Although the financial crisis may have exacerbated the need for cost containment (and some blunter uses of ABMs may indeed be a form of cost containment/cost cutting), at its heart, the move towards ABMs is more long term than a knee-jerk reaction to current economic conditions. Consequently, the experience we have had is that no particular type of ABM is ‘best’. Clients have a variety of different needs that demand specific responses.

We have been utilising ABMs for many years, but recently we have strived to bring more discipline into the dialogue we have with our clients to understand their goals.

Best fees forwards

To be effective, ABMs require recognition from both the client and the legal service provider that, in certain circumstances, an alternative to hour-based billing is a more equitable way of recognising the relative value of the service provider. At Freehills we have long been of the view that we need to understand our clients’ commercial imperative and then align our service offering and the way in which we charge accordingly.

Of course, if ABMs are just used as an instrument to reduce costs, this changes the dialogue from one of genuine partnering, with a focus on commercially relevant outcomes, to a mere price negotiation.

– mark.rigotti@freehills.com