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Firms look for continued use of alternative fee arrangements

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When the economy collapsed in late 2008, the legal industry’s standard model of pricing -- the billable hour -- collapsed right with it.

And while the economy has begun to recover, the use -- and variety -- of billing practices by law firms continues to rise.

In a recent survey by the Association of Corporate Counsel, 29 percent of in-house counsel reported an increase in their use of alternative fee arrangements in 2010.

San Diego firms, both large and small, are using alternative fee arrangements with regularity as well.

“The trend in the past was for our lawyers to think -- and we were trained this way -- about how to deliver the absolute best legal product, no matter how much time it takes,” said Kurt Kicklighter, managing partner of the San Diego office of Luce, Forward, Hamilton & Scripps. “Clients now are saying we’re not willing to pay for that last hour that will give the absolute best value. They want us to be efficient rather than give them the last, best clause in the contract.

“That’s a change from being a profession to being a business.”

Kicklighter said the initial push to create different billing plans came from clients, who were looking for the best value in a difficult economic environment.

“Now it’s one of the things we don’t wait for the clients to ask for,” he said. “We start talking about it earlier in the relationship.”

Susan Hackett, the senior vice president and general counsel for the Association of Corporate Counsel, said the trend began earlier than the recent recession.

She said there has been a strain in the relationship between corporate legal departments and outside counsel for a long time, arising mainly over the cost of legal fees.

“I think a lot of people came to the table as a result of the downturn, but the pot has been simmering and ready to boil over for more than a couple of decades,” she said. “The question has been whether there was the political will to turn things on its head, and were they going to focus on a more efficient business models.”

Hackett said clients are looking at increasing the expectation that the value of the services received more closely matches the prices charged.

In 2007, well before the market turned sour, her organization started working on the ACC Value Challenge, a project designed to study the different types and uses of fee arrangements.

“Generally, talking about fees with clients is a good thing,” said David Sunkin, a Los Angeles partner with Sheppard, Mullin, Richter & Hampton and one of the firm’s four “alternative fee czars.” “Being transparent in both directions is a good thing. I think that for lawyers, we can be better advocates and counselors if we understand what the client’s business endgame is.”

One alternative to the billable hour is a fee deferral, most commonly used for startups and young companies. The law firm can accept delayed payments in exchange for equity in the company or future work from the client.

A popular option for transactional work is a flat fee for certain elements.

Other types of alternative fee arrangements include blended rates, caps on fees and payment based on how successful the lawyers are. If a firm does well, it gets a bonus; if not, the firm only gets percentage of what they normally receive.

“The key is really talking to your client and understanding what it is their objectives are, what the challenges are and working out a solution that works for both parties,” said Sheppard Mullin’s Sunkin.

In some cases, law firms are loaning one of their attorneys to the client to participate as an in-house lawyer. The associate’s salary then gets paid by the company while he or she learns more about the clients’ needs.

Luce Forward is working on an arrangement where one of its clients would give the firm all of its litigation work in California for a fixed amount. Kicklighter said he doesn’t expect that to be commonplace, but in this one instance it could result in the firm getting extra business.

“The client is looking for lower legal fees; we’re looking for more volume,” he said. “The (alternative fee) arrangements work best when there is history of a relationship and trust.”

In the past, Kicklighter said, the flexibility of small to mid-sized firms to offer alternative fee arrangements used to give them an advantage over the bigger, national firms. But now the AmLaw 100 firms are being forced to offer different payment schedules as well.

“National firms are much more astute about this,” Kicklighter said. “They’ve changed with the market.”

Before tinkering with billing fees, the ACC’s Hackett recommends that firms look at their staffing structures to make sure the work is being done by the right people. Senior partners, junior associates and paralegals all should be used to their highest capacity and their strengths should be defined ahead of time.

She said firms also should be gathering data on a company’s record in litigation and seeing how certain cases fared over a 10- or 15-year timeframe. It could help determine how much it costs to litigate certain cases.

“If you analyze the data, you should have an indication of what the ballpark (price) is,” Hackett said. “Look at what strategies were employed.”

She said the alternative fee arrangements are the new normal, preferring to call them “value-based” arrangements.

“What appeals to in-house attorneys the most about this -- besides predictability, quality of life, money savings -- is the ability to get back the 20 hours a week they spend arguing about outside counsel bills,” Hackett said.

Sunkin, the fee czar of Sheppard Mullin, thinks the variety of fee arrangements are here to stay.

“Anything that gives a client better certainty as to what something’s going to cost -- that is here to stay,” he said.

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