For all the talk about alternative billing as a byproduct of the downturn, signs point to the trend continuing even as the economy improves.
For general counsels who oversee legal matters for companies here, finding alternatives to billable hour charges by law firms took on new importance during the downturn.
Cash-strapped businesses looked to reduce expenses, which led many general counsels to reconsider working relationships with outside law firms.
“The recession has forced all business to focus on cost measures and that’s trickled into our business model,” said Bryan Gadol, a partner in Dorsey & Whitney LLP’s Irvine office.
The percentage of general counsels who said they used a flat fee as an alternative to billable hours increased from 48% to 53% between 2009 and 2010, according to a survey by the Association of Corporate Counsel in Washington, D.C., and The American Lawyer.
Nearly one-third of in-house counsels surveyed increased their use of alternative fees last year.
If firms weren’t looking at fee alternatives before the recession, they certainly were pressured to do it the last couple years, Gadol said.
Alternative fees can take many forms.
On mergers and acquisitions, for example, Gadol said some of his clients are interested in discounts from the standard rate based on the transaction’s outcome. If the deal doesn’t close, the client pays less. If the deal closes, Dorsey gets paid a premium over its standard rate.
In other cases, fee alternatives can be flat fees for a set amount of work. Repetitive work for law firms, such as lease deals for a retail client, is something that can be packaged into a flat rate.
In the case of litigation, fees can be structured around different variables such as a set number of cases, or alternative billing up until the start of a trial.
Always Been an Issue
The alternatives to hourly billing are nothing new, many attorneys contend.
“That’s always been an issue, but we’ve always thought that we’re very good at obtaining lower overhead than our national competitors, which tends to make for a lower cost structure,” said Marc Schneider, a shareholder at Newport Beach-based Stradling Yocca Carlson & Rauth.
In the case of litigation, Schneider said Stradling always has addressed possible risks up front with corporate counsels to avoid surprises about the cost of work once it is done.
More important than the discussion of discounted rates is the idea of predictability to in-house counsel, said William O’Hare, administrative partner at Costa Mesa-based Snell & Wilmer LLP.
“The predictability element is certainly as important as lowering costs,” O’Hare said. “It gives the client the ability to make informed choices, so they can do a better job in budgeting expenses.”
Communication Counts
Communication about discounts has become more of the standard, some in-house counsels say.
“I think there’s an assumption that there’s going to be a dialogue about the way billing is going to be structured, the way the work is going to be done, in a way that probably wasn’t done before,” said Teigue Thomas, Irvine-based vice president and general counsel of Acer America Corp. and Gateway Inc. in San Jose.
While the spotlight was on alternative billing during the downturn, it isn’t the only improvement that can be made to how in-house and outside counsel work with one another.
“There has been a lot of brouhaha on alternative fee arrangements,” Gadol said. “While they’ve always been opportunities, they can be very difficult, and I think there are better ways to assess the value proposition outside of alternative billing.”
Point of Agreement
That’s something that in-house counsels and outside lawyers appear to agree upon.
“There’s been a shift from risk management to lawyers becoming more business partners,” said Kate Duchene, chief legal officer and executive vice president of human resources at Irvine-based Resources Connection Inc.
Resources, which operates as Resources Global Professionals, provides contract accounting, legal and other staffing.
Duchene said one of the law firms she worked with offered to bring senior partners to the office to provide free training on new whistleblower laws.
Free training on various regulatory matters is something Duchene said she’s seeing offered a lot more by law firms.
“Five years ago they wouldn’t have given away that work,” Duchene said. “It’s a pretty significant change because it won’t be just a half-hour meet and greet. It’s a substantive training session.”
Thomas of Acer/Gateway said companies’ in-house counsels also have gotten smarter about parceling out legal work.
“Now, it’s much more of a strategic approach where the firm is used for certain elements of an undertaking, but you may decide to take a fair amount in-house, bring in other resources at a lower cost or use a different firm altogether,” she said.
Dawn Haghighi, assistant general counsel of Santa Clarita-based Princess Cruises, one of the brands under Miami-based Carnival Corp., finds law firms more flexible in general.
She said she managed to negotiate a lower rate with one firm just by leveraging the fact that Princess was offering a large amount of work.
Haghighi is on the board of directors for the Southern California chapter of the Association of Corporate Counsel. Nearly two years ago the group created a value challenge, offering corporate counsel various tools ranging from a law firm rating system to project planning to help squeeze out waste and increase efficiencies.
Seeking New Model
“Many companies’ firms would give you something in January saying that billing rates would go up 10%, and when you looked at the numbers, it was just outrageous,” Haghighi said. “So we said we need a different business model. There’s no other business model out there where rates keep rising.”
Despite progress made during the downturn, outside and in-house counsels agree there is room for improvement in their relationship.
Not Always the Answer
Some law firm leaders note that alternative billing doesn’t always work for every matter brought before them.
“It is easy to spread lofty concepts, but what’s important is that there needs to be discussion between in-house and outside counsel,” said Hilarie Bass, a global operating shareholder at Miami-based Greenberg Traurig, LLP, which has an office in Irvine. “I think one of the interesting things that was recognized by in-house counsel was that only when they spoke in detail to outside law firms did they begin to understand that some of the particular concepts they were espousing might not work and why.”
Based on her experience, Bass said problems between lawyers and their clients often boil down to a misunderstanding or lack of communication about what both sides expect.
Within each Greenberg practice group, alternative fee liaisons have been assigned to help attorneys negotiate with corporate counsels.
For Duchene, understanding what makes a company tick is crucial if a law firm truly wants to deliver good customer service.
“If you’re working with associates or more junior level attorneys, their response is often just about what the law says—not what’s right for business or what your risk appetite is,” Duchene said.
Client’s Nickel
A more thoughtful approach to staffing also would be helpful, Duchene said.
“Large law firms have to staff differently,” Duchene said. “You can’t have three junior level people on a deal who are not adding value. You have to stop training on the client’s nickel.”
