An hourly shift: Law firms see alternative fee arrangements as here to stay

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The billable hour has long been the mainstay of law firms and their pay structure. But in recent years, firms have had to become more creative in how they get paid, as they compete for business with ever more cost-conscious companies.

Enter the "alternative fee arrangement." Whether it's a flat fee, a capped fee, a blended rate or some other variety, alternative fee arrangements are giving the billable hour a run for its money.

Bill Stang, managing partner of the Pittsburgh office of Fox Rothschild, said now that firms have begun offering alternative fee arrangements, there's no going back. "We'll never get away from strict hourly work," he said. "But this is not a fad."

The demand for alternative fee arrangements is very much market-driven, Mr. Stang pointed out. A 2012 study by ALM Legal Intelligence found that while alternative fee arrangements, or AFAs, had been a topic of discussion in the legal sector for some time, they became more prevalent between 2008 and 2010 during the economic downturn.

Sixty-two percent of the firms surveyed saw an increase in alternative fee arrangements during that time period, the study found.

The Washington, D.C.-based Association of Corporate Counsel, comprising companies' in-house counsel, launched an initiative five or six years ago "to kill the billable hour," said vice president and chief legal strategist Amar Sarwal. He said his organization prefers the term "value-based fee arrangement" rather than "alternative."

While it has backed away somewhat from its initial hard line against the billable hour, the association has several goals in mind when it comes to dealing with outside law firms.

"First, we wanted to work toward reducing costs ... because they had gotten outsized," Mr. Sarwal said. "We wanted to increase the predictability [of legal costs], because in-house counsel have to justify to the C-suite what they're spending."

The first step in any alternative fee negotiation should include establishing trust, Mr. Sarwal said. "The inside counsel is worried about being taken to the cleaners, and the law firm is worried that the case may go in the wrong direction."

Vincent Cordo, global director of client value for Reed Smith, leads that firm's strategy around alternative fee arrangements and value pricing. He said a big part of what he does is legal project management.

"We're getting to what we're already good at, and then putting a management structure around it, to get better analysis of metrics," Mr. Cordo said. "Companies want to make sure they're not leaving money on the table."

The principles behind structuring AFAs are tried-and-true business ideas: tracking work and being able to demonstrate its value in order to compare it to the competition.

"I can say, 'Here is my quality, here are the facts,' " Mr. Cordo said. And the certainty that comes with alternative fee arrangements is a huge plus for a company seeking to keep costs down.

Mr. Stang said alternative fees work well not just for litigators and corporate counsel but for experienced attorneys who may rarely set foot in a courtroom.

Estate planning is one area where, while depth of knowledge is important, most of the costs are fairly predictable, he noted.

"If I've done thousands of estate planning cases, I know with a fair amount of certainty what is involved and how much time I'll need to spend on it," he said.

Smaller firms aren't necessarily at a disadvantage in an alternative fee market. "If everyone has to play on the same playing field, boutique firms can figure out what value they offer," Mr. Cordo said. "Regardless of what size they are, it's the clients who will determine what they are willing and able to pay for."

Alternative fee arrangements have been around in some form or another for a while, said Casey Ryan, vice chair of Reed Smith's global litigation department, because finding better ways to serve clients isn't a new concept.

"We look at it as an opportunity, as a way to get out of looking at how things have always been done," she said.

The ALM Legal Intelligence study found that 92 percent of law firms and 88 percent of corporate law departments believe alternative fee arrangements are here to stay. Still, Mr. Sarwal said that despite his organization's past quest to get rid of it altogether, there probably will always be a place for the billable hour.

Ms. Ryan agreed, "I don't think the billable hour is dead, but I think it has company."

Kim Lyons: or 412-263-1241. Twitter: @SocialKimly

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