Traci Gentilozzi and Phillip Bantz
The billable hour. For decades, these words have struck fear in the hearts of big firm lawyers and their clients. But the days of the billable hour may be waning, as many large firms are now turning to flat fees as a way to attract — and keep — clients.
Solo practitioners and small firms have long used flat fees as a way to entice clients. But it took the Great Recession to help large firms realize the benefits of flat rates.
That is when clients, particularly corporations and businesses facing financial uncertainty, began questioning the real value they were getting for their billable hour.
“The central theme is that our clients want predictability and we want predictability as well. We also want to enhance the relationship that we have with our clients,” said Angela Zimmern, senior counsel at McGuireWoods in Charlotte.
Zimmern heads her firm’s ClientSync initiative, a year-old program that aims to help attorneys manage client-related matters, including fixed and other types of alternative fee arrangements.
“The genesis of this is in large part driven by just the sheer increase in AFAs that are taking place now,” Zimmern added. “The increase in AFAs across the board has just really been remarkable since the recession.”
Clients have been the driving force behind the large firm switchover to flat fees, said Joan Vestrand, associate dean at Western Michigan University’s Thomas M. Cooley Law School’s Auburn Hills campus.
“Demands have changed, and times have changed,” Vestrand said. “There’s a lot of discontent that goes along with hourly fees. Clients today prefer a known quantity they can control.”
And while the business sector has historically accepted the billable hour, “those clients are no longer standing for it,” Vestrand said. “They’ve got legal work … and they’re looking for a good deal.”
Patrick Johansen, a law firm pricing blogger who works at Brinks Gilson & Lione in Chicago, said more large firms are converting to flat rates because they now have the ability to better gauge the expense of a case.
“They know how much it will cost to deliver the service and what the value is to the client,” Johansen said. “And as long as the value is higher than the cost to serve, then it’s worth it to sell that service.”
Harmful effects
Winston-Salem litigator Keith Vaughan, chair of Womble Carlyle, spoke with Lawyers Weekly about the advent of flat fees in 2011. He was a proponent of AFAs back then and he still is, but he said convincing clients and attorneys to step outside their comfort zones has been difficult.
“In our experience, those fee arrangements haven’t caught on,” he said. “We have about the same percentage of alternative fees now as we did in 2011 and although we try to propose those approaches and are very open to those approaches we just haven’t been successful in expanding the scope of their use.”
While some are skittish about signing fixed rate agreements, clients still want lower costs and more predictability – objectives that they’re achieving by requesting upfront fee estimates and discounts, according to Vaughan.
“A lot of the results end up being the same, but it’s not as clean,” he said, adding that he would like to see AFAs become the norm rather than the exception. He’s certainly not alone in having that vision, which could come to fruition years, perhaps decades, from now.
But even then it’s likely that the billable hour, however antiquated and flawed some say that it is, will still be roaming the legal landscape like some extinction-proof dinosaur.
“It is a valid fee arrangement and, basically, it is a price tag,” Johansen said of the billable hour. “But just like every other market, there are sales, discounts, coupons and motivations to get buyers to actually buy. So that’s where flat-fee arrangements come into play. The buyer rejects the initial price tag and you figure out how to entice them.”
Vestrand added that the hourly rate, which became the go-to billing method in the 1950s, has dramatically increased law firm revenue by creating a “golden pyramid where legions of associates toil away for partners at the top.”
She argued that the billable hour is largely responsible for the legal profession’s bad rap. She said traditional billing provides lawyers with an incentive to draw out cases, makes clients reluctant to communicate with their attorneys for fear of getting hit with a large bill and can lead to infighting and low morale at firms.
“If you’re an efficient associate, then you’re not billing as many hours as your colleagues. You can then get resentful of other associates who are billing a lot more than you, but who are not as efficient,” Vestrand said. “An associate may be more apt to engage in unethical practices to try and bill as many hours as possible.”
The flat rate fee is the antidote to the harmful effects of the billable hour, according to Zimmern of McGuireWoods. She said AFAs encourage “efficiency and productivity.”
“It’s about making sure you’re working as hard as possible,” she said. “It drives a lot of positive behavior in the law firm.”
‘Here to stay’
Lawyers who have experience with fixed rates say their comfort level in entering into a non-traditional billing agreement is often proportional to the health of their relationship with a particular client, which makes sense. After all, it’s far easier to predict the amount of time and effort that a client is going to demand if you’ve worked together in the past.
“I think it’s easier to do fixed fee arrangements with a client that you have a longer relationship with because you have a course of history about what types of projects are coming down the pipe,” said Matthew Roberts, an attorney at Nexsen Pruet in Columbia who represents physicians and hospitals. He estimated that he employs a flat fee in a quarter of his cases.
“You have to be able to have good communication with your client when you enter into a fixed fee arrangement,” he said. “If you don’t the chances that the arrangement could be unfair to one or both sides is going to be increased. I think sometimes lawyers are reluctant to have that kind of transparent dialogue with clients, but you’ve got to do that to make it work.”
Roberts added that his area of expertise, which is centered on transactional and compliance cases, lends itself to flat rate billing more so than other types of complex and unpredictable legal matters.
That being said, alternative fee arrangements, including fixed rates, can be used in virtually all types of cases because they can be tailored to the firm and the client, mitigating the risk faced by both.
“A lot of our AFAs have built-in assumptions and clauses that can be revisited if certain things change,” said Zimmern, who has noticed an increase in the popularity of setting flat fees for each phase of litigation. Her firm uses AFAs in all 19 of its practice departments.
“I think a lot of people thought seven or eight years ago that AFAs were a trend,” she added. “But we don’t see this as a trend. We think it’s here to stay.”
Follow Phillip Bantz on Twitter @SCLWBantz