The NYTimes has an article that has been on the top of its "Most Emailed" list the last several days talking about how large law firms think that the days of the billable hour may be coming to an end as clients' legal budgets are slashed and they are looking for ways to limit legal fees.
Clients have complained for years that the practice of billing for each hour worked can encourage law firms to prolong a client’s problem rather than solve it. But the rough economic climate is making clients more demanding, leading many law firms to rethink their business model.
The Times spoke to several prominent lawyers who indicate they are seeing more "flat fee" arrangements in their large firms for service performed, using alternative billing arrangements such as success fees and benchmarks. While I'm sure some of this is happening, I am skeptical that this business downturn will be the end of hourly billing. More likely, law firms are doing this to help out clients through the tough times and we will see the discussion about killing the billable hour end after the recession - only to be revived during the next downturn. (Large law firms also have big marketing departments who do things like float stories to the media about the possibility of receiving flat fees at their firm - Call now! This offer won't last!)
There are many difficulties with killing the use of billable hours in large firms. As the article points out, it would require law firms to find another way to judge associate compensation and advancement other than by how many hours they bill - and big firm lawyers are notoriously bad with giving performance reviews. Law firms also like change as much as I like cauliflower - it doesn't go down very well. Lawyers by their nature are risk-adverse, so big law firms are not exactly places of innovation. And charging flat fees is a big innovation for a large firm with many competing partner voices often having equal say in management decisions. Attorneys using the hourly billing system for years aren't going to want to spend the extra time changing the whole system.
One of the other problems that large firms run into with flat fee arrangement is that it is very difficult to estimate fees for a complicated case or a transaction. Only the most basic of case or transaction will require a set amount of time and effort. The variables that come up during negotiating a large deal or in court are such that an attorney can easily spend twice as long working on a matter than they anticipate. So in setting flat fees, lawyers would be forced to build in extra fees to cover for the possibility of an extended transaction or case - potentially raising instead of lowering fees.
The cynical view is that flat fees may even create the reverse incentive for large law firms to spend as little time as possible on a deal - essentially cutting labor costs to make a larger margin. Clients would inevitably shop a deal around to big law firms they use - getting flat fee "bids" from each firm. The firm that wins the bid may not have the incentive to spend the extra time a deal or case often requires to get the best outcome for the client. It should be noted that spending extra time on a transaction or case these days usually isn't just wasted - it is used to make sure that all aspects of a case or transaction have been considered and that the client is getting the best legal advice possible.
So, while it could happen - I think flat fees will be used by large firms on a case by case basis, but it will still be many years before we see widespread use by them. If/when large firms do end up using them extensively, I think we will see the entire legal industry change rather drastically - with firms using junior attorneys on a contract basis instead of as associates (think construction subcontractors) and doing much more outsourcing of work to overseas legal service providers -something that is already growing increasingly popular.
Interestingly, while large firms debate whether to try out flat fees, small firms and solo practitioners already regularly use them. As a solo practitioner, I can and do consider flat fees because I am the boss. I don't need to get approval of a committee. I know that for many of my clients who have limited budgets, having a flat fee allows them to know with certainty what a legal matter will cost. For example, in forming a company for a client, negotiating and drafting a service contract or employment agreement or putting together documentation for a private securities offering, I can figure out a fair flat fee for clients. I also know that by setting flat fees, I can compete for work with larger firms who do not use flat fees - or whose flat fees will necessarily be inflated by their much larger operating overhead costs and salaries.
As a solo practitioner, I do not have the incentive to try to spend as little time on a flat fee deal as possible. The assumption by clients using a solo practitioner instead of a large firm is that they are going to be getting work that isn't quite as good or thorough (a faulty assumption for someone who, like me, has spent significant time being trained in a large firm). So I in fact have the incentive to put more time than may be required into a matter to make sure my clients get the best outcome possible and hire me again. Charging a flat fee allows me to do extra research or to consider other options without worrying about charging a client for unnecessary time. If I am representing a client in an area of law with which I have less experience, charging a flat fee allows me to spend the extra time learning what I need to learn without having to charge a client for that educational process. (One of the biggest complaints clients have of large firms is they run up hourly bills using inexperienced lawyers - using their deals as training grounds).
At the same time, it is still difficult to gauge flat fees for larger transactions that I handle which require a lot of negotiation and often have hidden problems that require unexpected extra work. In negotiating and documenting more complicated commercial real estate or corporate transactions in particular, it is very difficult to set a fair price due to the many unexpected twist and turns of a deal that can vary the time spent greatly. So I sympathize with large firms in this regard. However, if a client is a repeat client and is doing their standard deal, charging a flat fee becomes easier. Either way, I always at least consider using a flat fee.
So, as I progress in my practice, my goal is to use flat fees on a more regular basis - both to earn business and to allow me to become an even better attorney. Large law firms will survive the downturn and they may even eventually turn to using flat fees on a more regular basis. But for now, if you want to get great legal service and also know what it will cost you - your best bet is to call someone like me and I will see what I can do to accommodate you. Paul Kingsley is a Phoenix business and real estate lawyer.
Wow!! Good thought with this one. Keep posting.
Mike
Posted by: lucas law group | April 05, 2009 at 10:53 PM