Lexington, KY - The practice of law is an area of business that is both an entity unto itself as well as a necessary component of nearly any other business practice. Though legal businesses have traditionally been run almost exclusively on an hourly-rate basis, some are changing their structures to include a larger variety of alternative billing offerings. Why are they making this change, and what does it mean?
According to David Smith, managing partner at Stoll Keenon Ogden, the idea of alternative fee structures has been on the mind, if not the balance sheets, of the collective legal community for a long time.
"The fuel was lying there on the floor, as it were, from decades of chatter about the hourly rate, frustration with people as far as how much legal fees cost, (client) frustration with the continuing inflation of hourly rates," he said of his firm's decision to take up alternative fee structure discussions in 2008. "There aren't many things you could point to where the price keeps going (up). Then there is the financial crisis, and particularly businesses that use legal services from large law firms are very squeezed, and so they're searching for cost savings."
Robert Sartin, an equity member and member in charge of the Lexington office of Frost Brown Todd, (which, according to Sartin, has been offering some alternative billing options since the early '90s) noted a similar impetus to include alternative fees. Both stressed the importance of the attorney-client relationship in finding the best arrangement for legal services.
"What we try to do is to get behind the real reason of the client's request - in other words, what are they looking for? Are they looking for greater predictability in their own cost structure? Are they looking for the law firm to have some kind of shared risk? For example, if it's a litigation matter, if we end up losing on this, we want you guys to share some of the proverbial pain," he said.
"In many ways, this is the most important right now," said Smith. "I think It makes the interest of the client and lawyer more congruent. There's more risk-sharing. If you're paying me on an hourly rate basis, irrespective of how long it takes - the result, the outcome - that means the client is absorbing more risk than I am. If you price things that are more driven on outcomes and results, there is a risk-sharing between the client and the law firm that ... should be attractive to the client and more convincing to the client that he or she is getting value for the admittedly high cost to get legal services from a firm like ours."
Value is a subjective word, however, especially in the area of legal services, and not all agree that alternative fee structures are the way of the future.
"We continue to use the hourly rate," said Bill Creason, director of marketing and client development at Stites & Harbison. "One thing we pride ourselves on as a law firm is, you know, we are very efficient. We don't overman - if you will, over-lawyer - a case. We usually are very lean when we go into a case, and I think that is the value proposition that we prize so dearly, ... that we are not going to overstaff a case."
And therein lies the essential conflict over the ideas surrounding changing legal fee structures. Where's the value?
"To the extent we start to price things differently and start to price things on a fixed-fee basis, there is a risk, particularly in certain pockets of our legal practice where we will take the risk of commoditizing ourselves," said Smith. He acknowledges that in a world that accepts hourly rates as a measure of skill, clients may still prefer to spend big bucks for the idea that a higher rate means better service. But he sees a flip side as well.
"To be succesful at doing this, to price yourself like this, you have to be good. You can't be mediocre, because you are going to be taking on more risk and therefore you have to win," he said.
So what does this mean for a potential client shopping for firms? Ask questions and be informed about what kind of services are needed. Transactional areas of law are commonly included in alternative fee structures (this includes work like drawing up a lease or drafting a contract). A retainer, wherein a client pays a certain amount per period of time for unlimited advice on run-of-the-mill issues, is another form of agreement that is increasing in popularity, because of the predictability of both budget and available services. Plaintiff's litigation can also be included, depending on the firm.
In considering any legal agreement or firm, be specific about objectives and budgets.
The bottom line is that, once a law firm is retained, that firm is bound by strict duties to represent the client to the best of its ability and to be responsible to that client. But choosing a firm - and a scope of services - is a personal decision, and one that is increasingly on the bargaining block.