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Alternative Fees: "This, too, shall pass." Really?

By Patrick J. Lamb

Let's start with a huge caveat.  The guy doing the talking in this interview, Stephen French, is the Managing Director of Legalbill.  According to the firm's website:

Legalbill is committed to providing corporations worldwide with unsurpassed solutions for legal cost analysis and management.

So, in real world terms, Legalbill manages hourly billing data, slices and dices in ways that are then used to help companies save money when dealing with hourly rate lawyers and firms.  If there is no hourly billing, there would be scant need for Legalbill, at least unless it came up with new, more relevant offerings.  So Mr. French's company has dog in this hunt.  But even with that caveat, he has some interesting things to say.

Watch AmLaw's video interview of Mr. French here.

Alison Frankel of AmLaw reports that:

There are two big problems with fixed rate or flat fees, as French sees it. First, clients don't get the same level of work from their lawyers. "When you get [fees] down to the lowest common denominator, it also has an impact on the responsiveness of counsel," he says. "It has an impact on the qualitative nature of the representation, and it also has, certainly, an impact on the cost effectiveness."

And second, alternative fees erode the very economic foundation of law firms. Especially with so much lateral movement and merger activity, French argues, it's very difficult to measure and compensate performance without hourly billing.

The second claim, that alternative fees erode the economic foundation of law firms is true.  That is why the firms need to change their business models, something at least some have started to recognize.  But to say that a business selling services should not change to meet the needs of the buyers of those services is an argument that, if accepted by law firms, will lead to their eventual demise.

The first argument is premised on the mistaken notion that "fixed rate or flat fees" are the essence of non-hourly fee arrangements.  There is scant data to support that assumption.  In-house lawyers who move toward use of non-hourly arrangements understand that every fee structure has strengths and weaknesses, but modifications to those structures can avoid the problems.  The problems identified by Mr. French are eliminated by including performance-based payments in the fee formula. 

I found it interesting, though, that Mr. French was straightforward in admitting that, for most law firms, the use of alternative fees is a marketing gimmick to appease clients.  There is evidence to support his impression, found in the fact that many law firms have not made the kind of systemic changes needed to maximize the profits from alternative fees.

Nothing in this interview is going to change the course of human events, but it is interesting to hear a robust defense of hourly billing.

 

 

 

 

Full post as published by In Search of Perfect Client Service on January 13, 2010 (boomark / email).