Law360 (March 12, 2021, 9:14 AM EST) --
From significant financial pressures to a rapidly changing business landscape and other operational challenges, long-lasting and far-reaching effects have also been felt within all segments of the legal profession.
Despite the disruption, these challenges have accelerated much-needed transformation and innovation throughout the profession as law firms and in-house counsel have had to quickly adopt and adapt to new models of practice. On the billing side, alternative fee arrangements have become more appealing.
While the traditional billable hour model may still be the most common and the most appropriate in many situations, there is a growing realization that it doesn't always have to be the default choice. Although the hourly rate model can have its advantages for both law firms and in-house counsel, this model has its flaws as well, in that it may lack predictability and transparency, and can be an inefficient measure of value.
In order to help ensure that the critical relationship between outside counsel and in-house counsel is based on mutual trust, it is extremely important that the pricing structure on which they agree — whether by hourly rate or a more flexible fee arrangement, has mutual benefits for both.
The debate over the shift from the traditional billable hour model to more flexible pricing structures has been percolating for two decades or more. However, with the volatility we have experienced in the past year, now may be the time for the legal profession to enthusiastically embrace flexible pricing structures since, more so than the hourly rate model, they reward smart execution, performance, predictability and efficiency in providing legal services.
Increased Predictability, Efficiency and Cost-Effectiveness
While many changes to the legal pricing model have been underway for some time, with the latest economic downturn, the legal profession has reached an inflection point, solidifying the case for alternative fee arrangements such as flat or capped fees.
Even with preengagement discussions between outside counsel and in-house counsel concerning objectives, level-setting and budgeting, the element of predictability is not baked into the billable hour model. Somewhere along the way, in-house counsel's original objectives can get lost and billing may become prioritized over the client's interests.
Take, for instance, a matter that might appear straightforward at the outset, such as a seemingly ordinary contract dispute, unexpectedly spiraling into something significantly more serious and expensive, up to and including a full-blown litigation.
To counteract potential liability arising from significant business interruptions brought about by the pandemic, a law firm partner might dust off a standard force majeure notice for a client. The client wouldn't necessarily be concerned with the hourly rate since preparing the notice would not be particularly labor intensive.
However, what could come next and at what expense is less than clear, especially if the firm and the client didn't pause to work out engagement terms in the event the force majeure notice elicits a strong response, which in turn necessitates more correspondence, negotiations and, quite possibly, a summons and complaint.
In addition to overall mission creep, the particular tasks for which the client can expect to be billed have become more unpredictable in the era of COVID-19.
Take travel time, for instance. Early in the pandemic, many courts were forced to close in accordance with federal and state guidelines. Then came a period of virtual hearings, conferences and trials along with remote alternate dispute resolution proceedings.
Now, as the pandemic is hopefully winding down and restrictions are lifting, courthouses and office buildings are reopening, but the rules governing in-person appearances in the U.S. District Court for the Southern District of New York might be radically different from, say, a private arbitration or mediation in Los Angeles. To date, this uncertainty as to in-person proceedings is a wild card when it comes to budgeting for an hourly billing engagement.
In contrast, travel expectations can be factored into alternative fee arrangements in a way that minimizes risk on both sides. This is but one case study evidencing the benefits of flexible pricing structures for the law firm and its client.
Flat or capped fees provide a means to improve time management and control costs. Fixed costs certainty come with peace of mind so both the client and law firms can plan accordingly.
Flat fees may be advantageous not only to the client but to the law firms as well. With flat fees, outside counsel can be secure in the knowledge that they will be paid for the value they bring to the table.
Flat fees may simplify the billing process and take the hassle out of recording time for simpler, straightforward and more routine matters — though not limited to those use cases. By agreeing to a fixed or capped fee arrangement at the outset, outside counsel may be incentivized to work more efficiently.
Outside counsel, rather than being subject to the inefficiencies inherent in the billable hour, can instead focus on resolving issues quickly, reducing duplication of effort, and ensuring that tasks are commensurate with attorney experience level.
However, it must also be recognized that the traditional billable hour model does have its benefits for both law firms and the client.
With lengthier, more complex issues potentially requiring additional time, there are sometimes too many unknowns at the beginning of a project, and so accurately estimating workload and value may not be possible.
We know from experience that what may appear at first glance to be an open-and-shut case can easily increase in scope or take longer than expected. To minimize financial risks for both law firms and in-house counsel, and to avoid the dissatisfaction that comes with forecasting the inherently unpredictable, hourly billing would be the best option.
However, using flat or capped fees can open the door to doing things differently, particularly during the post-pandemic era. Although flat or capped fee arrangements might traditionally be associated with simpler, more transactional matters, they may also come in handy for larger projects that can be broken out into discrete tasks.
Consider, for instance, retention of outside counsel to handle a panoply of labor and employment work occasioned by the pandemic. Preparing return-to-work and vaccination policies come to mind as timely examples of targeted tasks ripe for a flat or capped fee.
When focused on results and not on time, outside counsel can better deliver on project management and apply other innovative techniques that allow them to work more effectively.
Laying the Foundation for Flexibility
In the past, there has admittedly been some skepticism over the use of alternative fee arrangements. However, the challenges created by the pandemic and the unpredictability of the evolving business environment have created opportunities for increased communication, transparency and trust in this arena, laying a strong foundation for adopting creative pricing and billing solutions.
Alternative fee arrangements only work when there is mutual trust between outside and in-house counsel.
In-house counsel trusts that outside counsel will strive for the optimal result even when it means lower churn on a file, and outside counsel trusts in-house counsel to make decisions that don't exploit the arrangement, i.e., with gratis services. Resolving these billing issues is all about investing in that relationship.
Like any pricing agreement, there is a level of expectation that must be established, and the ability to have an open dialogue and transparent communications between outside counsel and in-house counsel helps to build the required mutual trust.
When the pressures of the billable hour are eliminated on both sides, in-house counsel do not have to be concerned with being charged for every communication, so they can freely check in, request updates and ensure that there is continued alignment with their expectations.
The obligation of trust does, however, work both ways. In-house counsel also has a responsibility not to abuse their "unlimited" access to the law firm. If there's trust when developing fee agreements at the outset, outside counsel and in-house counsel may also build into their engagement and billing arrangements mutually acceptable protections enabling the renegotiation of engagement terms in the event the work is prolonged or goes beyond the original scope.
And, it almost goes without saying that the free and frank flow of communication between outside counsel and in-house counsel effectively removes the taboo of discussing money, which is often a barrier both to flexible pricing and to good professional and personal relationships.
Advancing Other Cost-Saving Measures
When assessing other ways to reduce costs while working with law firms, in-house counsel should consider whether the matters can be managed in-house, or whether there is an opportunity to negotiate discounts, or whether work can be reprioritized while pausing work on less critical matters with lower return on investment.
Another option in our digital age would be for in-house counsel to evaluate how technology can be used in-house to streamline work processes and drive down costs, whether it's through digitizing records or enhancing tools for collaboration.
Embracing the Future
While the legal profession has sometimes been slow to adapt to the changing demands of the business world, these challenging times present an opportunity to reimagine the current billing models and move toward delivering greater value and cost-effectiveness.
Whether employing the traditional billable hour, alternative fee arrangements or hybrid arrangements, we should continue to prioritize strong relationships, open communication and quality over quantity. Hourly billing has its advantages but doesn't have to be the default choice. We should welcome change and innovation with open arms.
During the past year of new and formidable challenges, we proved that, as a profession, we can be agile and flexible in finding ways to continue providing high-quality, effective and efficient legal services to our clients.
However, now that the global pandemic and some of our other business, social and political challenges seem to be reaching at least some partial resolution, it is not the time to rest on our laurels. Instead, we must take the lessons we have learned and work together to usher in new ways of doing things — with the ultimate goal of achieving better results, better performance and greater satisfaction for all.
Jessica L. Hodkinson is vice president, general counsel and secretary at Panasonic Corporation of North America.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the organization, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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