Attorneys more receptive to alternative billing as economy forces belt-tightening

An old joke about attorneys' billing rates goes like this: Did you hear about the new microwave lawyer?

The punch line: You spend eight minutes in his office and get billed as if you'd been there eight hours.

While it draws a chuckle or two from those on the receiving end of bills for legal services, it's no laughing matter for law firms. The economy is forcing many of their corporate clients to rein in costs. That reality is forcing law firms to re-examine the tried-and-true fee method: hourly billing.

Though that remains the dominant fee arrangement at most law firms, many of them have been looking at — and engaging in — more alternative billing methods.

Some alternatives include a fixed fee for a given project no matter how long it takes, or a percentage of the value of a transaction. Other situations such as a fine might result in the firm receiving a percentage of the savings if it is successful in getting a reduction. In other cases, the firms and the clients agree to a combination of fee structures.

"A lot of this is being driven by the economic climate," said Jonathan Minnen, who chairs the corporate practice at Smith, Gambrell & Russell in Atlanta. As the economy has sputtered, corporate CFOs and in-house counsel are facing boards of directors who are in belt-tightening mode.

So having an idea about what something could cost at the outset saves the clients from getting surprised when the bills come.

"Alternative billing can be good because there's more thought and discussion on the front end," Minnen said. "It encourages a much higher level of front-end communication between the lawyer and the client."

The focus on billing comes as the economy has forced many national firms to cut staff and shutter offices to bring overhead costs in line with revenue, said Edward Poll, who runs LawBiz Management Co. a Venice, Calif.-based company that advises law firms on business strategy.

Alternative billing also shifts some pricing power to clients, giving them more direct involvement in determining how much work they want done versus what they're willing to spend.

"It's a dance that the lawyer and the client have to enter into so that in the end, they're both happy," Poll said. "The law firm and the client have to be partners and they have to negotiate the result that the client really wants and the fee that is reasonable for the lawyer."

Such arrangements don't necessarily mean clients will pay less for services, said Donald A. Loft, a partner in the litigation practice at Morris, Manning & Martin in Atlanta. It does allow clients to understand how much, say, getting 10 depositions costs compared with 15, and consider hat against their budget to decide if it's necessary.

The firm developed and has patented a software program that over time can "learn" from past cases and help Morris, Manning attorneys project a more realistic budget.

Loft likened it to building skyscrapers. "If you build enough skyscrapers, you come up with a best practices menu on how you build a skyscraper," he said.

The program has a 400-line item budget of questions the client can answer — the number of witnesses who may need to be called or documents that may need to be produced, for example. The result: Both sides get a real sense of a case's complexities and what costs it might entail.

"In theory, you get a much more reliable budget," Loft said.

The firm has used alternative billing in its mergers and acquisition practice the past two years, and now has expanded it to litigation as more clients have begun placing more scrutiny on budgets.

While alternative billing makes sense for some practice areas — Smith, Gambrell & Russell formed a religious institutions practice this week which will be centered around flat fee arrangements — it's not a one-size-fits-all approach.

"It doesn't lend itself to every practice and not every client wants to do that," said Poll, the legal industry consultant.

And some clients prefer the hourly billing method, firm managers said, mainly because that's what they're familiar with and it's not as involved since they know the set per-hour rate.

Still, more clients across all sectors are asking for and lawyers are suggesting to their bosses that alternative billing might be the way to go in a given situation.

"I don't see it by industry," said Irv Belzer, who is a member of the management committee of Bryan Cave, a global firm with offices in Atlanta, Charlotte and Dallas. "What we're seeing is a lot of pressure in all sorts of expenses from all companies. They're both trying to predict it and limit what their spend will be."