Billable Hour Alternatives

The billable hour has long been a staple of the legal profession. But as companies watch their balance sheets more closely, local lawyers say their clients are increasingly hesitant to pay fees that can exceed $500 per hour.

“Our clients are much more sophisticated consumers of legal services now than they’ve ever been,” says Andy Ritten, a partner in Faegre & Benson, LLP’s corporate practice group. “They’re saying: Why is the billable hour the be all and end all?”

Many local firms say that it isn’t—and all indications point to a permanent shift toward alternative fee arrangements, although the types of arrangements vary by firm and by practice area.

“There are as many alternative fee arrangements as there are clients and lawyers,” says Pierce McNally, a senior attorney at Minneapolis-based Gray Plant Mooty whose practice areas include business law and entrepreneurial services.

One common arrangement is some variation of a flat fee. Minneapolis-based Bowman and Brooke, LLP, which handles litigation defense, primarily for product manufacturers, has had a flat fee arrangement—an annual retainer that covers a number of cases—with one of its largest clients for more than five years, says founding partner Richard Bowman.

There’s definitely some risk involved, Bowman explains, but the firm cautiously weighed its fixed fee arrangement before offering it to clients, to create a cost structure that would be reasonable for the client and the firm. In its first flat-fee arrangement with one of its largest clients, the firm charged hourly rates for the first three months of a case. After the attorneys were familiar with the details of the work, they offered the client a flat fee to finish the case.

Minneapolis-based Faegre & Benson has also offered various flat fee arrangements. In the transactional practice area, flat fees have been offered in exchange for a certain volume of work.

Take a client who wants to pay $40,000 for the firm to represent it in acquiring another company, even though the law firm determines that the representation would likely cost $80,000 under an hourly billing structure.

“We’ll say, if you can give us a steady diet of this type of work—say six deals over the next year—then we’ll do it,” Ritten explains. Under such an arrangement, the firm becomes more efficient with each subsequent transaction—thus allowing it to later recover from some of the monetary losses on the initial deals. However, the firm would only enter into such an agreement if each acquisition was guaranteed to be substantially similar. For example, an agreement may specify that the client is a lead investor in all of the corporations being acquired, and a banker or broker is involved.