LMA 2010 - Examining the Current Use of Alternative Fee Arrangements

My second session on Thursday, March 11, 2010 was "Examining the Current Use of Alternative Fee Arrangements," with presenters Lindley J. Brenza, a partner at Barlit Beck Herman Palenchar & Scott LLP and Reed S. Oslan, P.C., a partner at Kirkland & Ellis LLP, and moderator Gabriel Miller, general counsel at Sokolove Law.  Because this is a hot topic in the legal industry, the session was well-attended and spawned some interesting conversation.

Oslan started by saying that Kirkland & Ellis have been doing a lot of alternative billing, and believe there will be even more in the future.  Brenza agreed, saying that at his firm, they do nothing by the hour anymore for new matters.  To clarify for everyone, they put up a graphic of the four types of legal fees - hourly, fixed, contingent and hybrid.  Brenza said that his firm doesn't do hybrid billing arrangements, because they are too problematic.  Interestingly, he added that the ABA considers non-hourly billing more ethically sound and client-focused than hourly billing.  The panel agreed that because of financial constraints in this economy, clients are willing to take more risks with their lawyers on how fees are structured - this was borne out in the general counsel panel the following day by clients who admitted to being reticent to use alternative fee arrangements, but felt pressured to find the most economically efficient way to handle legal work. 

One of the panelists pointed out that despite the industry's seeming fear of moving away from the billable hour, hourly billing rates have only been around for the last sixty years.  When they took an informal poll of the room, most of those present were from firms doing some type of non-hourly billing.  Oslan said that it has taken his firm some time to get comfortable with the idea of alternative fees, and observed that clients aren't always ready to take that route.  Brenza agreed and said that although his firm does work entirely on an alternative fee basis, clients come to them for their skill, and not their fee schemes, and it often takes some time for them to become comfortable with it.  But at heart, the panel said that basically, clients want less expense and more certainty.  Law firms can't say that their work is too unique for a budget - it may be a leap of faith to handle work on an alternative fee basis, but other vendors are already doing it.

That being said, the panel agreed that the discussion over alternative fees is actually a lot bigger than the demand for them.  There are a lot of downsides to discounts, which the attorneys don't always consider as part of alternative billing.  Oslan pointed out that most firms are pyramid-shaped, with the majority of the lawyers being associates, and billable hours are rewarded.  These types of firms can't easily do alternative fees.  Firms built for non-hourly billing are structured differently - more diamond shaped with the greatest number of attorneys being experienced partners.  To be able to do alternative billing at a firm shaped like this, the partners doing it must be supported by the firm. 

The key takeaway from this presentation was that although the demand for alternative billing arrangements isn't as high as it's hyped to be, clients are looking for less expense and more certainty in their billing and firms will have to be able to adapt to best service their clients.