Is time running out on the billable hour?
By Catherine Ho,
When Washington lawyers Marc Zwillinger and Christian Genetski left Sonnenschein Nath & Rosenthal in 2010 to open a four-lawyer firm, they took with them 24 corporate clients, including some big names such as Yahoo, MySpace, Blizzard Entertainment and Cricket Communications. By the end of 2011, the Internet law boutique, ZwillGen, had more than quadrupled its client billings to 100.
ZwillGen, which now has eight attorneys, espouses a flexible billing philosophy based on efficiency, not hours. In a lengthy section of the firm’s Web site, they call individual hourly rates “the old-boring-way.” The firm prides itself on its Silicon Valley start-up culture: there are no partner or associate titles, lawyers wear jeans to work, and one of the firm’s co-owners, Elizabeth Banker, took the job partly because it gave her the scheduling freedom to carve out a part-time wine consulting business (she also leaves early on some Fridays to work at the tasting room at Sunset Hills Vineyard in Virginia).
Much of what’s driving the success of ZwillGen and other boutiques is the growing demand from in-house legal departments — law firms’ most coveted clients — to negotiate alternative billing arrangements that include flat fees, retainers, blended rates and bonuses based on success.
“We put a lot of emphasis on the alternative billing approach when we left,” said co-founder Zwillinger, a former federal prosecutor in the Justice Department’s computer crime section. “We try to do a flat fee or monthly retainer or something that better aligns our incentive so we make more money the more efficient we are, and we make less money the less efficient we are.”
Those are magic words to chief legal officers who are under unrelenting pressure to contain outside spending.
“We have limited resources, and the legal advice we receive cannot suffer,” said Stephen Dwyer, general counsel of the American Staffing Association and president of the Washington Metro Area Corporate Counsel Association, which represents 2,000 in-house lawyers at companies and nonprofits in the District, Maryland and Virginia. “That’s forced inside counsel to look at different billing arrangements.”
Looking for alternatives
For some, that means turning to smaller firms that offer specialized services, minus the big-firm rates. Karen Litsinger, senior vice president and general counsel for Mirixa Corp., the Reston-based health care services provider, started looking to regional firms to handle routine matters that don’t need the staffing of an 800-lawyer firm.
“There are some employment law matters or run-of-the mill litigation where I don’t need a national or international firm,” said Litsinger, whose company runs Web-based programs that help pharmacists counsel patients on their medication. “I can get an hourly rate that starts with a ‘3,’ not a ‘6.’ You have to find the right people ... but for us, that’s been a way to contain costs and get very good quality work.”
Others are pressing traditional top-tier firms for alternative billing arrangements — and they say they’re getting them.
“All firms will do it, it’s not just alternative firms,” said Brian Miller, executive vice president and general counsel of Arlington-based energy company AES Corp.
Two years ago, many top firms were willing to discuss alternative fee structures, but it was in-house counsel who were gun-shy, said Michael Wu, general counsel and secretary for Arlington-based language-learning software company Rosetta Stone.
“Now, it’s much more prevalent,” Wu said. “Every firm needs to do a discount now. The ‘rack rate’ is not the rate anymore.”
Marriott International has alternative fee arrangements for “all major litigation and any major transactional piece of work,” said Ed Ryan, executive vice president and general counsel of the hotel giant, where 80 percent of outside legal spending goes to a handful of top 100 firms, including Jenner & Block, Gibson Dunn & Crutcher and DLA Piper. “Sometimes it’s heavily discounted with a success bonus if the transaction or litigation is successful.”
Big Law gets into the act
A December American Lawyer survey of leaders at top 200 firms indicated Big Law is increasingly open to alternative billing, with 92 percent of firm leaders saying they used flat fees for at least one matter in 2011. Eighty-two percent used caps or “collars” — arrangements where lawyers and clients agree on a flat fee, and the firm offers a discount if they go over the agreed-upon figure by a certain percentage. Leaders at some of Washington’s largest firms don’t expect the demand for alternative fees to go away anytime soon.
“Our clients are interested in these arrangements because it provides them with predictability as to what they’re going to have to pay each quarter,” said Amy Wigmore, vice chairwoman of litigation at WilmerHale, which has long advocated for alternative fee arrangements. “We expect it’ll continue, perhaps increasingly so, in 2012.”
Most of the matters Wigmore handles — intellectual property litigation on behalf of pharmaceutical and biotech companies — use alternative fees, including flat fees and collars.
Most general counsels agree, though, that when it comes to outside counsel, it’s less about landing the cheapest result and more about finding the best lawyer for the job. While cost is a major driver to jump ship to a boutique, chief legal officers say trust in individual lawyers trumps firm masthead.
Yahoo’s legal department had a 10-year relationship with Zwillinger at the time he left Sonnenschein (now SNR Denton), and the Internet giant stuck with the attorney for his knowledge of Yahoo’s operations and expertise in Internet security, e-commerce and privacy law. Yahoo’s fee arrangements with ZwillGen have reaped a significant cost savings. Cricket, one of ZwillGen’s original clients, said its decision to leave with Zwillinger “was all about Marc.”
“The more we work with him, the more he knows my business, my department and my concerns,” said Monica Gleeson, Cricket’s senior legal counsel. “If we had stayed at Sonnenschein, I’d be educating someone else. It makes things go quickly so we’re not reinventing the wheel every time we have an issue.”