Rethinking Legal Fees for Lean Times
Monday, October 20, 2008; Page D01
The economic crisis is giving the prosecution a boost in the case of Fixed Fee v. Billable Hours.
Corporate legal department officials say fees to outside law firms have risen faster than energy costs, salaries and other expenditures. Some senior partners in the most prestigious firms charge up to $1,000 an hour and require their associates to bill up to 2,000 hours a year.
Since becoming commonplace in the 1970s, hourly billing has been the subject of criticism by clients and debates by legal experts, who say they give lawyers incentive to work inefficiently. But law firms have been slow to embrace alternative billing.
"I think the financial crisis will exacerbate everybody's pain point," said Pam Rothenberg, managing member of Womble Carlyle Sandridge & Rice's D.C. office. Rothenberg said the firm, which has 550 lawyers in 11 offices, works within a budget that the client and firm set ahead of time.
"There will still be firms resistant to change," she said. "But those that embrace change will likely gain more market share."
New efforts to jettison hourly billing are being driven by in-house corporate lawyers, who say they have grown frustrated seeing fees to outside firms soar even as they slash their own costs. They said they want more certainty in their legal budgets and worry that outside firms are spending unnecessary amounts of time on their matters.
Some lawyers say they resent that assessment. "An honest lawyer works efficiently and does not charge clients for inefficient use of time. If I go to a meeting and learn it's the wrong day, I'm not going to charge the client for that," said Joel P. Bennett, who handles employment cases in a solo practice in the District and supports hourly billing.
In a recent survey conducted by the Arlington-based Corporate Executive Board, a for-profit organization that does research on best practices, 800 in-house lawyers said they spent 50 percent more last year on large outside law firms than in 2002. They said the hourly rates they paid jumped 70 percent between 1996 and 2005.
Steven Williams, managing director of the Corporate Executive Board's General Counsel Roundtable, said those increases can't continue: 57 percent of the corporate lawyers he surveyed this month said they plan to cut their budgets for outside legal help next year.
The Association of Corporate Counsel, which represents 23,000 in-house corporate lawyers, last month launched the "Value Challenge," an initiative aimed at spurring corporate lawyers and outside law firms to develop alternative pricing plans, including fixed rates, volume discounts and lower rates in exchange for performance bonuses. "When we started looking at this project, we were thinking, 'How do we make people realize now is the time' [to stop charging by the hour?]," said Susan Hackett, the association's general counsel. "Then the economic crisis happened. There's going to be a heck of a lot of directives for folks at the firms to lower their costs."
Law firms are divided over the calls to abandon hourly billing.
Joseph E. Lynch, a partner at King & Spalding's Healthcare Practice Group in the District, said he would work under fixed fees only in rare circumstances. It's often difficult to assess how much work a project will actually need, he said.
"Counsel doesn't want a fee arrangement that's insufficient to cover the work that's necessary," Lynch said.
Jay Shepard, chief executive of Shepard Law Group in Boston, said his 2007 revenue doubled after switching from his firm's $250- to $500-an-hour rates to fixed and negotiated fees the previous year.
"Before the financial crisis happened, I thought in 10 years the billable hour would be on the way out. I now think that will be sped up," said Shepherd, who has represented Adobe, Samsonite and Costco in labor cases.
"A lot of clients are saying, 'Enough is enough,' " he said.