General Practice, Solo & Small Firm DivisionMagazine
Tort and Insurance Practice
Alternative Billing Systems: Abandoning Time as a Measure of Value
By Dianne K. Dailey, Stephen F. English, and Linda M. Bolduan
Fixed-fee Approach. Under a fixed-fee approach, a law firm and its client typically agree on a single fee for specified legal services. One type of fixed-fee arrangement is where the law firm and the client agree on a fee at the beginning of a case. That fee generally remains the same, regardless of how much or how little time is spent on the case. Fixed fees often are used in routine cases where fees can be estimated with a fair amount of accuracy.
A fixed minimum or maximum fee in a case is another type of fixed-fee approach. If the results desired by the client are achieved, then the maximum fee is charged. If the results are not satisfactory, then the fee charged would be no less than the minimum.
A fixed fee can cover more than a single case. For example, a law firm may negotiate a fixed fee for an entire year’s worth of legal services. The firm would determine the prior year’s total legal fees, which would become the client’s legal costs for the current year. The client would pay the total bill at the beginning of the year, providing the law firm with immediately available operating capital. During the year, the law firm would send to its client informational billing statements for services rendered.
Although the fixed-fee approach generally benefits both the law firm and the client, the client may dislike the fixed-fee option because it could pay a fee at the beginning of a case, which then settles very modestly. To counter such concerns, a law firm could include risk-sharing features wherein both the client and the law firm share the risk. For example, if a law firm were to incur actual costs greater than some fixed fee, it would have to absorb those costs and would be paying for its inefficiencies. On the other hand, if the law firm were to incur costs less than the fixed fee, it could retain the difference, in effect receiving a bonus for services efficiently provided. Risk-sharing features could also depend on the outcome of the litigation.
Task-based Approach. A task-based fee is based on the type or category of services provided. Initially, a case is broken down into components, such as the initial investigation and research, answering the complaint, discovery, depositions, and trial. A client can pick those tasks that it wishes performed and fees are set for each task.
Instead of negotiating all legal fees at the beginning of a case, another alternative is to budget in phases. For example, the fees could first be determined for the investigation and pleadings phase of a case. After that phase is completed, a fee for written discovery could be determined. Budgeting for trial may make better sense after the completion of discovery.
Like fixed fees, a task-based fee arrangement may include certain incentives or disincentives. For example, to get away from hourly fees, ServiceMaster Corporation in Chicago built into its task-based billing arrangement a 15 percent enhancement or 15 percent discount on those components of the case that might be dispositive.
Corporate clients see the task-based billing approach as providing the client "with some degree of certainty of what the case will cost" and the ability to plan. Moreover, such an approach "imposes some discipline on the law firm," which consequently will be sensitive to going over budget and "will be reluctant to come back to you and explain why this phase of the case cost twice as much as they had predicted."
The American Bar Association Section of Litigation and others have developed a Litigation Code Set (Code Set), which is a budgeting and billing system based on 29 distinct tasks involved in litigation. The Code Set describes four goals: (1) enable client and counsel to plan and maintain an efficient and effective litigation; (2) facilitate effective communication of the tasks and costs of litigation and any variations from the expected or the norm; (3) for greater efficiency and as a foundation for use of alternative billing arrangements, provide each client and law firm with a means to individually understand and compare the cost of litigation; and (4) harmonize the various task-based efforts to ease widespread adoption of a simple, concise, and flexible task-based management approach.
The Code Set consists of five basic phases of litigation plus expenses: (1) case assessment, development, and administration; (2) pretrial pleadings and motions; (3) discovery; (4) trial preparation and trial; and (5) appeal. Each phase contains a number of different, but relevant, tasks. For example, the discovery phase lists written discovery, document production, depositions, expert discovery, discovery motions, and other discovery. For each billing period, the time charges by the attorney are recorded by task, and all work associated with a task is included in the relevant category.
Other Approaches. Under the contingent approach, the fee depends only on the outcome of the particular case. Typically, this method is used in plaintiff personal-injury cases for clients who cannot afford to pay for legal services rendered, and in subrogation and collection matters. Under a modified contingent fee approach, the client would agree in advance to pay a premium under certain conditions.
Under the cost-plus fee approach, an attorney’s fee is calculated based on the lawyer’s overhead plus a reasonable profit. An example of a "cost-plus" billing method would be charging three times the cost of each item in an attorney’s office.
With the equity fee approach, the attorney and the client wait until the end of a case to determine the applicable fee. This holistic billing system is based on the criteria set forth in the Code of Professional Responsibility for determining attorney fees. Factors to be considered in determining the reasonableness of a fee include: (1) the time and labor required, the novelty and difficulty of the questions involved, and the skill required to perform the legal service properly; (2) the likelihood that the acceptance of the particular employment will preclude other employment by the lawyer; (3) the fee customarily charged in the locality for similar legal services; (4) the amount involved and the results obtained; (5) the time limitations imposed by the client or by the circumstances; (6) the nature and length of the professional relationship with the client; (7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and (8) whether the fee is fixed or contingent.
Valuing Legal Services. At issue in most fee arrangements not based solely on time spent is how to quantify the value of the legal services provided. Certainly, repetitive, routine matters lend themselves to alternative billing arrangements. Where both in-house and outside counsel have a fairly good base of knowledge on which to make a prediction, alternative billing arrangements make good business sense.
Impact of Technology. Technological capability is important in developing alternative fee billing systems. Requisite data can be easily tracked and analyzed and utilized in initial negotiations with a client. Having the data readily available permits a lawyer to develop, for example, "‘in minutes a fixed-fee quote that falls within the firm’s historical billing parameters.’" Technology also can play an important role in the effective and efficient implementation of alternative approaches.
Dianne K. Dailey, Stephen F. English, and Linda M. Bolduan are with the law firm of Bullivant House Bailey, A Professional Corporation, in Portland, Oregon. Ms. Dailey is immediate past chair of the Tort and Insurance Practice Section.
- This article is an abridged and edited version of one that originally appeared on page 44 in The Brief, Spring 1998 (27:3).