Alternative fees (Part 9): Hybrids

When I started working on this series, I hoped to find a single definitive list of all possible types of alternative fees.  But I’ve given up.  There are too many lawyers creating new variations.

Consultant Ann Lee Gibson convinced me that it helps to analyze legal fees in terms of four fundamental building blocks:
1. hourly billing
2. fixed fees
3. contingent fees based on results
4. retrospective bonuses based on client ratings of value

These can be combined in a large number of ways to form hybrids.  Winning Alternatives to the Billable Hour lists fifteen of the most common hybrids (p. 97), and a quick web search will turn up many more.

My personal favorite was first mentioned in Part 3 of this series:  with value-adjusted hourly billing, legal matters are billed in the traditional hourly way, but at the end of the matter the client is invited to subtract or to add any amount, in order to reflect the value received.

Isn’t that risky?  You bet it is. 

But in his article “Creating the Law Firm of the Future”, pioneer Ralph Palumbo, reports that it has worked extremely well for the Summit Law Group:

“Our experience with value-adjusted fees has been terrific. Our customers have voluntarily paid us tens and even hundreds of thousands of dollars more than our proposed fee in matters where the value of our product substantially exceeded the fee proposed. Other customers have asked us to raise our hourly rates in order to better reflect our value. We even benefit when a customer discounts our proposed fee (a rare event) because we get immediate notice that something is wrong and we have time to fix the problem and save the customer relationship.

An unexpected benefit of our value-based pricing is that it has significantly reduced our accounts receivable. We get our bills out by the 10th of every month and ask to be paid promptly. Most of our customers respond -- we believe in part because it’s hard to object to paying a fee that the customer can adjust to any amount the customer believes fairly reflects value.”

Palumbo says that one key to success was building this approach into the firm’s culture: 

“No lawyer or staff member wants to be embarrassed by having a customer significantly reduce our proposed fee. The result is that our lawyers take more care to work with customers at the beginning of the engagement to define the scope and cost of the legal product to be provided. And they take more care to ensure that the cost of our legal product matches the customer’s objectives.”

If you are not ready to invite clients to subtract from fees, you could consider hourly rates plus a contingency, which supplements the traditional hourly arrangement with a fixed fee which is contingent upon success.  In an article on Alternative Fees for Litigation, James Shomper and Gardner Courson list a variety of ways of defining success, including:

“...time of disposition (for example, dismissal or settlement by a specified date), type of disposition (summary judgment, voluntary dismissal), favorable judicial rulings (for example, denial of class certification, forum non conveniens, statute of limitations, preemption, or other dispositive rulings), disposition before fees and costs reach a specified level, and the like...

“[A] performance award can be defined in any number of ways, such as a percentage of the fees saved below budget, a multiple of the discounted fees, or a specified dollar amount. The performance award might also be paid in stages rather than on the happening of a single event.”

If you are looking for approaches that work especially well in a down economy, see the Law.com article “New Clients and Enhanced Fee Opportunities in Today's Market” by Gavin Lantz for several options, including blended contingency fee agreements:

“I begin by telling the clients if they want me to be committed financially to the case, I need a financial commitment from them. I believe the best way to do a blended, contingent-fee agreement is that the client pay an initial flat-earned fee that will cover evaluating the claims and defenses and drafting the lawsuit. Thereafter, the client only pays litigation costs and the firm gets a contingent bonus of 25 percent to 35 percent of the gross recovery at the conclusion of the case. In my experience, if you select your cases correctly, these agreements will result in much better fees than a standard hourly fee agreement.”

Another hybrid approach is to cap hourly fees.   Here, hourly rates are charged up to a maximum cap.  Beyond that, the law firm agrees to work at its own expense.  These arrangements are generally more advantageous to clients than to outside counsel, since the maximum serves as a kind of fixed fee, but the hourly billing also enables clients to pay less. 

In Part 7, I wrote about the value of safety valves in fixed fee work.  The same applies to a capped fee:  a safety valve should be defined in advance, with both parties agreeing to renegotiate if the fees exceed the cap by a certain number of dollars or hours.  When safety valves are used, it will be helpful to send formal monthly reports comparing progress to the cap and the safety valve, and offering suggestions for keeping each matter within budget.

I could go on about all the different approaches to alternative fees, but I’d have to write a book.  And luckily for me, several people already have.  In my opinion, the best by far was published by the ABA Press last year – the third edition of “Winning Alternatives to the Billable Hour - Strategies That Work”  (edited by Mark Robertson and James Calloway).  

The predecessor of this book came out in 1989 (under a different title) based on work by the ABA Law Practice Management Section Task Force an Alternative Billing Methods.  They’ve been improving it for twenty years, and the 2008 edition includes “tools you can use in your practice to implement and evaluate alternative billing methods, including real case studies of lawyers and firms successfully using alternative billing to deliver value to both the client and the lawyer.”  So if you want to dig deeper into the details of many different ways to structure alternative fees, do what I did:  Buy the ABA book. 

For a summary of this entire series, see the LegalBizDev Guide to Alternative Fees, in the free resources section of our web page.

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