How an alternative rock song can provide insight to the evolution of the cost for legal services.
When I learned the theme for this month’s iBi would be change, my mind wandered toward David Bowie’s 1972 musical manifesto that challenged mankind to “turn and face the strain” of changes. Upon its release, the song was considered a relative failure. Bowie’s “Changes” never reached the American Top 40, unlike most of the hits he released during his Ziggy Stardust era. In a metaphoric example of life imitating art, as time passed, this song became one of Bowie’s most requested melodies and ultimately landed as No. 127 on Rolling Stone’s Greatest 500 Hits of All Time.
There are lessons we can learn from the insight of Bowie’s music. Sure, we can reminisce over how our personal and professional lives have transformed over the decades. Beyond that, however, Bowie’s song cuts a bit deeper and suggests that each generation will face its own unique challenges and will require courageous leaders to overcome them. Without question, the unique predicament facing us today is our economic environment. In light of this adversity, law firms today face the need to modify their price structures to address the changing demands of corporate clients.
“I still don’t know what I was waiting for.”
Business consultants in the legal industry seem to agree that strategic modifications must be made to the generic law firm business plan in reaction to today’s challenges. Those law firms that make difficult decisions and undertake the appropriate modifications will emerge stronger as the economy recovers. These same experts conclude that law firms who lead the innovation into the next generation will thrive in it, while those who lag and refuse to react to the changing climate will suffer.
I have asked some of these consultants why law firms needed an economic crisis to identify the modifications needed in their price structure. My initial response was obvious—without economic instability, there would be no need to stabilize it through a different pricing model. Still, it seems troublesome that when times are good, we fail to recognize the need for forward-looking renovations and improvements in our business plans and pricing.
Whether times are good or not, clients still seek to streamline the cost-effectiveness of their legal services. Hindsight notwithstanding, it was long before the economic downturn when clients began asking us not for our hourly billing rates, but rather, how much an entire legal undertaking would cost. Today, as one would expect, the question is even more predominant. If we are not prepared to answer this question sufficiently, our clients will bid us a quick farewell and visit our competition. As a result, we seek not only to answer budgetary questions in appropriate detail, but also to offer innovative alternatives to the traditional “billable hour” to help address our clients’ fiscal concerns.
“Just gonna have to be a different man.”
I have written and spoken frequently during the past two years about the impending death of the billable hour as the universal basis for budgeting legal services. For now, it remains a primary form of compensation between many law firms and businesses. As a result, firms still need to translate their fees into hourly billing rates. Nevertheless, most clients, even the ones who prefer hourly rates, are now inquiring about the alternatives and the rationale behind them.
In short, the current economic and regulatory climate is pushing companies to seek two important changes in their legal budgets: (i) to require legal counsel to share some of the risk in the legal undertaking, and (ii) to assist in converting legal fees into a fixed cost rather than a variable in their budgets. In theory, these changes should increase the value for the legal dollars spent and decrease the likelihood that legal fees will exceed expectations and cause unwelcome adjustments to income statements.
Our firm has researched numerous alternatives implemented across the country in cultures similar to our own and have begun implementing some of them into our own practice. Admittedly, many of these billing alternatives are based upon volume discounts and economic scales, and will succeed only when a true “partnership” exists between the law firm and the client. Some of the most common billing arrangements we utilize as an alternative to the legal industry’s standard hourly rate are briefly described as follows:
- Flat rate task-based billing. A “menu” of flat fees can be developed to charge a client specific fixed amounts for various tasks and services requested. This method allows clients to accurately forecast their legal budgets. Simply stated, if a service is not requested, there will be no invoice for it.
- Flat contractual fee forming a “general counsel” type of relationship. This alternative involves a formal contractual relationship with a client under which the law firm will undertake all legal matters for the client during the contractual period, in exchange for a flat fee. This is the best alternative when the client desires to convert a variable legal budget into a fixed cost, but still have their attorneys available to address all of the business’ legal needs.
- Contingency. Traditionally used by personal injury and medical malpractice firms, this type of arrangement can also be used in a business context. This alternative is particularly attractive when clients want their legal counsel to share the risk of litigation. Under this alternative, the law firm is only paid if they win.
- Reverse contingency. Similar to a contingency arrangement, clients often find themselves defending against claims when the opposing party is seeking an unreasonable recovery. Under this alternative, the law firm’s contingent fee can be based on the amount saved for the client off the unreasonable amount sought by the opposing party.
- Bonus system. Sometimes clients are under an intense time constraint to complete a file quickly. Under these circumstances, a flat “bonus” schedule can be agreed upon, under which the overall fee paid to the firm is based upon how long it takes to resolve the matter to the client’s satisfaction.
- Combination. Often, one or more of the above methods can be combined and tailored to address any specific scenario. Most of the alternative billing arrangements used by our firm involve some type of blend or mixture of different methods.
“Time may change me, but I can’t trace time.”
Yes, I wish I had foreseen the need for alternative billing methods long ago. Even more, I wish I had a crystal ball to know for certain whether we are properly reacting to our clients’ long-term needs. Other firms have developed different approaches, and many have chosen to make no changes at all in their price structure. Who is right and who is wrong during these critical times cannot be certain. In time we might be able to measure the success or failure of our changes, but for now, perhaps it helps to remember the closing words to David Bowie’s song:
And these children that you spit on
As they try to change their worlds
Are immune to your consultations
They’re quite aware of what they’re going through. iBi