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New pricing models help lawyers garner more business

Some say clients more engaged when they don’t worry about billable time

Once the backbone of pricing for legal services, the billable hour is no longer the only fee model at most Rochester-area law firms. Clients clamoring for cost certainty during the recession helped usher in other fee agreements and forced firms to refocus on value.

Still, alternative fee arrangements are not just about the bottom line. Clients tend to shy away from calling to ask a question if doing so will trigger a charge, “and that’s a barrier,” says Richard Kroll, partner at Kroll Law Firm LLP, which transitioned to fixed-fee billing in the early 1990s. “When a lawyer represents a client, there should be–in our opinion–no barriers.”

Offering various pricing models has become a way for law firms to differentiate themselves in an increasingly competitive marketplace, says S. Todd Brown, professor of law and vice dean for academic affairs at University at Buffalo School of Law.

“It’s not just about keeping the clients that you have, but possibly expanding the business that you have with existing clients,” Brown says. A company that relies on one law firm for transactional work but gives day-to-day litigation work to another may be swayed to shift all business to the firm that offers fee-agreement options, he adds.

Known in legal circles as “AFAs,” alternative fee arrangements vary in their terms and practical effects.

Often used in personal injury and workers’ compensation cases, a contingency fee involves the client paying the law firm only if it obtains the agreed-upon result. In that event, the lawyer accepts a fixed percentage–usually 33 to 45 percent–of the amount recovered or accepts a sliding-scale fee, such as 35 percent of the first $100,000 recovered and 30 percent of the next segment that is recovered.

Another common AFA is fixed-fee billing, when a law firm handles a single case, a portfolio of cases or a case phase for a prespecified sum. Besides reducing the possibility of bill padding and fee disputes, a fixed fee supports open communication, proponents say.

“For example, if we’re going to draw a trust for a client, we should be experienced enough to know what it takes to do everything that needs to be done – including the planning, the drafting, the funding – and to anticipate follow-up questions that are going to arise when it comes to tax time down the road,” says Kroll, whose firm specializes in trusts, estate planning and elder law.

He adds: “So we like to do a fixed fee and then tell the client, ‘We don’t care how many times you meet with us, how many times you need to ask questions, how many times you call us on the phone, how many documents we revise.’”

Another alternative fee arrangement is the holdback, when an agreed-upon portion of fees is held until a matter concludes or a benchmark is achieved, and then it is disbursed to the law firm, the client or both, based on the agreement. A satisfied client also may agree to provide a success fee, meaning a defined bonus for interim or final successes achieved.

A desire to predict legal costs has prompted more commercial clients to seek alternative fee models, says Tom Knab, partner at Underberg & Kessler LLP, where the billing structures range from flat fees to retainers.

“So there’s cost certainty, and they’re looking, obviously, to get their work done at the most affordable price,” Knab adds.

Many legal-industry analysts claim that the billable hour is on life support, “but it’s hard to say for sure,” Knab says. “I think that it’s being more and more questioned, but I can’t say for sure that it’s fading out. The sense I get, at least from the local community, is people still bill by the hour in many cases.”

While not all practice areas of the law are equally suited to alternative fee agreements, those distinctions are beginning to blur.

“Historically, I think people thought that litigation was a much more difficult practice area (to offer AFAs) than some other practice areas because of the unpredictability of litigation,” Brown says.

But one option is a fee collar that sets a budget, a percentage above and below that amount, and a percentage for under- and overruns to determine if the client pays a percentage of any overrun or if the law firm pays back a percentage of the savings to the client.

“The more we get into a world where alternative fee arrangements are growing, the more we’re going to see innovation (in pricing models),” Brown says. “So even in an area like litigation, you could see it grow.”

At Harter Secrest & Emery LLP, the demand for AFAs is strong, says managing partner Craig Wittlin.

“It is a much bigger topic than it was when I began my career 25 years ago,” Wittlin notes. “(Back then), it would have been relatively unusual for us to do work – other than maybe plaintiffs’ litigation work – on something other than on an hourly basis. Now, it’s an important part of our practice. It’s an important part of the economics of our practice.”

He adds: “Law firms have not abandoned the billable hour or the billable hour requirements for their associates. So we’re in a little bit of a period of flux, where an associate at a law firm might have more contingent work than he or she did at an earlier time (or) might have more work that’s just on a different kind of alternative fee arrangement, but that associate still has a minimal billable standard, which is not going away.”

Leaders of law firms have become more aware of the need to partner with clients, so alternative fee arrangements will likely evolve, Wittlin says.

When it comes to the human side of practicing law, further development of alternative billing models cannot happen soon enough, Kroll says.

“If I want to spend 10 or 15 minutes of my conference with a client asking about them, finding out about them as people, sharing things about myself–if I’m flat-fee billing, it doesn’t matter,” he says. “If I’m charging by the hour, the client resents every moment that you’re doing anything other than talking about the business problem.”

Online platforms that charge a flat rate for basic legal forms have muscled into the marketplace, but that does not mean lawyers are headed for obsolescence, Kroll says.

“That’s because practicing law is not science; it’s art,” he says. “Science lends itself to rigid formulas that always come out the same and have no variables. But art lends itself to infinite interpretations, and we as lawyers are artists because each of us interprets the picture before us a little differently and paints it a little differently.”

Sheila Livadas is a Rochester-area freelance writer.

(c) 2017 Rochester Business Journal. To obtain permission to reprint this article, call 585-363-7269 or email madams@bridgetowermedia.com.

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