Corporate Law Departments Should Consider Value Billing

Often, lawyers who engage in alternative-fee methods do so only at the client’s insistence, feeling they must yield to the client’s will. The attorneys assume that only the client benefits from alternative-fee arrangements.

This assumption, however, is not accurate. The motivation behind alternative fee arrangements is to improve efficiency and quality. To this end, both client corporations and outside counsel should be willing to invest in the quality of their work product and be rewarded for the results of their efforts.

Clients long ago concluded that hourly billing fee structures reward the inefficient. Now, clients are beginning to evaluate law firms based on their willingness to accept alternative fee arrangements. In today’s competitive environment, the only firms that can afford to accept alternatives to hourly billing are those that are highly efficient, extremely effective and can lead their teams to new levels of performance. As a result, these firms are now sought out by clients, a trend that will dramatically increase in the future.

More and more, firms that are willing to bill only by the hour are labeled as inefficient and quickly screened out of the hiring process because corporate counsel are interested in buying results and efficiency. Firms that bill by the hour are no longer responding to the needs of their clients.

Value-based billing should create incentives for outside counsel and are predicated on the corporate client’s perceived value of achieving a specific result. On the other hand, the term “alternative fee” is a generic reference that includes value-based billing, as well as other methods such as capped and fixed fees. Caps and fixed fees can provide some budgetary certainty, but do not necessarily reward results.

Corporations that want compensation for their significant cases to be based on results should focus on value-based fee arrangements. Likewise, companies that want stability in their budgets should test value-based billing. The issue is how innovative the client is willing and capable of being.

Clients often confuse value billing with other forms of alternative fees. As a result, when they relate an example of value billing that was not successful, further inquiry usually reveals they were not using value billing but, instead, were trying something like a fixed budget with a cap, which contains no incentive at all for the lawyer to achieve specific results.

If a corporate law department wants to use value-based alternative fee arrangements, its relationship with outside counsel should be based on trust and a well-grounded understanding of the client’s needs. This does not mean the company and outside counsel will be together forever. Instead, it means simply there is a commitment beyond one case or one transaction and that as long as both parties benefit, the relationship should continue.

The biggest barrier to alternative billing is the law firm’s belief that it is not in the best interests of the firm. After overcoming that barrier, the next obstacle is that in-house counsel does not know how to create an alternative fee arrangement. Or, he or she does not feel confident he or she can withstand criticism from management who contend law firms have been overpaid.

Certainly, value billing carries with it the fear of overpaying outside counsel. When the payment to counsel, however, is based on the result in-house counsel wants to achieve, outside counsel benefits only when in-house counsel benefits as well. In-house counsel should structure the transaction so it is impossible for outside counsel to benefit without in-house counsel and the corporation realizing a much greater benefit. In this way, value billing results in high quality, productive legal services and prevents the inefficiencies of hourly arrangements.

One thing that is vital to a value-based fee arrangement is effective, early case assessment. Neither outside counsel nor the corporate lawyer can predict the value of the matter or start to define good results until they have a firm grasp of what is involved in the lawsuit. They must know how likely they are to win or lose and the potential damages they may recover or for which they may be held liable. In-house counsel cannot effectively start to negotiate a value-based fee arrangement until he or she has enough facts to make this informed judgment.

The legal system is being driven toward results-oriented incentive methods of compensation by a systematic reassessment of what lawyers do for their clients and where they add value, whether they work inside or outside the corporation. This paradigm shift is changing the definition of legal service quality — a change from the focus on process to a focus on results.

In the next five years, we will see a fundamental change in the way legal services are consumed. Clients looking for value for their legal services dollar will increasingly gravitate toward law firms that insist on billing based on the value of services delivered. Corporations that are not prepared to actively engage in value-based billing will be denied access to those highly efficient, results-oriented, law firms that want to be rewarded for their results.

Provided as an educational service by John Raymond Dunham, III, Esq..

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This publication is designed to provide accurate and authoritative information in regard to the subject matter covered and report on issues and developments in the law. It is not intended as legal advice, and should not be relied upon without consulting an attorney.