Is the billable hour dead? Controlling legal costs in a tough economy.

• Author: Barton, Carl W.
• Position: Legal Brief

Sales and profits in most businesses have suffered the recession squeeze over the past 18 months, and legal budgets are no exception. Consequently, the economy is spawning questions about the demise of the billable hour and is producing heated discussions about the alternative billing methods that may replace it. Not surprisingly, recent studies indicate that nearly 80 percent of general counsel and chief legal officers would like to see alternative fee arrangements increased as a percentage of their legal budgets.

Increased Interest in a Familiar Concept

The concept of alternative billing arrangements has been around for several decades. But in the past year there has been increasing pressure to reconsider this topic. This issue has come to the forefront not only because of the downturn in the economy, but also because of the Association of Corporate Counsel's "Value Challenge," a recent national survey of corporate counsel designed to reconnect the value of legal services to the cost paid for them. In fact, 43 percent of in-house legal departments spent at least 10 percent of their budgets on non-hourly-rate arrangements in 2009, according to an Altman Weil study.

Has the billable hour, in fact, become obsolete? What are some of the possible alternative billings arrangements, and when do they make the most sense?

Fixed or Flat Fees

In a fixed fee or flat fee arrangement, the outside law firm agrees to perform a discrete project for a fixed amount of legal fees. Fixed fee arrangements seem to work best for standard, uncontested matters such as preparing corporate documents, mergers and acquisition transactions, venture funding transactions, non-judicial foreclosures, uncontested receiverships, preparation of employee benefit plan documents, conducting corporate compliance audits, preparation and negotiation of leases, and preparation of certain motions and briefs.

The key to a successful fixed fee arrangement is a clear and careful definition and understanding of the specific scope of the project to be performed.

Contingent Fees

While most litigation is not well suited to a fixed fee arrangement, contingent fee arrangements are often used in litigation and also may occur in some large transactional matters. One approach involves paying a reduced hourly rate, plus an additional fee that is contingent on a successful outcome. The company and its lawyers must carefully define what constitutes a successful outcome at the outset of the...