Today more than ever, clients require creative, flexible, and predictable approaches to the delivery and pricing of legal services. If implemented successfully, alternative fee arrangements provide substantial value and are mutually beneficial for the firm and the client.
Below are some examples of the alternative fee plans legal clients have find attractive.
Alternative Hourly Rates
Blended Hourly Rates – For some matters, a law firm may agree to bill the same rate for all lawyers who work on a client’s matters, regardless of each lawyer’s level or individual billing rate. Blended rates are determined on the basis of work the law firm expects to be provided for a matter and the billing rates of those lawyers the firm anticipates will work on the matter.
Volume Discounts – In situations where a client prefers traditional hourly rates, a law firm may consider providing hourly rate discounts on a sliding scale in return for that client guaranteeing a set level or volume of legal work.
Fixed or Flat Fees
Straight Fixed or Flat Fees – A law firm may be willing to provide some services for a set fee. This fee could cover a particular matter (e.g., a fixed fee for all work provided on an internal investigation) or a particular service (e.g., a flat fee for consulting services provided on a monthly basis). Fixed fees typically are set for individual matters or for an entire portfolio of matters, and may cover the entire life of a matter or be limited to a specific period of time or a particular task.
Fixed Fee or Pre-Agreed Upon Budget with Collar – Some fixed fee arrangements (and matters with pre-agreed upon budgets) will warrant a “collaring” arrangement. This fee arrangement anticipates engagements in which the amount of effort needed to fulfill the law firm’s obligation as responsible legal counsel is greater or less than what both the law firm and the client initially thought the effort would require.
Under such a collaring arrangement, the law firm and the client would agree that if the hourly value of the firm’s lawyer time expended on a matter falls considerably outside the fixed fee (or pre-agreed upon budget), the parties will share the fee upsides and downsides with each other.
Monthly Access and Advice Retainers – Although this is a variation of the straight fixed fee approach described above, an advice and access retainer has benefits that warrant further explanation. This approach makes sense in situations where a client wishes to be proactive in seeking legal advice to avoid legal exposure, but does not want to pay for expensive legal research every time a potential legal issue arises. This arrangement offers clients ready access to relatively inexpensive legal advice and offers the law firm the chance to add value to the client. It helps the law firm distinguish early on between those situations that are easily dealt with and others that, unaddressed, might expose the company to significant liability.
Phase-Based Fees – The firm will estimate a specific fee for each phase of a matter based on the work anticipated for each phase. In litigation, for example, this arrangement might result in a separate fee for each of the following phases:
- Motion to dismiss
- Dispositive motions
- Trial preparation
In transactional matters, phases of work might include due diligence, drafting of specific agreements, negotiating the terms and amount of the purchase/sale price, closing activities, etc. This approach could be implemented in a variety of ways. For example, the arrangement may be based on fixed fees, where the law firm charges a fixed fee for each matter phase. Another approach that might be taken would require the client to pay an estimated (budgeted) fee for each phase with a rationalization against actual billings at agreed-upon times, e.g., quarterly, annually, or when the matter is concluded.
Fee Caps – For matters in which the scope is understood and well defined beforehand, the firm may agree to cap its fees. Fee caps are determined based upon anticipated fees for the scope of work, and they can be set for the entirety of the matter or for each phase.
Risk Sharing Arrangements
Fee Holdbacks – In certain situations, the law firm can hold back an agreed-upon percentage from its monthly billings. In return, the law firm will have the opportunity to earn and be paid the full holdback amount at the client’s discretion. Whether the law firm earns back all or some of the holdback amount will be based on the client’s assessment of our performance against certain predetermined criteria, e.g., work quality, results, creativity, efficiency, cost-consciousness, collaboration with other outside counsel, and effective utilization of the client’s own resources. In these situations, the criteria are established up front. The client’s holdback determinations could be made annually or when the matter concludes. A fee holdback arrangement could be applied to a litigation or transactional matter.
Success Fees – Under this arrangement, the law firm would be eligible for a success fee or premium in addition to its prior billings, in the form of a performance bonus at the client’s discretion. A success fee can be a set fee, a graduated fee according to a mutually developed schedule, or a percentage of the law firm’s billings. As with a holdback, whether we earn a success fee will be based upon the client’s evaluation of our performance against predetermined criteria.
Broken Deal Discounts – The law firm would consider a discount off of its fees in the event that a project did not proceed beyond a certain stage of the transaction. For example, there would be an agreed upon substantial discount if the client chose not to proceed after completing its due diligence, followed by separate discounts should the client elect to proceed with documentation after completing due diligence, but then failed to reach a financial closing of the project.
Traditional Contingency – Under a traditional or full contingency arrangement, the law firm will defer its fees entirely in exchange for receiving an agreed upon portion of the client’s ultimate recovery. Typically, the client pays the expenses of the litigation.
Partial Contingency – In a partial contingency arrangement, the firm handles a matter at a reduced hourly rate and shares in a favorable recovery or resolution at a smaller percentage. Partial contingency arrangements reduce legal expenses during the course of a matter, and provide a mechanism for the firm to share litigation risk with the client. Defense cases can also be structured as partial contingency fees with success contingent on specific predetermined results or milestones being achieved.
For transactional matters, the firm may conduct the work at reduced hourly rates in exchange for a percentage of the value the client receives upon liquidation or sale.
Hybrid Fee Arrangements
Hybrid Fee Arrangements by Matter Phase – In certain situations, the billing arrangement that makes the greatest sense is a combination of several arrangements described above. For example, the law firm could estimate fixed fees for some matter phases, holdbacks on hourly rates for other phases, and success fees for other phases.
“Frequent-Flyer” Credits toward New Legal Services – The law firm may agree to provide a significant reduction in fees for one matter in exchange for the client’s commitment to assign other matters to us where we have not yet served the client. This could take the form of a discount on the instant matter, a credit against future billings for the new matters, or some combination.
To ensure alternative fee arrangements are successful, at the initiation of a new engagement, Kernan and Associates will invest significant time and effort to better understand the client’s ultimate objectives and preferred approach and legal strategy, as well as agree on the scope and parameters of the project. Because details of the matter are disclosed and discussed at the outset, the resulting fee arrangements typically provide the optimal balance between risk and reward for both parties.