Alternative Billing Increasingly Important for Texas Firms, Survey Shows
Jeanne Graham, Law.com
Each Wednesday at noon Texas time, all of the lawyers in Susman Godfrey's five offices are invited to dial in to vote yea or nay on proposed cases that require alternative -- nonhourly -- billing.
Kenneth S. Marks, a partner in the firm's Houston office, says he was ready to vote thumbs up for a defense case in which the client would pay a fixed fee and a negative contingent fee, which is like a bonus. "There's a specific claim made against the potential client for a specific amount, and if we are able to resolve it for less than that, we get a percentage of the savings," Marks says.
As it turns out, the case proposed by Bill Carmody, a partner in the firm's New York office, would have created a conflict of interest for the firm so it didn't take the case, says founding partner Stephen D. Susman. But the hybrid fee arrangement of a fixed fee plus a negative contingent fee is representative of the kind of flexibility firms can use in alternative billing, he says.
Balancing the risks and rewards of using alternative billing, such as fixed or contingent fees, is a strategy many firms are employing in today's uncertain economy, based on responses from the 74 firms that participated in Texas Lawyer's 2009 Salary & Billing Survey. Other strategies include holding hourly billing rates stable and requiring that new clients pay higher front-end retainers. Some firms froze associate salaries earlier this year, while just last week Howrey, a Washington, D.C.-based firm with a 45-lawyer office in Houston, announced a new compensation program for first-year associates that calls for more training during their first two years on the job, but at a reduced salary and with reduced billable-hour requirements at a lower billing rate.
Firms are hesitant about increasing rates during the economic downturn, says Courtney B. Sapire of Houston-based Sapire Search Group, who recruits in-house counsel. "Corporate legal budgets are being heavily scrutinized and drastically reduced, so corporate clients are looking for lower and predictable pricing," Sapire says.
Firms' hesitancy to increase billing rates is reflected in Texas Lawyer's survey, which shows that average billing rates and employee salaries, across the board, rose less than 4 percent and in many cases a mere 1 percent to 2 percent compared to the 74 firms' 2008 billing rates and salaries.
Eighty percent of the 74 firms participating in the survey say they use some form of alternative billing. Flat or fixed fees are used by 45 percent of the firms, contingent fees by 31 percent and blended fees by 45 percent. More than half of the firms, or 66 percent, say that they discount fees.
"I think the down economy has accelerated ... some of the long-term trends in the market," says Peter Zeughauser, a legal consultant with the Zeughauser Group in Newport, Calif. "One of which has been a slowly developing trend toward alternative pricing. And so I think that trend has been accelerated, and we're seeing more of it."
Susman Godfrey built its reputation on contingent fee cases. The firm did no hourly billing when it launched in 1980 and instead only worked on contingency representing plaintiffs in securities fraud and antitrust matters, Susman says. "It's what I considered was the market at the time."
As a litigation firm, Susman Godfrey is heavily invested in alternative billing strategies. About one-third of the firm's clients pay on a contingent-fee basis, one-third pay on a fixed-fee basis and the remaining one-third are billed hourly, Susman says. "I would rather have 100 percent all contingencies, because the rewards are better if you pick a good case," he says.
Due to the slow economy, the 85-lawyer firm -- which has offices in Dallas, Seattle and Los Angeles in addition to Houston and New York City -- is among those that did not increase its hourly billing rates for 2009, instead holding rates at the $250 to $1,100 an hour range charged in 2008, Susman says.
A common arrangement the firm makes with clients is determining a fixed monthly fee, based on factors such as how many parties are involved in the suit, how many depositions are required and where the people to be deposed are located, and whether the judge will hold to an expedited schedule so that discovery is completed within six to nine months, Susman says. "Then we'll quote $50,000 a month, $75,000 a month, $200,000 a month depending on our assessment of what will be involved in handling the case," he says. "We quote them a price to handle a case up to 30 or 60 days before trial. The fixed fee jumps at that point in time because the intensity of the work is much greater."
Fixed-fee arrangements award lawyers for efficiency, and they often have an incentive component, such as resolving a case within a specific period of time or settling for under a certain amount of money, he says. "All kinds of bonuses can be built in and subject to negotiation with the client," Susman says.
Any case a lawyer wants to take at a nonhourly billing rate must be approved during the Wednesday conference call with the firm's lawyers, all of whom are eligible to vote. A case needs a majority approval before the firm will accept it. But for some cases, such as class actions or patent infringement matters in which the firm is required to advance expenses, two-thirds of the lawyers must approve taking it on, Susman says. "We know in a patent infringement case, it normally costs us $2 million to $2.5 million in attorney time," he says. "We know that the out-of-pocket, what we have to advance, is $1.5 million to $2 million."
A Susman Godfrey lawyer proposing that the firm take a case with alternative billing writes up a case acceptance memo and circulates it to all the firm's lawyers. The memo must reach the lawyers by midnight Monday to be considered two days later during the Wednesday conference call. While all lawyers are encouraged to read the memo, five partners are assigned to study the proposal and argue its advantages or disadvantages during the meeting. The members of the five-partner panel change each month. The meetings usually last about one hour, then the vote is tallied as each office reports the number of lawyers for or against taking a case. On average, the lawyers consider one to three cases each week, says Marks, one of the five partners on the June panel.
He notes that about 15 percent or 20 percent of the time, the cases proposed require more information. The attorney who proposed the case then gathers the additional information and the firm's lawyers reconsider and vote on it during a conference call two or three weeks later.
More than half the cases proposed are accepted, Marks says. The typical memo is seven to 20 pages long depending on attachments such as copies of contracts, indictments or pleas, he says.
But that's not the end of the firm's review process. After an accepted case is settled or resolved, the lawyers study it again. "We go back and say, 'Here's what we told ourselves on the front end, and here's what happened on the back end,' and we learn from that if possible," Marks says.
The firm absorbed the risk of alternative billing in 2008 when a payment for a contingent-fee case, representing 25 percent of the firm's anticipated gross revenue, was not received by year's end. Susman says the company involved has agreed to pay the fee in installments during 2009 and 2010. "We will get paid every dime," Susman says.
The firm had successfully represented a client that was supposed to receive settlement money by Dec. 1, 2008, then pay the firm its contingent fee. But the creditors of the company that settled were threatening to force it into bankruptcy if it paid the client before reaching a payment agreement with the creditors, Susman says. "So we began negotiating with the banks and other creditors and worked out a deal so everybody is going to get paid."
MONEY UP FRONT
With a slow economy forcing clients to stretch their fee payment schedules, Tom Buckle, a principal in Scanlan, Buckle & Young in Austin, says he has become more diligent this year about requiring retainers from clients. "I've rarely gotten retainers," he says. "The fact that I'm requiring it now is a change."
"I've gotten much firmer on taking retainers with new clients than ever before," he says. "The fear is they will not be able to pay and we will be left holding the bag, especially on litigation costs."
Buckle says he has not received a negative reaction, nor lost a client, by requesting a retainer. "Most people understand."
At six-lawyer Scanlan Buckle -- which handles everything except family and securities cases -- retainers for litigation matters depend on individual cases. Buckle says the complexity of the cases determines the amount of the retainer. He notes that each lawyer negotiates his or her own retainer agreements.
Buckle says he asks his clients to pay retainers ranging from $2,000 to $5,000 for nonlitigation matters such as representation before city zoning commissions, city councils or administrative agencies.
The firm decided to hold its billing rates for 2009 at the $150 to $250 an hour range, which is what the firm charged in 2008, he says. "We represent a lot of middle-income folks, and so I have a pretty good sense of what is affordable and what is not affordable," he says.
The firm does not discount its rates but does collect about 30 percent of its revenue in flat fees or contingent fees, Buckle says. The remaining firm business is billed by the hour.
The firm, which is located a few blocks from the Capitol in downtown Austin, has been able to control its overhead costs. "We have low overhead because we own our own building and parking lot, and do not have a lot of entertainment expenses," Buckle says.
Austin-based McGinnis, Lochridge & Kilgore is another firm that did not raise billing rates this year, instead holding at 2008's rates of $175 to $525 an hour, says Pat Lochridge, managing partner of the 75-lawyer firm, which also has a Houston office. The firm typically increases rates each year, but decided to break with tradition for 2009, he says. "The clients are hurting, and we don't want to increase the pain," Lochridge says.
He says the firm does little alternative billing, but does discuss discounts when negotiating with a new client or on a new matter. "We try to do something fair for the client and for us," he says.
While litigation firm Beirne Maynard & Parsons bills 75 percent to 80 percent of its business by the hour, managing partner Martin D. Beirne says clients have shown an increased interest in alternative billing during the past six months. "The clients want the lawyers to share in the risk," he says.
The 70-lawyer Houston-based firm uses fixed fees, contingent fees and combinations of hourly billing plus contingent fees, he says. A good method for introducing clients to alternative billing is by offering a volume discount based on the total fees the firm earns from the client during the year, Beirne says. "When the client's billing hits a certain amount, say $1 million, then any and all fees above that get a certain discount," he says. "Maybe there's an X discount for the first million, plus an additional X discount for the second million; it's tiered," he says. Beirne says this encourages the client to give the firm more business and often leads to discussions about flat fees or project-based fees.
In 2008, the firm, which also has a Dallas office, notified clients that it would not raise billing rates in 2009, he says. The firm charges $200 to $675 an hour, he says. "Most clients these days want a budget from you so they can have a degree of certainty about what matters will cost," he says.
The firm uses decision tree analysis when creating budgets for clients, basically looking at a series of 'what if' scenarios and their potential costs. For instance, the first scenario might be a settlement with a plaintiff, a second scenario would be the plaintiff bringing in a third party, a third scenario would be whether the case remains in state court or is moved to federal court, he says. The firm can estimate the likelihood of each scenario, and based on the firm's and client's experiences, can estimate what legal action and fees will be required to deal with each, Beirne says. "We try to maintain enough information on matters we've done so we have a baseline on which to operate," he says. "The budget is not a fixed fee; that's a whole different ballgame. But clients do expect that you stay pretty close to that budget."
Susman predicts that firms will adopt more alternative billing strategies during an ailing economy as clients push for greater cost efficiency. "Is hourly billing dead? I don't think so," he says. "It is safe. It is traditional."
*reprinted with permission 2009
