Besides some obvious reasons not to seek alterative fee arrangements (e.g., hourly fees are easy to implement, hourly billing provides visibility, our systems are set up for hourly billing, alternative fee arrangements can create their own incentive issues, we may not have enough data to set alternative fees), perhaps the biggest source of GC resistance is risk aversion. Part of the problem is that most GCs tend to be very focused on whether they might end up leaving money on the table (relative to an hourly rate).

For example, a matter that is expected to take 100 hours at $300/hour (i.e., $30,000) may be priced as a $24,000 flat fee. This seems like a 20% discount. But it’s entirely possible that the law firm will complete the work in 60 hours instead of 100. This translates to an effective hourly rate of $400/hour. So did the client save 20% ($24,000 vs. $30,000) or lose 33% ($400/hour vs. $300/hour)? While GCs know that the $6,000 in perceived cost savings is what matters most, many tend to worry about the fact that the law firm seemingly received a windfall – larger margins – on the client’s dime.

I’m very sympathetic to this view (having worked on behalf of the GC community for the last 11 years), but we can’t let this worry stand in our way. The truth is that there is always “risk” when setting up alternative fees. It’s the same as running our businesses: we have to take the risk that any given business project, however sound, won’t work. But over a portfolio of sound projects we’ll come out ahead.

Likewise, general counsel implementing alternative fee arrangements will certainly benefit in the long run. This is because: (a) they will learn how to price these better over time; (b) alternative fees can dramatically reduce the single largest driver of legal cost – law firm inefficiency; and (c) just as clients sometimes leave money on the table, at other times it’s the law firm leaving the money (e.g., the flat fee arrangement above may take 120 hours due to factors outside the law firm’s control).

Also, we need to remind ourselves that it’s the very possibility for law firms to preserve their profitability (if they are efficient) that makes flat and other alternative fees sustainable. Contrast this with discounts, where law firms receive lower margins and still have the hourly billing incentive to be inefficient. (As the General Counsel Roundtable suggested as far back as 2001 – and they have data to back this up – seek discounts, but recognize that they don’t necessarily reduce legal spend.)

My advice is not to worry quite so much about the possibility of leaving money on the table in any one matter (based on not being able to perfectly price an alternative fee arrangement), that we lose out on the large upside that alternative fee arrangements deliver over the long run. It’s simple advice, but based on what I’ve observed, it’s worth this gentle reminder – so that we may forge a path to greater law firm efficiency and lower outside legal costs.

Future Thought Pieces

• CEO and Board Perspectives on What Makes For an Effective General Counsel
• “Flexing” – An Increasingly Valuable Law Firm Capability
• How Does Law Firm Culture Influence Client Service Delivery?
• Measuring Law Firm Performance: Are Objective Metrics Better Than Subjective Metrics?