Despite constant talk that hourly billing is dead, our survey shows otherwise. In-house lawyers’ responses on fees contain a few surprises
One of the standout findings of our survey is that hourly billing is still alive and kicking. The hourly rate is often used as a billing method by 59% of respondents, with just 4% never using it.
However, it isn’t the most popular method of billing among clients: in these austere times, it is unsurprising that fixed rates per project dominate. Over two-thirds (70%) of respondents said they often use1§§ this method of paying their legal fees, with just 5% saying they never use it. Other methods such as capped fees, annual fixed fees, and discounted rates are used, but the fixed project fee and the hourly rate still lead the way.
Success and contingency fees are among the least popular billing arrangements, with just 9% of general counsel (GC) saying they used them often, but the least popular billing method is annual fixed fees – popularised by clients such as Tyco and Colt Technology Services Group – with 65% of in-house lawyers surveyed saying they never use this type of arrangement.
This high tolerance of hourly billing is at odds with persistent and widespread industry comment that it is on its way out. What emerges is that the billing method used chiefly depends on the task at hand. Tom Keevil, group GC and company secretary for Barratt Developments, says that it’s a matter of selecting the right firm for the job and the right billing method for the transaction. ‘Whatever comes through the door, and it could be an M&A enquiry, or even litigation, everyone has their own model,’ he says. ‘One size doesn’t fit all.’
Fixed-fee arrangements also tend to be more common in transactional work, according to one banking GC. ‘When firms are working on a particular mandate and you know it’s going to take three or four months, it is common to fix fees. But in high-end work for banks it’s harder to cap fees as it’s harder to set timescales and also it’s a one-off case. So hourly billing works better with an agreed discount at the end.’
The processes and prices should be ironed out when the client and law firm agree to work together in the first place, according to Keevil. The fixed fee holds an attraction for many GCs because of the certainty it offers. ‘Where possible we will agree the fixed fee in advance, but a law firm has to have some measure of its profit and hourly rates is how to assess this,’ he says.
Martin Bowen, group general counsel at Dyson, is not surprised that hourly billing remains common practice among law firms because the very nature of the work involves outsourcing specific expertise. ‘Often you have to react quickly under pressure and get specialists onboard, in which case hourly rate billing is something you accept,’ he says. He adds that this is totally different for more planned work, where there is ‘no reason at all’ why there should be hourly billing, and alternative fees are more suitable.
According to Bowen, for extraordinary or agreed-upon circumstances there should be a capped fee, a fixed fee, or it should be negotiated on a case-by-case basis, because ‘to simply rely on hourly billing is lazy’.
One respondent who works for a fast-moving consumer goods company (FMCG), is more strident in criticising a firm they deal with as ‘still stuck in the mindset that hourly rates are the way to go’. However, another in-house lawyer points out that the type of billing structure they use is highly dependent on the project at hand, remarking: ‘The arrangements vary, according to the type of work and the commercial context.’ Meanwhile another simply concedes: ‘We just go for the best deal we can get.’
Despite these variables, 21% of those surveyed chose ‘flexibility of billing practices’ as a ‘very important’ factor in choosing a law firm (see part II of this report, ‘Horses for Courses’, page 40), which would suggest that GCs themselves have a role to play in reducing any tensions over billing.
Lisa Hart Shepherd, chief executive of legal market intelligence provider Acritas, says that its research of clients on behalf of law firms suggests the hourly rate is as popular as ever. ‘We actually find that most GC are happiest with the hourly rate – it’s what they know and what they understand,’ she says. Although 70% of respondents to the survey also said that they used fixed fees often as well, Hart Shepherd says that GCs are showing a preference for hybrid fee arrangements, using fixed fees for straightforward matters, blended with capped or discounted hourly rates for more complex issues.
Sheena Singla, GC at Essar Energy, sums up the position: ‘No firm is that inflexible in billing and having a relationship already helps. I think firms are much more willing than they used to be to look at different arrangements rather than the old hourly rate.’
‘I have very upfront discussions with law firms and request fee discussions to be carried out openly and as a result we have put some really good arrangements in place,’ she adds.
Bills, thrills and bellyaches
Linked directly to billing practices, one pivotal question in our survey related to whether GCs regard their external law firms as good value for money, with just 42% of respondents responding positively. Another 48% said the value offered by firms was ‘fair’, leaving 11% rating their law firms as poor value for money. The fact that the majority of clients appear to be underwhelmed by the value for money offered by their law firms raises issues such as whether law firms overcharge for their services or are simply poor at applying resources to a particular job.
One GC says: ‘I still don’t think law firms have moved away from the inherent concept of hourly billing. While I get good service from my law firm the bills are too high. Some firms take a better view on what is free and what is an extra and this creates enormous goodwill.’
However, one law firm partner says GCs need to vote with their feet if they feel they are getting poor value for money. Put simply, if a law firm isn’t good at what it does, then it’s not worth paying for. They add: ‘If GCs are saying they are not getting value for money, then they need to look at which law firms they are using. If you were sick and you had a severe headache, would you go to a doctor that specialises in broken legs? That doctor would be able to read the medical books but not give you the answer off the top of their head. If you need advice on a very complex area of insurance law, you should not go to a local firm but a specialist that knows the answer to your question.’
But some law firms’ response is that costs dictate that there is little leeway offered when negotiating a price. Therefore, the role of the GC as risk manager is to judge what advice they need and at what price.
One law firm partner says that most industries require their costs to go down over time but that doesn’t work as easily in professional services. ‘There is the cost of doing business,’ they say. ‘If you charge for your services, based on the cost of human beings doing work, the cost of human beings doesn’t go down over time – it goes up.’
There is undeniable evidence from GCs that they have their own role to play in managing the value issue. Deborah Prince, head of legal at the British Heart Foundation, points out that it is important that the client does not match low fees with unreasonable expectations of what they will get in return, adding that GCs also need to understand the realities that law firms face. ‘At the end of the day some law firms have huge overheads and have got to make money,’ she says.
This raises the spectre of unexpected and contested bills, both of which occur far more frequently than either clients or law firms would like. While only 7% of respondents said that they receive an unexpected bill frequently, a whopping 57% said they did on occasion. Although it depends very much on the individual GC and their experiences with law firms, most GCs said that they had received an unexpected bill at least once. Once is often enough however: the general consensus is that if there is a dispute with a law firm over a bill, that firm would not be instructed again.
Bowen says: ‘Arguments over bills are pretty run of the mill, and I’ve found that by pushing law firms on this you can usually agree an outcome that is satisfactory to everybody. But it takes discipline, asking them for ballpark analysis of what the costs may be, talking to them when the bills come in, checking that there is no duplication, and that the quality of the work is commensurate with the actual charge.’
An example of this is one respondent to the survey who has adopted a straightforward system for reducing the problem of unwanted bills: it cannot be billed unless it has first raised a purchase order and that number needs to be quoted each time.
But unexpected bills can crop up even within fixed-fee arrangements. Prince says: ‘Sometimes when I get an unexpected bill I think: “that’s crazy, I’m not paying that.” Trying to pin lawyers down is like trying to pin clouds to the wall. Even if you can get a fixed fee, they will push the work down to the lowest common denominator, which is not what you want.’
For law firms that are erratic with their bills, some responses to our survey should serve as a warning. One client comments that on one occasion the difference between an estimate and the actual bill was so large that they had to raise a query with the firm. ‘I received a discount but not enough to make me want to use the firm again,’ the client says. Meanwhile, another in-houser had been overcharged by £24,000 and had to issue a costs order, which forced the law firm in question to back down and pay the client’s in-house costs as well.
Niamh Pollak, GC at Canadian company Digital Payment Technologies Corp, says that in order for law firms to provide better value, they should stick to the matter at hand, and if they offer proactive commercial advice they shouldn’t necessarily be charging for it. ‘I want the law firm to answer my question and if they have further thoughts they want to offer, I’m welcome to take it, but don’t want to necessarily be billed for it,’ she says. ‘You do want some business advice from experienced lawyers, you expect that, but you want to make sure you’re not paying for it, unless you agreed to pay for it.’
For this reason, communicating the right message at the right time is vital. Bowen adds that it is an important role of the GC to manage those relationships with law firms in a way that overbilling does not happen and, the quality is at the right price. ‘Law firms are not daft, they just need to be marshalled a bit better by the GC,’ he says.
But marshalling will only get a GC so far and it is inevitable that law firms will ultimately have to push back against persistent demands from clients to lower their prices. This will be a challenge for firms, says one partner, because of their business model: ‘It’s not about breaking even. Law firms are not charities, they are about making money – just like companies.’
The situation can be tricky, as outcomes are unpredictable. ‘Often, when you are going into a deal, you have no idea how it’s going to pan out – you don’t know what the pitfalls are going to be and how much time it’s going to take, the twists and turns,’ says Prince. ‘Good value is really that you get a fair result in the circumstances, and that you haven’t been ripped off. You should at least feel that you paid a fair price for the job. If I asked for a Rolls-Royce service, I got one. And if I paid for a Skoda, I got a Skoda.’