When Burger King Holdings Inc. casts around for outside attorneys, it includes this wish in its "request for proposal":
"We don't necessarily believe the billable hour is the most efficient way of billing so please suggest some alternative and creative billing methods."
So far, the $2 billion fast-food company has been able to have it its way.
The company -- which spends millions on legal fees every year -- has negotiated a variety of alternative billing methods with such firms as Greenberg Traurig; Holland & Knight; Genovese Joblove & Battista of Miami; Sher Garner Cahill Richter Klein & Hilbert of New Orleans; Jackson Lewis; and Kelley Drye & Warren of New York.
Those arrangements include fee caps, blended rates and monthly retainers.
"We always feel pressure to keep legal fees as low as possible," said Craig Prusher, Burger King's vice president and assistant general counsel. "After all, the legal department is never a profit center."
And except for some New York and Los Angeles firms that have refused to deviate from or discount their standard billable hour rates of $700 or more, Burger King has had great success with law firms willing to be creative in their billing.
The company is not alone.
What has been a slow and steady call by many corporations, in-house counsel and legal think tanks to law firms to abandon the billable hour in favor of alternative fee arrangements has turned into a loud drumbeat in the past year, as the economy heads south.
Many law firms are now offering clients an array of alternative fee arrangements, including flat fees, success fees, contingency fees and retainers. Even some large law firms, which have clung to the billable hour, are bowing to pressure from economically challenged clients and agreeing to other types of fees.
SHARING THE PAIN
Still other corporations, such as AT&T Inc., have simply asked all its outside law firms in the past couple of years to accept across-the-board cuts. Those that "agreed to share our pain ... are still with us today," said Patricia Diaz Dennis, senior vice president and general counsel for AT&T.
"Firms are going to need to be more creative about fees in the future, no question," said Bruce MacEwen, a New York-based law firm consultant. "As clients get more demanding about fees, you can be more creative. One of the things you'll see more of are 'success fees,' or a discount for a high volume of business -- we'll give you a break if you give more business to us."
Yet the problem is not so simple to solve. Although corporations give lip service to trying alternative fee arrangements -- and send out requests for proposal requesting them -- many wind up sticking with the billable hour rather than trying something new.
"Lots of clients' lips are moving, but their feet aren't moving," said Susan Hackett, senior vice president and general counsel of the Association of Corporate Counsel, a group that has called for alternative fee arrangements to be accepted by all parties. "There is a huge push by everyone to do this. People assume that we're pointing our fingers just at the firms. But we have the guns aimed at ourselves, too."
Before the billable hour, the retainer was the standard fee arrangement for law firms. The retainer could be making a comeback, say law firms.
"We've actually had a number of clients say, as of late, 'We'd like to put you on a retainer,'" said Sheryl Willert, managing director at Williams Kastner, a Seattle-based law firm of 100 lawyers.
"What's wrong with the old-fashioned retainer?," said Willert. "Say a client gives you $1 million a year and says you can handle all our cases for that type of thing. It forces the law firm to be efficient, because you know you have to do all of the work for that amount of money and no more. It makes you approach problems in a more practical and efficient way."
The billable hour is despised by most associates who are required to bill a certain number of hours a year in order to get bonuses, and criticized by many clients who say they are fearful of calling their lawyers and starting the clock ticking.
Plus, the hourly rate has steadily grown -- and peaked last year with several New York lawyers claiming bragging rights for reaching the $1,000-an-hour mark.
In recent years, groups such as the American Bar Association, the Association of Corporate Counsel, various corporate executives and even U.S. Supreme Court justices have called for the demise of the billable hour, saying it breeds inefficiency and is driving up legal costs.
As part of a "values initiative," ACC plans to encourage firms to deep-six the billable hour model in favor of "value-based alternatives," and will carefully monitor corporate outside legal fees during the next year to determine whether alternatives to billable hours become more common.
"The majority of firms are still on the hourly basis," said Hackett. "But the timing of this project couldn't be better. No one wishes the economy to suffer, but people are being forced to go into their budgets and see how they can save money. I think our project will succeed."
In fact, a number of small law firms have heeded the call and begun offering alternative fee arrangements, ranging from success fees to fixed fees to monthly retainers, including the Boston-based Shepherd Law Group; Akron, Ohio-based Roetzel & Andress; Williams Kastner; and Cincinnati-based Waite, Schneider, Bayless & Chesley's Columbus, Ohio, office.
"A lot of this flows from the fact that it's difficult for clients to budget legal fees," said Jeff Casto, president of Roetzel & Andress. "In the past year, there's been an increased demand for flat fees. Hourly rates have too many variables in them."
Still, Casto said that his 227-lawyer firm won't abandon hourly rates altogether. "There's a time and a place for both of these, and there's a fit for both," he said, adding that flat fees are commonplace in bond work, trust and estate work and in trial preparation.
In the past year, a few firms have even formed specifically based on the concept of offering a variety of fee models, including Valorem Law Group in Chicago, which trumpets such slogans on its Web site as, "The Billable Hour is Dead."
"We wanted to kill the billable hour and have a firm that was built from the ground up serving the client as a priority," said Patrick Lamb of Valorem. His firm offers clients a smorgasbord of fee options, including fixed fees, fixed fees with holdbacks, fixed fees with success premiums, straight contingency fees, down payments plus contingency fees and more. "We have an unlimited supply of fee arrangements," said Lamb.
Now, even large law firms, which have resisted abandoning the billable-hour model, appear to be starting to slowly offer clients alternative fee structures. They say they're responding to requests from some clients that desire budgeting certainty as much as savings.
For example, Morgan, Lewis & Bockius and Mountain View, Calif.-based Fenwick & West both agreed to fixed-fee arrangements with Cisco Systems Inc. Morgan Lewis handles litigation matters for Cisco, and Fenwick & West, securities and mergers and acquisitions. By working with outside counsel on alternative-fee arrangements, Cisco has managed to reduce its legal fees as a percentage of the company's revenue by more than 20 percent during the past five years, according to Mark Chandler, Cisco's general counsel.
Tom Sharbaugh, managing partner for operations at Morgan Lewis, said his firm would like to have more fixed-fee arrangements, but finds some clients resistant to the idea.
"For all you read about it, clients often shy away from the fixed fees when we propose them," Sharbaugh said. "There's a fair amount of discussion about them, but frankly there's not as much fixed-fee arrangements as we would like to have. I don't see the billable hour dying."
Fenwick & West has a number of alternative-fee arrangements with clients and is seeing requests for more, said managing partner Kate Fritz.
"The things that tend to drive these is the desire for predictability in budgeting," she said. "The thought is it encourages efficiency. We try to be open with clients about fee arrangements."
However, Fritz's firm is seeing what Morgan Lewis is -- a lot of interest and request for alternative fee arrangements, but reluctance to actually implement them. "I'm not sure why that is," she said. "Some people are just more comfortable with straight hourly."
Rhea Law, the chief executive officer of 150-lawyer, Tampa, Fla.-based Fowler White Boggs, said her firm is currently exploring billable hour alternatives.
"People are looking for more certainty so they can budget their costs," Law said. "We're looking at a lot of things, some of them pretty specific to the client. These are tough economic times, and we are partners with our clients -- we want them to be successful. We can be as creative as they want."
Among the alternatives Fowler White has considered are retainers and success fees. Law said she even recently did a "double-or-nothing" fee deal with a client on a land-use entitlement case -- and won double her normal fee. If she had lost, she wouldn't have gotten a dime, though. "I wouldn't really recommend anything that high-risk for others," she laughed.
Some law firms have quietly offered discounts, success fees and flat fees to major clients for years, but are seeing an increased demand for alternative arrangements in recent months. Such is the case for Williams Kastner and Roetzel & Andress.
In addition to a renewed interest in retainers, "some of our clients are saying, 'We would like to see across-the-board cuts,'" said Willert of Williams Kastner. "Some are just saying, 'Come up with a creative way of telling us how you can save us money.'"
In January 2008, Waite Schneider began offering alternative fees out of its Columbus office, including success fees, fixed fees, monthly retainers and contingency fees. While clients with existing business still pay hourly fees, all new clients pay alternative arrangements.
Waite Schneider partner D. Michael Grodhaus, who runs a blog called The Alternative Fee Lawyer, said the more he thought about alternative fees, the more sense they made. "We thought: Why can't lawyers estimate what the costs of a project or case would be?," he said. "If you get a new roof on your house, someone has to give you an estimate. I mean, we've been doing this for awhile. We should know how much time things take. This gives budget certainty to clients."
Grodhaus said his firm has gotten numerous inquiries from potential clients -- "a lot of kicking the tires" -- but the jury is still out about how profitable the plan will be. "It's so new we haven't run the numbers," he said, adding that he is confident the new fees will catch on.
Still, Wall Street law firms that jumped on the $1,000-an-hour bandwagon say they are still finding clients willing to pay that much, despite rumors and blog postings that clients are balking at that fee.
Barry Ostrager of New York's Simpson Thacher & Bartlett said that, while clients that bring in many millions of dollars of business a year, such as JPMorgan Chase & Co., have always received discounts, "people off the street" still pay his $1,000-an-hour fee. "Major Wall Street firms view themselves as providing a premium service," he said. "I'm not hearing about any alterations in that. You can't walk into Bloomingdale's and say, 'give me $30 off that suit.'"
