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In these troubled economic times, fixed fees for particular legal matters have appeal both for law firms and their corporate clients. We -- a former general counsel of a major company and a current co-managing partner of a major firm -- strongly believe that this is an idea whose time has come. For in-house counsel facing tremendous budgetary pressures, the fixed fee addresses the problems caused by the hourly rate, such as unpredictability, high costs divorced from actual value and, most importantly, the maddening law firm definition of "productivity" -- defined as more lawyers and more hours per matter.

For law firms facing reduced demand and cash flow problems (if not crises), the fixed fee addresses the issues of increasing overhead devoted to the billing process, clients flyspecking bills and demanding after-the-fact discounts, and delays in payments and falling realization rates.

Seen in its best light, fixed fees thus have significant benefits for both in-house and outside counsel: reduced billing hassles, more predictable cost to the client, more predictable and timely payments to the firm, and, ultimately, better alignment between the cost and the value of the legal service. The credit meltdown and the deep global recession may provide the impetus for real change in this corner of the economy, as in so many others.

Seen in the sweep of recent history, the fixed fee can also address a critical conflict at the center of the evolving inside counsel-outside counsel relationship. The 20-year rise in the talent, experience, and expertise of in-house lawyers has led to co-equal partnering on matters. But significant changes in both law firms and law departments have often led to ill will and conflict over money. As Am Law 200 firms have grown as businesses, they've faced relentless pressure for revenues, and the new breed of in-house lawyers (often alums of firms) face incessant business pressures for cost control.

During this period, there have been many attempts to find détente on hotly contested money issues: task-based budgeting and billing; RFPs; preferred providers; auctions; discounted, blended, or bulk hourly rates; or some combination of the above. But all have stumbled on the ultimate questions: how to set price with quality and achieve cost and value alignment.

SETTING A FIXED FEE

Historical data should provide the starting point for setting the fixed fee. Both firms and corporations have detailed information on the past cost of different kinds of matters. They can use data-mining techniques to determine reasonable ranges of cost for a wide variety of legal services. These services range, obviously, from the simple to the complex:

• A single project involving expertise and judgment, but not much risk, such as writing a handbook, creating form contracts, developing a compliance training program, and monitoring developments in evolving areas of law.

• A repeating, routine book of business, which involves expertise and judgment, but not much risk, such as filing a certain type of patent or trademark application, monitoring compliance with environmental permits, and handling routine labor matters in arbitration (as opposed to court).

• A repeating, but more complex book of business that involves judgment, expertise, and risk, such as annual securities reporting, a line of product liability cases, a series of venture capital financings, or more complex multiparty contracts for capital equipment sales.

• A one-off, highly complex, high-risk matter. Some may have historical antecedents: the bet-the-company litigation for the pharma company; the companywide bribery scandal being pursued by enforcers in multiple jurisdictions; the transaction to double the company's size with a target in similar lines of business. Other high-risk matters may arise on new frontiers: a patent-defense action in China; a novel product litigation; the huge acquisition of a company in a different line of business.

In complex, risky matters, the fixed fee can be split into segments. For example, one flat fee for a litigation evaluation period, and then a second fixed fee for completion -- depending on joint expectations of the likely process (early settlement; reasonable discovery/settlement; full, contested discovery and trial). But whatever the type of matter, arriving at the fixed fee will depend on the motivation of both in-house and outside counsel to work toward a future result that is fair to both parties.

As in all business, a total price for a matter or a book of business is built up from costs (and, at times, also derived from the significance of the matter). One of the most important issues in setting fixed fees is distinguishing between a law firm's actual costs (which firms see), and the actual costs, plus profit margins for the partners (which is what clients see in a firm's bills). A second, related problem is that the history of costs to the company may be an imperfect guide. Past bills are an aggregation of hourly rates (plus out-of-pocket costs), which may reflect inefficiencies.

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