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As more corporate clients are getting the alternative billing arrangements they want, they are claiming some pushback from law firms trying to make the best of the new deals. A mix of sky-high billing rates, ballooning associate salaries and pressure from company executives has heightened corporate counsel’s demand for different ways to pay their outside law firms. And while they report that more of those firms are answering the call, in-house lawyers say that these new payment methods create their own sets of challenges in dealing with outside counsel. “You’d think they could budget more accurately,” said James Potter, general counsel for Del Monte Foods Co. Potter, like many in-house lawyers, appreciates the flexibility that alternative billing provides. In theory, it enables legal departments and the law firms they select to tailor legal services more specifically to a variety of matters. The arrangements include fixed fees, contingency/results-based fees, retrospective-based compensation, blended rate deals, discounts and more. 85% try alternatives More than 85% of in-house counsel are testing out alternative billing arrangements, according to a recent survey sponsored by Chicago law firm Butler Rubin Saltarelli & Boyd. Sixty percent of the 162 in-house counsel who responded to the online survey on managing litigation expenses also reported success with fee arrangements other than the traditional hourly billing method. Alternative billing provides options to payment based on the billable hour, which, many observers assert, creates a disincentive for efficiency from outside counsel that generally want to bill as many hours as possible on matters. But alternative arrangements take longer to devise, say lawyers from both camps, and they are far from foolproof. One of the primary problems in-house counsel say they encounter is a slowdown in work performed under a fixed-fee arrangement. “There is a grave concern that outside counsel will take their eye off the ball,” said Steven Lauer, general counsel for Global Compliance Services Inc., a provider of corporate compliance services and products. If the parties miscalculate how long they expected a matter to take, and if they do not make contingency plans for extensions, law firms may be tempted to start pulling lawyers off the file. “Once they blow through the fixed number, there’s less work [completed],” Potter said. Dykema Gossett Chairman Rex Schlaybaugh recognizes that the slowdown phenomenon is a major concern for corporate counsel in fixed-fee arrangements, but he said planning and vision on the part of the law firm can help alleviate problems. As part of the learning process of offering more billing options, law firms sometimes have to take a hit and keep their focus on the big picture, he said. “It makes very little sense for a law firm working on a fixed fee, where they’re under water, to cut corners and put the entire relationship at risk,” Schlaybaugh said. Dykema Gossett has made big strides to offer alternative billing options to clients, Schlaybaugh said. The law firm has alternative billing agreements in some form with most of its top 50 clients, he said. Arrangements that are some derivation of hourly billing, whether it is a discount or a “rate tiered to volume,” are the easiest to negotiate, he said. The further the attorneys get from the traditional form of payment, the greater the unknowns become. “There’s less comfort that you’re getting it right,” he said. Particularly irksome for Potter, at Del Monte, is the bait and switch that he says starts at the proposal stage. Many law firms in recent years have improved the pitch to win bids from in-house counsel. The problem, he said, is in the delivery of services. He sees a mismatch between the assurances made by the team that sells the deal and the resources available to actually do the work. He attributes the disconnect, in part, to poor internal structures at firms. “They turn junior people loose on it and don’t coach them,” he said. Bonuses problematic Bonuses tied to outcomes are also problematic, he said. At the conclusion of a matter, in-house counsel may consider the result merely adequate, while outside counsel may view the outcome as extraordinarily positive � and seek additional compensation for it accordingly. Lawyers can avoid most alternative billing headaches through careful planning, said Rees Morrison, a consultant with Hildebrandt International who advises legal departments. Unexpected events on cases do not happen “out of the blue,” he said. Well-crafted agreements need to have buffers in place if matters get sticky, he said. If difficulties do arise, they usually are an indication of a larger problem between in-house counsel and the law firm it hires, said Andrew Shipley, assistant general counsel of Northrop Grumman Corp. “It generally runs deeper than the bill,” he said. The defense contractor giant utilizes a variety of alternative billing methods, depending on the matter, but central to any arrangement, Shipley said, is the quality and efficiency of the lawyers and their written product. For lawyers inexperienced at creating alternative arrangements, there is a learning curve, Schlaybaugh said. His firm has spent time and money training practice leaders on how to form agreements that make the firm and the client happy. He added that although legal departments are calling for more billing options, they, too, are often inexperienced in negotiating the arrangements. Jolene Yee, assistant general counsel for E. & J. Gallo Winery, said that alternative billing is “enticing,” but she added that there is a “lack of models” to use in drafting the agreements. Because alternative methods may be new territory for both groups of lawyers, drawing up solid agreements can be time-consuming. Lauer, with Global Communications, estimates that in-house lawyers and outside counsel should expect to attend at least two meetings, one of them face-to-face, in order to negotiate a successful alternative fee arrangement. During those meetings, one group should try viewing the situation from the other’s vantage point to help align interests, he said. “Very often, in-house and outside attorneys don’t mean the same thing when they use the same words,” he said. The word “productivity,” from the law firm’s perspective, means the hours associates can bill a matter. To in-house lawyers, it means “efficiency,” he said.

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