While the use of alternative fee arrangements seems to have become “the rule and not the exception,” as one New Jersey midsized firm leader put it, the use of such arrangements, and client demand for them, still varies widely by firm and practice area, it seems.
“It’s very easy to say, ‘my rate is $500 an hour,’ and dash out a retainer agreement that says that,” said Donald Scarinci of 66-lawyer Scarinci Hollenbeck in Lyndhurst. ”AFAs are outside of the comfort zone for many law firms. They don’t think in terms of the project cost.”
But it’s not only firms that can be sheepish, according to Scarinci: he estimated that 60 percent of his firm’s clients, when given a choice between an AFA and traditional hourly billing, choose the latter.
Aside from being somewhat outside the comfort zone, crafting an AFA can be time-consuming at the outset of a matter, and doesn’t necessarily mean less clock-watching once the work begins in earnest. And most firm systems, including those that track billing and realization rates, are time-based. Even in-house counsel might be more confident in an hourly structure because they’re accustomed to determining the value of legal services that way, lawyers said.
According to a recent Association of Corporate Counsel survey, while 42 percent of respondent chief legal officers projected that their use of alternative fee arrangements will increase in the next year, CLOs in the U.S. reported that an average of 26 percent of their outside spend is on AFAs, which was the lowest of any region represented by the survey.
Other New Jersey-based midsized firms, including Brach Eichler and Connell Foley, have previously acknowledged using AFAs, albeit with different approaches as to whether it is the firm or client who typically broaches the subject first.
Other midsized firms contacted recently declined interview requests.
Despite the variations and uncertainties, there are New Jersey midsized firms dealing confidently with AFAs.
At Atlantic City-based Cooper Levenson, AFAs have become an ordinary part of firm business over the past five years, and nonhourly arrangements are pitched to clients in the normal course, according to Robert Salad, chairman of the 70-lawyer firm.
“We affirmatively raise these issues,” Salad said. “We don’t wait for the client to ask what the fee is going to be.”
As a result, “the client is appreciative, and we know our budget,” he said. “I think it’s led to a very healthy relationship with our clients.”
To get to that point, Cooper Levenson has had to “evolve the process” of client engagement, Salad said. That means discussion among the attorneys involved in a matter, if it’s more than one, as well as among the chairs of the appropriate departments, if more than one practice or specialty is required.
Despite the front-loaded process, lawyers still must watch the clock when doing the work.
“We do track that time to gain empirical information,” as more data now means more accurate pricing for AFAs later, Salad said.
Fixed fees are the norm on the business and tax side of the firm’s practice, including estate planning, and loan transactions handled on behalf of banking institutions.
Salad said the firm is more conservative about AFAs in litigation and mergers and acquisitions, “because you don’t really know what you’re getting into.” But often a cost range can be provided, and in litigation, the firm can set budgets for the motion, discovery and trial stages of a matter.
According to Scarinci, Scarinci Hollenbeck routinely implements AFAs and has begun experimenting with such arrangements in the litigation context, in part by quoting prices by stage of litigation, in a process seemingly similar to what Salad described.
“Everyone says it’s impossible; it’s not impossible” to work litigation on a fixed fee, and firms can gather data and become familiar with how long matters take by vicinage and even by judge, he said.
More commonly, fixed fees are used for real estate matters, where often the obtainment of financing triggers a fee payment. Other types of fixed fees might call for a monthly payment schedule, according to Scarinci.
When developing an AFA, the firm’s CEO and CFO are consulted. They rely on decades’ worth of data rather than a price list, Scarinci said. “It takes a lot of time—that’s the downside.”
Attorneys at Scarinci Hollenbeck, like Cooper Levenson, track time even when working on AFAs, not only to amass data, but also as a management tool, Scarinci said.
Thanks to its long history with contingency-fee work in its plaintiff-side practice, at 90-lawyer Stark & Stark, based in Lawrenceville, nonhourly billing has “sort of been baked in” to the firm’s business model, but alternative fees go well beyond plaintiff work, according to managing partner Michael Donahue. He estimated that about half the firm’s nonplaintiff work is done on nonhourly arrangements, including common use of fixed fees for community association work, as well as some transactions and compliance work performed for investment adviser clients.
“We have a pretty good idea of where our waterline is,” Donahue said, crediting, as others did, data the firm has accumulated. “It’s really having a firm understanding of the service you’re providing and what it takes to provide it … without devaluing our services.”
At Stark & Stark, too, there is an up-front process to implement AFAs, but successfully adopting alternative billing models also requires evaluating matters that have already concluded, he said.
“Could we have delivered these services using a nonhourly arrangement?” is the question to ask, according to Donahue. “We can to some extent geek out about how things could’ve been done better.”
Stark & Stark does actively pitch AFAs to clients, but when it comes to clients vociferously demanding AFAs, “I believe the perception is a little greater than the reality,” Donahue said.
Implementing nonhourly billing might be a logistical challenge, but the call for an industry movement toward project-based pricing isn’t going away.
“Clients generally don’t care what an attorney’s hourly rate is. They generally care how much something is going to cost them,” Scarinci said. “[They] want to be your partner in how you spend their money.”
And as a goodwill gesture, spending time with a prospective client on pricing tends to pay off, Scarinci said.
“It’s pretty rare not to get the client after you make that effort.”