Nonhourly fee deal may outweigh hourly

The simplicity and flexibility of the billable hour have made it the standard for creating and measuring output in the practice of law in all types of matters. Track your time, bill the time worked and clients pay upon receipt.

Although it often works as a "go to" method for pricing, the billable hour model presents significant problems in measuring true client-defined value. Indeed, the billable hour has become a signal of deeper issues in our industry that erode otherwise healthy relationships between corporate clients and outside counsel - lack of efficiency, collaboration, transparency and predictability.

For these reasons and others, the death of the billable hour has been predicted for years. Yet, despite those predictions, this billable hour remains very much alive. And - perhaps most surprising of all - both firms and corporate law departments continue to struggle with using and structuring successful alternative fee arrangements (AFA). Indeed, they are formulated incorrectly as retooled models based on the billable hour that lack communication and mutual cooperation and ensure a "win-win" for all parties.

Our industry has yet to fully realize the benefits of AFAs. Compared to the one-size-fits-all billable hour model, AFAs provide true client value. Here are three considerations for how to tame the billable hour monster through use of AFAs.

Collaborate to define how you want to measure and deliver value

The key to a successful AFA is aligning both the attorney's and the client's needs with the fee arrangement that delivers true value to the client.

The first step is defining what it means to the client to "win." This requires knowledge of what success means for the client internally at an organization (i.e., as a business partner to their clients), across a variety of stakeholders in an organization (i.e., not just one client contact), in an substantive legal matter pending (i.e., in a matter in court), and more generally, how the legal function affects or reacts to corporate culture, among other factors.

It also helps to explore the importance of the problem identified by the client; the strategic, operational and financial impact of this problem and its solution on the overall business; the client's risk tolerance; how much the client is willing to pay for various outcomes and solutions; and whether the client is willing to pay a premium for service solutions that deliver superior results. These questions will give insight into how a client defines value in legal services delivery.

Next, it is imperative to understand the client's true appetite for use of AFAs by exploring their motives for seeking one, the existing methods of cost predictability and risk management, and whether a change in measurement for value is even possible. Importantly, value to a client does not have to equate to time spent, on a matter - time is a unit of measurement, but it may not equate to the unit of measurement that defines true value.

To arrive at a clear articulation of what qualifies as true value, counsel and their clients must develop clarity around business objectives. Quantifying law department targets into functional metrics on legal outcomes is a challenge that must be addressed to deliver a successful and workable AFA. Because there is no easy one-size-fits-all solution for measurement, it must be done individually by each organization to determine whether an AFA should be used and, if so, what type of AFA model will work.

Understand that you can break down law into process

One of the challenges we face as a profession is the myth that all attorneys perform "artisanal" work - that each matter is entirely unique and that successful results are based purely on the individual attorney's magic approach to his or her matters. In this archetype, predictability is impossible, and the billable hour model reigns supreme.

In reality, while individual excellence and creativity in the delivery of legal services should be celebrated and rewarded, we should also recognize that many legal projects lend themselves to a defined process. With a focus on process, all of the parts of legal service delivery can be explored, including legal project management, process improvement, technology, data and analytics. This allows a different application of levers - people, process, technology, analytics, strategy - to transform the delivery of legal services.

Be prepared to put some skin in the game

Despite its flaws, the billable hour model is easy to implement and understand. To break away from this model, both clients and firms must be prepared to do more work than the billable hour requires to craft a valuable pricing model. For clients, it means a greater investment of time to define business objectives, as well as the project's scope, scale, and budget. For firms, it requires a greater management of matters, to ensure that during the engagement, the team - both the firm and the client - are on pace to meet those metrics.

The process of establishing non-hourly, fee-based arrangements yields a powerful benefit: the ability for clients and firms to develop relationships that extend far beyond the parameters of any single engagement.

Laura J. Maechtlen, a partner in the San Francisco office of Seyfarth Shaw LLP, is the national vice-chair of the Labor and Employment Department and co-chair of the firm's Diversity and Inclusion Action Team.