Fulton County Daily Report
Thursday, September 7, 2006
Lawyers find new way around billable hour
Firms use advanced software to encourage alternative billing arrangements

CLIENTS DISTRUST them. Associates abhor them. Some lawyers, allegedly, abuse them and find their bar licenses stripped as a result. But billable hours remain the foremost currency by which law firms calculate what to charge their clients.

But some law firms are trying powerful software programs that could give lawyers alternatives to checking off timesheets.

The programs construct complex mathematical models to determine when it’s cost-effective to use alternative billing arrangements such as a flat fee, said Kilpatrick Stockton Chief Financial Officer Gary Dacey. Kilpatrick Stockton bought the Dashboard software package sold by Redwood Analytics of Mt. Laurel, N.J.

When a company sends a request for proposal (RFP)to law firms, the company usually feels comfortable with the quality of all the lawyers on its RFP list, Dacey said. Law firms need to find some way, other than being the cheapest, to stand out in the crowd of bids. Being able to propose a number of options, including flat fees or contingency fees, can help a firm’s bid stand out in a competitive field.

"It’s a given that you have to have A-1 quality legal support, but there are a number of firms with those qualities," said Dacey, who joined Kilpatrick Stockton in 2002 as the firm’s first CFO.

General counsel say they aren’t always looking for the cheapest law firm. Retainer fees or flat fees provide a firm number that executives can plug into estimated yearly budgets, said Cox Enterprises Inc. assistant general counsel Robin H. Sangston.

"It’s not necessarily that you think you’re going to save a lot of money" with flat-fee billing, said Sangston, who coordinates contracts with outside law firms for the company. "It’s the peace of mind of knowing there is a set amount of money you’re going to be spending."

Firms used to respond to RFPs from Sangston and other in-house counsel by offering a discount, Dacey said. The problem was that the size of those discounts was arbitrary.

"We’d give discounts of 10 percent or 15 percent and not know the effect on our costs," Dacey said. "We had no idea how much it was costing us to provide our services."

Redwood’s Dashboard is one of a

number of business-intelligence software packages aimed at law firms and other professional-service firms. McGuireWoods uses Thomson Corp.’s Thomson Elite software. Other software packages—including Conshohocken, Pa.-based Satori Group Inc.’s proCube Legal-Ease and Atlanta-based Aderant’s Expert—help lawyers determine a law firm’s cost to perform a job, weed out projects that aren’t producing enough revenue, and ascertain which clients are the most profitable and which practice groups produce the most profits.

"You could not make these sorts of decisions without [the software] because you would be shooting in the dark," said Molly M. Remes, a vice president at McGuireWoods Consulting, the lobbying arm of the Richmond, Va.-based law firm.

Seeking predictability

Since most of the move to nonhourly billing is spurred by clients, some firms are waving their arms in the air to let companies know they’re ready to dump hourly time sheets.

McGuireWoods has used alternative fee arrangements for a few years, but the firm this month paid for a print-media advertising campaign in Atlanta and Baltimore to tout its flexibility on billing. The firm’s leaders believe the effort will help McGuireWoods reduce from about 65 percent firmwide the amount of work it now does through hourly billing.

"We’re seeing more and more RFPs where in-house counsel are asking you to be creative with fees," said Fred T. Isaf, managing partner of McGuireWoods’ Atlanta office. "They want fees that are predictable. It’s hard to make business decisions when you don’t know how much the cost will be."

For McGuireWoods and other firms, an alternative billing arrangement is usually a flat fee, contingency fee or a blend of the two. Equity-based compensation, in which legal advisors received shares of their clients’ stock, was popular during the technology boom of the late 1990s but has become passé, Isaf said.

Both Kilpatrick Stockton and McGuireWoods are moving to nonhourly billing for all lines of legal work—corporate, labor and employment, intellectual property, and litigation.

Recent incidents of bill fraud at big firms around the U.S. shone a light on the problems inherent with the billable hour, Isaf said.

"With a negotiated fee, instead of hourly billing, you don’t have those kinds of concerns" about bill fraud, he said.

Matthew Farmer, a partner in the Chicago office of Holland & Knight, left the firm last year after he told firm leaders that his hours on a case were inflated by the partner in charge. The firm’s failure to investigate or take action led Farmer to leave Holland & Knight and later to file a complaint with Illinois State Bar officials, according to an Aug. 30 Wall Street Journal story.

In January, William P. DiSalvatore resigned as partner from Wilmer Cutler Pickering Hale & Dorr in New York after admitting to creating fictitious billing records, among other violations, according to The New York Law Journal, a Daily Report affiliate publication.

Patrick Carmody resigned in April 2003 from Willkie Farr & Gallagher in New York, where he was a tax partner, after he was caught billing $30,000 in personal calls to clients. In August he was suspended by the New York State Bar for one year because of the incident, according to The New York Law Journal.

Negotiating a flat fee may eliminate most clients’ concerns about falsifying hour-based billing statements, but do flat fees remain profitable for the law firm? One attorney vigorously denied that nonhourly billing means giving up profits.

"This is not a discount program," said McGuireWoods corporate partner John C. Beane in Atlanta. "You’ve got business risk on the lawyers’ side, but you’ve got upside for the lawyers too."

Staff Reporter Andy Peters can be reached at apeters@alm.com.