Reprinted from: LawPracticeTODAY

Why and how to employ an alternative billing philosophy in which lawyer and client share risk based on the case’s outcome.



Much of the pressure for law firms to take alternative billing approaches comes from the firms’ clients in Corporate America. Corporate culture is focused on organizational performance and values, while law firm culture is primarily individualistic and focused on personal performance. Correspondingly, corporate discretionary spending is set by budgets and strategic plans, while law firm discretionary spending often reflects individual partner decisions.

Such distinctions mean that priorities between corporate clients and lawyers have in the past diverged on controlling costs. Here is advice on how to bridge that gap.

Shared Risk

Corporate clients increasingly want to bridge the gap by appealing to the individuality of lawyers. That requires an approach to alternative billing by rewarding lawyers for having “skin in the game”—a personal financial stake in the outcome of a matter as reflected in compensation that goes up when the results justify it. The idea is one of sharing risk, something that lawyers are warned against in law school. In fact, the Rules of Professional Conduct specifically prohibit the idea of clients and outside lawyers sharing a business arrangement.

However, in this type of alternative billing philosophy, lawyers don’t become partners in the clients’ business—they become partners i n the resolution of each specific matter. The sharing of the risk is based on the outcome. And that is based on communication right from the start, on appropriate early case assessment and budgeting. When this is approached successfully from the start, lawyer and client have a mutual success goal. The risk for the lawyer is in not meeting the goal; the reward is in meeting or even exceeding it.

Case Analysis and Budgeting

Litigation provides a good framework for analysis, starting with case assessment. Corporate clients should have in mind how much money they want to spend to resolve a problem, just as they know what they want to spend on a piece of equipment. In either case, a higher initial cost may be acceptable if the long-term return on investment justifies it. Sometimes a legal problem is large enough that spending big sums on it is justified. Most issues, however, involve everyday costs of doing business. It makes no sense to budget spending $2 million to try a case if a $100,000 settlement will meet the client’s objectives.

Budgeting begins, or should begin, by getting as much information as possible from the client about goals and expectations. Information should cover parties, claims, anticipated strategies and desired outcomes. “Winning” may not be one of them. A client may, for example, wish to delay the final outcome for political or financial reasons, believing that a continued threat of litigation may bring a settlement. Understanding the client’s objectives is the prerequisite of the budgeting process. The key is not just preparing the budget, but involving the client in the preparation. The client should also formally approve the final budget. Without client buy-in, the process is meaningless.

Client Participation

No lawyer wants to lose control and direction of an assignment, but accepting informed client judgment can sometimes be essential for true sharing of risk. Several years ago, an assistant general counsel for a major multinational corporation stated that creating a budget saved her company close to half a million dollars in one litigation, by deciding during the budgeting process not to do things the outside counsel firm might otherwise have done. For example, the law firm suggested taking 30 depositions. The general counsel, though, reviewed the list of proposed individuals and decided that only 19 could provide useful information. The law firm then expressed a concern over potential accusations of negligence or malpractice if one of the canceled depositions proved to be a key information source. The client responded by saying, “We are in the business of taking reasonable risks. If we agree on what should be and what need not be done and something goes wrong later on, that's our responsibility not yours.” The result was agreement, lower costs and a successful engagement—a true demonstration of what an alternative billing thought process can do.

The lesson here is that communication makes the process work. One of my clients, a large law firm, sought to end write-offs of litigation fee s. I suggested creating a flowchart of the litigation process to determine where and how much each client had really been involved in the process of the representation. This showed that there were very few points at which clients were actually involved, apprised of what was happening in the case and reviewed the lawyer’s strategy. Often, when the final bill came, the firm’s clients were shocked at the large amount and refused to pay. The lawyers defended themselves by saying, “I talked with the client frequently. We were preparing for depositions and constantly asking for documents.” But that's not the kind of interaction that supports mutuality in billing arrangements. When the firm changed its process, requiring lawyers to effectively involve clients in the process of representing them, bills got paid time—and in a timely way.


Performance Milestones

When budgeting for the entire litigation in a risk-sharing arrangement, different budget milestones should be tied to success. The budget can be for the entire case, or just to that point in the litigation where, if appropriate after a certain amount of discovery, it is decided that a motion for summary judgment has a good chance of success. The engagement goal is tied to that probability, just as a success bonus can be if the firm has stayed within budget to get to that milestone. Different parameters will define different success outcomes—but when the client and the lawyer work as a team to achieve them, both parties benefit. For example, if the summary judgment motion is a success (even though the full case was budgeted), the client gets out of the lawsuit and the firm gets a success bonus. It is a win-win situation for both the client and the law firm.

Of course, there also have to be provisions for approach ing the alternative fee if success is less than complete. One way to deal with this issue is to use a success pool in conjunction with an hourly rate. Here, the firm and the client jointly determine what percentage of the hourly rate goes into the success pool. For an easy calculation, assume a billing rate of $200 per hour with 15 percent of that rate put into the success pool. Four hours of billing ($800) equates to $120 being put into the success pool. If the firm does not achieve success based on the previously determined definition, it does not get the bonus from the success pool.

There also should be provisions for different degrees of success. Suppose, for example, the firm and the client initially agree that the case is worth X amount of dollars. If the case is settled for that amount, the firm gets the success bonus in full. If the firm exceeds expectations and settles the case for 20 percent below what it and the client had thought was a reasonable amount, then a percentage bonus above that which is in the success bonus pool would be paid. Thus, there are success gradients beyond all or nothing. But it is absolutely vital that the firm and the client agree on these gradients or milestones before the engagement begins.


Essential Flexibility

Note that there is only so much that lawyer and client can control between themselves in this kind of alternative arrangement. If, for example, a litigation opponent suddenly decides to take 35 depositions when the case management budget assumed that only 10 would have been reasonable, the client must be willing to adjust the budget upward. Similarly, opposing counsel may not take the time to delve into and understand their client’s case, such that they could engage in meaningful settlement discussions before trial. This makes the time and expense of preparing to go to court a necessary evil. Often in such situations, the result is a settlement on the eve of trial—a settlement that is negotiated exactly in line with the original case objectives, but with the additional cost of trial preparation added.


The crucial point is that, because lawyer and client will each have unique information at any given time on how the litigation is proceeding, both must be in constant communication about developments and be willing to be flexible to keep the alternative arrangement on track. The terms should be periodically reviewed, with clients being told how much they have already spent and receiving a full update on where changes might be necessary. This provides a benchmark for the firm’s work as it is completed and billed, and it maintains confidence that the alternative billing arrangement will be founded on promises made and kept. Trust and candor between lawyer and client are essential.


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