Time nearly up for hourly billing as in-house lawyers ask firms to share risk

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Fees: fixed amount increases trust and reduces doubt

There is a widespread desire to move away from the hourly rate model, according to a survey of in-house lawyers that found them wanting their external law firms to share risk.

Senior counsel at 80 international multi-million pound companies believe that law firms should provide ‘budget certainty’ before a case starts – particularly with contentious work.

The report – Is time up for the hourly rate? Client attitudes to billing arrangements in commercial disputes – was conducted on behalf of City law firm Field Fisher Waterhouse.

The research found that this month’s introduction of damages-based arrangements will only add to the options available for companies looking for alternative ways of fixing fees.

The report said that in the UK, Belgium, France and Germany, the majority of respondents still paid external lawyers at an hourly rate for disputes – with 61% of those surveyed using the traditional method.

That rose to 68% for UK respondents, whereas in Italy and Spain the majority do not use the hourly rate as standard.

Nonetheless, 51% of respondents said they thought the hourly rate was ‘not a good model’ – and again that rose for UK respondents, to 60%.

Increasingly, in-house legal teams feel that it is fairer for law firms to share in the litigation risk and are expecting alternative fee arrangements, such as fixed and conditional fees, in disputes.

The dissatisfaction with hourly rates has led to procurers of legal services seeking discounts from their external providers. The survey said 81% of respondents ask for some flexibility in charges – especially if no alternative fee arrangement is offered.

And an overwhelming 94% of those surveyed said they had used or discussed using other fee arrangements, with many opting for a hybrid of payment models.

One response, from the head of legal at a German manufacturer, said: “We are trying to move away from this pay-per-hour model. We would rather have a fixed fee model, because it increases trust and reduces doubt.”

A legal director from a UK financial services firm said:  “I try to split disputes into chunks and agree a fee for each stage in the process. It would be good for lawyers to take some responsibility for dispute results.”

Among the other options being explored are twin hourly rates, with a winning case paid at one amount and an unsuccessful representation resulting in a pre-agreed fraction of that amount.

According to the survey, 45% (43% in UK) of respondents have used or have considered using an inflexible fixed fee, 76% (81% in UK) for fixed fee with changes agreed in the event of unforeseen circumstances, and 26% (41% in UK) for conditional fees.

Every single respondent said that they would consider a fixed fee for disputes advice.

The focus on costs for corporate entities is a significant factor in the move away from hourly rates. The research found that in-house lawyers place upmost importance on accurate forecasting as their single biggest problem with hourly rates is an unpredictable budget if a case drags on.

Budgetary certainty was an important consideration for 90% of respondents when managing a legal dispute – 78% for UK-only respondents.

The research also looked at how companies resourced legal work. It found that just 1% use in-house lawyers only, with 59% using mostly in-house with some outsourcing, 29% evenly split, 5% mostly outsourcing and 6% outsourcing only.

Of those that outsource, the vast majority (86%) use multiple firms based on experience. But the report also found that the tendering process was also aimed at driving down price.

Scott Pugh, principal in-house solicitor at Sport England, said tendering is a healthy way of finding the right advice at a competitive price.

He said: “I use two firms, both of which have particular strengths. Each individual piece of work might suit one team better than the other, in which case I will make a call on which firm to choose. But there are also times when either firm would do the job well, so I might then call in a quote from both firms. For us it works well – and I think modern law firms expect to be able to make a competitive cost argument as a matter of course.”

The report concluded that although the hourly rate model is “not broken”, it works best as part of a “menu of options” – and that firms should be prepared to offer alternative billing arrangements by looking closely at fixed fees or fee capping.

However, it warned clients not to see new models solely as an opportunity to drive down price – as fixed fees may actually carry a premium to compensate for the extra risk taken on by the law firm.