Outside counsel/law firms have an interest in developing pricing arrangements that will differentiate them from their competitors in client perception and provide them with an edge in marketing to new clients or expanding the breadth or depth of their services to existing clients. In addition, law firms and their partners pay a substantial price for the resulting back-loaded revenue streams. A compensation arrangement that derives from the annual collection pattern affect the way law firms structure fee arrangements to recoup investment and maintain profit margins.
1. Hours times rates (“HTR”)
The classic HTR model typically assigns an hourly billing rate to each timekeeper in a law firm (i.e., each partner, of counsel or senior attorney, associate, legal assistant, and perhaps other professionals such as lobbyists, librarians or in-house experts).
2. Modified HTR
a) Fee Caps
A common variant on HTR is the placement of an upper limit, or cap, on the total amount of HTR that will be charged for a matter or task. If the law firm’s HTR exceeds the cap, the firm absorbs the excess and its profit margin for the matter is reduced
b) Budgetary Constraints
An agreed budget between client and outside counsel may provide that the firm will not charge more than the budgeted number of hours or dollars for a matter or task without additional review and approval by the client.
c) Phased Billing
Also known as multi-staged or incremental billing, this variant of HTR estimates the aggregate HTR necessary to complete each phase of a transactional or adversarial matter. Any excess HTR for a particular phase may be placed in a suspense account and recouped if a subsequent phase is completed under budget.
d) Target Fees
The “share the pain, share the gain” approach can be negotiated to higher or lower amounts if the fees reach expected thresholds.
e) Blended Rates
This arrangement involves negotiation of a single hourly rate for all time spent on a project, which includes different rates of lawyers or combined rates of lawyers.
f) Partner-Based Rates
Time is charged only for partner involvement.
g) Discounted or Premium Rates
This variant involves negotiation of a percentage discount or premium on the hourly rates normally charged by some or all of the timekeepers (where highly specialized or unique expertise) assigned to a matter.
h) Volume Discounts
Law firm gets more business and the client gets lower overall cost (so-called economies of scale).
i) Frozen Rates
Law firm will not adjust its rates at all or by more than a given percentage during the life of a matter (typically, litigation matters that can last a number of years) or during a particular time-frame of the lawyer-client relationship.
j) Per Diem Rates
Some types of legal matters may be amenable to daily rather than hourly charges. For example, trial time, time spent out-of-town, or time spent on matters such as lengthy mediations or transactional negotiations that necessarily render the lawyer unavailable to work on matters for other clients on the same day.
An agreed lump-sum profit is added to HTR calculated using rates for each category of timekeeper that are set according to the actual cost of their time to the firm.
3. Flat Fees
a) Fixed Fees
Instead of HTR, lawyer and client can negotiate a fixed fee for a particular matter or task or for all work in a particular subject area.
b) Unit Pricing
This variant of the fixed fee assigns a fixed fee to each stage of a transaction or proceedings.
Under a retainer arrangement, the law firm agrees to provide particular services during a specified period for an agreed fee.
d) Percentage Fees
Charging a fee is calculated as a percentage of the value of the transaction or lawsuit.
4. Value billing
a) Contingent Fees
Contingent fees could be used in any situation where lawyer and client are able to agree upon (i) the goal that must be achieved to trigger the contingent payment obligation; and (ii) the consequences that will flow from such achievement.
b) Success Fees or Bonuses
This arrangement involves the negotiation of incentive payments that will be added to fees otherwise payable (often discounted HTR) upon the achievement of specified goals. For example, closing a transaction or settling a lawsuit within a particular time period or on particular terms could lead to success fees or bonuses.
c) Result-Based Billing
Closing a transaction might result in a bonus while failing to close would yield only a greatly-reduced break-up fee. Alternatively, a percentage or lump-sum premium could be added to standard HTR where the transaction closes, while a similar amount is deducted if it does not.
In this variation, a pre-set range of compensation is established, with the ultimate payment falling at a point within the range measured either by achievement of various results, by the client’s discretion, or by end-of-matter negotiation.
a) Investments in Clients
It is becoming increasingly common, especially with emerging or startup companies, for lawyers to acquire equity in clients in lieu of fees or on top of fees. Stock ownership obviously creates a broad incentive for lawyers to contribute to the overall success of their clients. The opportunity to invest in a client in an initial or early financing round may also persuade a law firm to discount its HTR or accept a relatively low fixed fee for start-up work.
b) Teaming Arrangements
Particularly for clients with large staffs of inside counsel focused on specialized practice areas, teaming arrangements between inside and outside counsel are common.
c) Loaned or Seconded Lawyers
Another alternative to HTR is an arrangement whereby the law firm “loans” a lawyer to the client for a particular period at a set daily or monthly fee (usually at a substantial discount from HTR to reflect the non-cash benefits the firm receives in the form of training, client bonding or access, and perhaps reduced costs). Less commonly, a client may second one of its lawyers to the law firm to function as one of the firm’s regular lawyers for a specified period.
Using contract lawyers or secondment services may be less expensive to the client than having basic legal research, document management, public record searches and the like provided by the law firm.
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