(This was first published on the Harrisonburg-Rockingham Chamber of Commerce website.)
For as long as there have been lawyers, there have been clients to whom lawyers seemed expensive.
In a world where you need certainty – knowing your costs, knowing your numbers – you never know how much you are in for when you pick up the phone to talk to your lawyer. You don’t know where it’s going to lead. Asking your lawyer a simple question might lead to unforeseen follow-up questions and “I guess I hadn’t thought of that” moments, and soon you feel like you’ve released the kraken.
Never has it been more true than now. In the grip of the COVID-19 pandemic, a company with reduced revenues and dependence on a PPP Loan to keep its employees for the next few weeks might come to a simple conclusion about the discretionary, non-emergency use of legal counsel – the conclusion being that it can’t afford it. The temporary drastic belt-tightening that everyone is doing now may lead some business owners to the conclusion that open-ended hourly legal bills need to be a thing of the past – at least their past.
Around the country, corporate general counsels – who, like any corporate managers, have to justify their expenses to senior management and boards – have been hinting, asking or outright requiring their lawyers to propose different ways of billing them. For smaller companies without inside GCs, the people responsible for hiring attorneys have come to their own similar conclusion. Many clients have heard about retainer arrangements, subscription models, flat fees, and similar alternatives to hourly billing before, but as COVID-19 squeezes budgets and clouds futures, companies are more and more asking their attorneys to actually propose these arrangements to them, and provide discounts in the interim. Lawyers are being asked, in essence, to invest in their clients. Some have called it a way for lawyers to “pay it forward” in a time of crisis. Others, like myself, view it as a permanent shift in the economic relationship between clients and their attorneys.
As Ben Gross, general counsel of retailer Rue 21, said recently, “When you have a good relationship with your outside counsel, they’re going to work with you in thick and thin.”
As an aside, I should note that even though hourly billing has fed lawyers for decades, the irony is that many (actually most) lawyers will tell you they hate billing by the hour. The mechanics of it, they will say, are tedious. So both sides have something they dislike about the hourly rate. Hourly billing is like the moon in that scene in Sleepless in Seattle, when Tom Hanks and Meg Ryan are both looking at it 3000 miles apart at the same time and thinking the same thing, except here instead of being in love its…well, it’s something else entirely.
There are real reasons why hourly billing has been the norm. Lawyers are ethically bound to not charge a client for work until it is already earned, in the absence of some other mutually understood arrangement. You do identified and authorized work, and then at the end of the month you send a bill.
But there’s never been a worse time (in least our lifetime) for major costs to be unpredictable in a business. It’s time for lawyers and clients to have conversation about other (and probably smarter) ways to work together.
Apart from lawyers getting paid by taking equity in a client that’s in a fast growth stage – a practice largely limited to Silicon Valley technology companies — there are two basic types alternative of legal fee arrangements. One structure is where a client pays a monthly fee in return for essentially unlimited access to lawyers in the firm, and the other is where a flat fee is charged a specific definable task. We began offering the first service – we call it OPENgc – four years ago, and we can attest that when lawyer and client spend the time to design an arrangement that works for the business, it’s an ideal way for the law firm to bring both certainty and immediate value to a lawyer-client relationship.
Flat fees for specific tasks, by definition, allow the client to budget legal services to the dollar. It’s a workable business model for lawyers who have the experience to predict what it will take to achieve a particular client’s goal — such as negotiating a loan or lease, purchasing or selling a company, drafting contracts, and other matters with a definite start and finish.
Both of these alternative fee arrangements push lawyers to work smarter and to really understand their clients’ businesses. This is a great thing, for both client and the attorney.
The uncertainty that surrounds business now, in the midst of this pandemic, amplifies the uncertainty that has challenged owners and executives forever, in good times and bad. Lawyers have been presented an opportunity to shut down the timeclock and take some of that particular fear off the table.
If you have questions about legal issues, the relative costs of legal work or just want to talk about your experience as a consumer of legal services, please contact me or any of our business lawyers.