Riding the tipping point

Despite all the talk about fixed fees, the hourly rate remains the dominant charging method for legal services. But, ask Chris Barnard and Ian Leedham, could we be on the verge of a tipping point?

It may surprise you to know that charging for legal services on an hourly rate basis only really caught on in the 1970s, after fixed fees - or 'base fees' as they were then known - were held to constitute price-fixing in the US, and as such be a violation of the country's antitrust laws.

Prior to this, various forms of fixed-fee billing arrangements had dominated for many years. Alternative billing is nothing new, then, just a trend that ebbs and flows depending on the external environment. Of course, those ebbs and flows need catalysts. Could the recession be a catalyst for a widespread shift away from the billable hour?

The recession has certainly meant greater cost pressures for in-house teams, with more scrutiny now being placed by finance departments on legal teams and their budgets. The result is that over the last few years most in-house teams have been in-sourcing work to try and lower costs, and generally attempting to do more with less while justifying existing headcount. In this environment, some significant changes have occurred.

For example, ITV now does all its legal work on a fixed-fee basis. And although not directly related to alternative billing, Rio Tinto's offshoring arrangement with CPA Global is another recent illustration of in-house legal teams' willingness to be innovative. We have also seen the advent of virtual law firms such as Axiom, Keystone Law and Berwin Leighton Paisner's 'Lawyers on Demand' service, and more sole specialist consultants and lawyers who have chosen to go it alone offering a dedicated service at a fraction of the price charged by law firms.

However, well over a year into the recession, the hourly rate still remains the dominant charging method for legal services. One of the reasons for this, no doubt, is that major change represents a threat to law firms. Consider, for example, how conveyancing has changed over the last 20 years, along with legal aid and criminal work. Changes in these areas were driven by either competition or rigorous tendering and demand for fixed pricing/capped fees for the provision of services.

Therefore, it may not be in the interest of any of the large law firms to actively and openly embrace alternative billing - particularly given the fact that their business models and internal cultures are tightly bound up with charging for services by the hour. With so many fixed costs in buildings, systems and support staff, as well as many junior lawyers to train, a wholesale change to fixed fees would be risky.

The fact that 90% of in-house counsel are ex-private practice is also significant - meaning our general view of value is based on perceptions developed within law firms. And our own internal budgets and cost predictions are difficult enough to make without attempting to factor in other variables. If you look at recent in-house studies and benchmarking exercises, most lawyers focus on law firms' expertise and knowledge of their business and relationships over cost and discounts offered.

Still, with profits at the top 100 firms having, on average, doubled in the last five years, at some stage there may be a tipping point beyond which alternative billing methods become dominant.

The data to create fixed and alternative billing does, after all, exist. It is in our companies' finance systems, document management systems and the billing systems of our law firms. These systems can be mined to look for trends and types of work and to work out averages or mean time on particular matters.

Insurance companies have for a long time compared the costs of law firms for personal injury matters and litigation and then used that data to strike fixed or lower legal rates. More sophisticated systems for analysis exist in Datacert, Serengeti and Eversheds' Global Account Management System.

Bigger in-house teams with greater budgets and more staff are able to experiment and innovate more easily. The trends they create can move and change the market. Technology has also been a great leveller and so smaller departments can also innovate or mimic more sophisticated systems of larger in-house teams at low cost. Perhaps we are on the cusp of that tipping point.

If the recession proves not to be the catalyst for change, though, perhaps the Legal Services Act will. If private practice lawyers and the in-house legal community do not work together to look at greater billing diversity and value analysis, then potentially the value of legal services will erode as businesses and in-house teams find other ways to meet their commodity legal needs via alternative multi-functional practices. In this scenario, the hourly rate would not die exactly, but the types of matters to which it would apply would be drastically reduced.

In-house and private practice lawyers need to spend more time considering the value of one another's businesses to develop new models - and each of these should be as individual as the companies and firms themselves. Alternatively we can wait and watch until we have change forced upon us.

We would very much welcome your feedback and views.

Chris Barnard is the general counsel of Coca-Cola Europe and Ian Leedham is senior counsel, commercial and dispute resolution at National Grid.

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