The Hour of Reckoning
An article published
in the Law Society Gazette (www.lawgazette.co.uk)
By Ann Mizzi.
On the 5th
October 2000.
Several top law firms are dropping their hourly rates in
favour of fixed charges and success fees. But as Ann Mizzi discovers, clients
concern is calling the shots in the billing revolution.
This year, City firms billed their clients more than £6
billion. Each Slaughter and May lawyer
pulled in more than £700,000, generating nearly twice as much revenue as their
nearest rivals at City firm Linklaters.
But they are not the only lawyers billing furiously as the market booms
– the entire legal market in the UK was worth £8.645 billion last year.
Many clients and a small minority
of firms are wedded to hourly billing.
But a Gazette survey indicates that a larger number are prepared to
ditch their time-based pay and success fees.
The survey revealed a 50-50 split
between companies that simply cannot imagine life after hourly rates and those
that envisage an end to the time-based culture as the future of billing. But the real revolution in thinking is going
on in the law firms themselves. More
than 80% of the top 25 law firms that responded to the survey say they may dump
their hourly bills in favour of fixed and success fees. Some said the shift is already happening,
while one thought the change would be sometime away.
Nabarro Nathanson’s finance
director, Andrew Scholefield, suggests: ‘there will always be a place for
time-based billing. However, there is a
role for lawyers to participate in the risk and reward of a project. In addition, estimates can be used but the
scope of the work needs to be clearly defined and understood by the client’.
A third of the top 25 City law firms
questioned said they charged clients hourly rates, fixed fees, annual retainers
and conditional fees, dependant on the client and the transaction. ‘We don’t care, as long as we get paid,’ was
the frank response of the managing partner at one magic circle practice when
asked about his firm’s billing methods.
All these firms forecast a move
from time-based charging, as did a further 40% that offered various options
apart from hours. Berwin Leighton’s
finance director, Charles Whittan, suggested that the choice is effectively
market-driven, and pointed out that fixed fees might be more appropriate for a
commercial property transaction, while litigation would be charged on an hourly
basis.
Slaughter and May’s finance
partner Jonathan Haw predicts law firms will move away from time-based billing
and instead use ‘a basis that reflects the value to the client of, for example,
the factors in the non-contentious fees order’, which is the way firms tend to
bill. Slaughters lawyers charge for
value-added legal advice, as well as research and expenses.
Despite the anticipated billing
revolution, all companies surveyed still pay for outside lawyers’ time. Hourly rates are usually discounted, but
also blended. Half the respondents also
pay annual retainers or negotiate fixed fees.
‘Unless the receiver of the
service is in possession of more sophisticated information to compare, contrast
and form the basis of negotiation with lawyers, billing method will not
radically change,’ warns a cautious Legal & General corporate counsel,
Geoffrey Timms.
Most blue chip clients have
elaborate billing needs. Lloyds TSB is
typical. The bank’s head of legal,
Geoffrey Johnson, says his company has complex billing arrangements, because it
is not just the legal department that hires lawyers, and different areas have
different billing needs. Mr Johnson
says: ‘We talk to them quite carefully about how we want to be billed. And that’s changing all the time.’ Ultimately, it’s the client that holds the
purse strings. Or as Mr Johnson puts
it: ‘It’s a question of the clients managing the solicitors.’
This point is not lost on Shell
UK’s Richard Wiseman, who is clearly not prepared to put up with any nonsense
from his law firms as far as bills are concerned. He is not the only in-house lawyer who has been scrutinising
developments in private practice such as rising levels of pay for junior
lawyers. Shell has banded together with
a number of other companies to look at pay.
Now that law firms in the City are paying their junior lawyers
substantially more, there is fear among clients that this cost will be passed
on to them. Mr Wiseman is adamant that
this is one bill he does not expect to land on his desk.
As far as the usual bills are
concerned, Mr Wiseman says Shell rules out use of annual retainers and
conditional fees, which he dismisses as ‘not appropriate’. Instead, he sticks to his guns, picking the
proverbial ‘horses for courses’.
Photocopying came top of the list
of expenses that corporate counsel do not expect to see on their bills. But there were other pet hates. They expect their law firms to bear some
travel costs, and do not want to end up paying for on-the-job training or
getting up to speed on the client’s business.
Clients also reported that they have disputed bills where they have been
charged for the use of inexperienced juniors.
So what are they willing to pay
for, aside from pure legal advice?
Responses to the Gazette’s survey showed that the market knowledge,
commercial acumen and knowledge of competitors were three vital areas. Clients are also prepared to pay for their
lawyers’ presence at meetings and pay for seconded lawyers. There is also evidence of law firms charging
for support services such as updates on legislative changes that might affect
their clients’ business. While some
firms offer this service free of charge – increasingly now over the Internet –
some practices charge for access to their support services such as law
libraries and training facilities.
Arguably the kind of corporate
counsels’ gripes is ‘not being kept up to date on the level of accrued fees or
the number of fee earners involved’.
But on this front, the future looks sunny for clients. One magic circle firm says time-based
billing will be replaced by assessment according to the value of the
transaction and the market, and it envisages electronic, on-line rolling
billing, followed by e-settlement.
Most firms now have computerised
hourly recording methods, with Carpe Diem the most popular software used among
the top 25 firms. Firms that did not
use Carpe Diem used a mixed bag of software, including packages that appear to
have been developed in-house.
Many other top 25 firms suggested
billing would change through the use of
IT and improvement in transparency.
The also predicted a shift towards fixed quote fees.
Although many clients are not
pushing for a change from hourly rates, there does appear to be a concern that
an hourly system does not promote efficient working within in a firm. If you string it out, the argument goes, you
will get paid more. Stuart Benson, a
consultant at London-based legal practice consultancy Patro and former DLA
partner says, says recent billing history shows that hourly charge-outs have
only become the norm in the last decade, while the used to be much more
project-based.
But the in-house response to the
resurrection of project-based dominance is reserved. The UK head of legal at oil and gas company Agip, Daragh Fagan,
suggest that fixed fees and annual retainers could replace time-based billing. But he anticipates that time billing will
remain central even if there is a pull away from hourly charge-outs. And Legal & General’s Mr Timms says
chargeable hours can be replaced by commodity and unit charges, to be
determined jointly with law firms.
So the clients have made
suggestions, what about the firms?
‘They don’t have the imagination to see how alternatives could work,’
says Mr Benson. But they have come up
with a few ideas about how to prize out cash.
Although only one respondent mentioned payment in shares would be an
option and none of the respondents would accept credit card payments, may
accept payment in foreign currency, including the euro.
The Gazette survey shows the
willingness of law firms to look at new billing methods, but a surprising
caution among their clients. But as
in-house lawyers begin to compare notes, they may well release their lawyers
from hourly constraints and focus on the job in hand.
