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When Are Flat Fees Better, and How to Initiate Flat Fee Arrangements

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The need to change the billing model for external law firms

In-house counsel attorneys

are hired based on their substantive knowledge, their ability to liaison with external law firms, and for being responsible for maintaining these business relationships. In-house counsel attorneys often lose time and have to mediate fee disputes between their employer and external law firms. Disputes occur due to lack of trust and transparency and inconsistent rates from different service providers. When there is sufficient information on the nature of any particular type of work including time requirements and the process of comparing and collecting the data, it may help to come up with a

flat-fee structure

for a particular type of assignment. If a major part of outsourced work can be measured and converted to flat-fee assignments it becomes a win-win situation for all, and allows the in-house counsel attorney to become a true asset to his/her employer.

The advantages with flat-fee assignments

Law Firms Working On Flat Fees
Law firms may insist upon enforcing

billable hour quotas

because the firm seeks to maximize profits or revenue, and because in the practice of law outcomes are not always easy to predict. However, a flat-fee structure holds out the promise of guaranteed income compared to the lack of predictability inherent in the billable hour structure. A major benefit of the flat-fee structure is that law firms are guaranteed a set amount of income even before the word is completed. However, according to legal ethics requirements in most states, without an agreement with a client stating otherwise, attorneys will keep the flat-fee in the lawyer’s trust account until the work is completed. Flat-fees increase predictability in money matters, and for certain businesses that predictability is extremely valuable. In fact, the lack of predictability in billable hours is one of the major issues why external law firms are failing. Additionally, external firms may go out of business, when a large percentage of billable hours are deemed uncollectable.

For businesses, whenever possible, the adoption of flat-fee structures for external law firm work can greatly reduce and standardize expenses. Further, the flat-fee structure also encourages external law firms to plan and streamline expenses.

However, not all kinds of legal work can be boiled down to flat-fee assignments.

Some lessons from an adventure in flat-fee structuring

In the 24th Annual Corporate Counsel General Counsel Conference, Kurt Stepaniak(“GC”) of Kone Inc. described how he managed to reduce outside counsel spending from $6 million in 2007 to $4.5 million in 2011. Superficially, it seems to be a grand savings close to 30 percent, but it’s more than that. The estimated $6 million in 2007 is probably closer to $6.6 million in 2011 because you can’t get the actual gain unless you adjust for inflation. Further, this is the gain only in spending because it does not take into account the thousands of work hours spent in reviewing hourly billing invoices and handling fee disputes.

Be that as it may, the lesson of Kone Inc. is clear. The company appointed about 50 external law firms, mostly for personal injury work. When under the leadership of the GC all the billing data was gathered, compared, and collated; it was found that although law firms hourly rates differed greatly, the

average costs per case

was very close across the different firms. So GC came up with a flat-fee structure backed by reliable data.

Surprisingly, in the case of Kone, over the years all external law firms signed up for the

alternative billing arrangement

, for it provided each firm with the predictability of income. The flat-fee structure is not immutable, and there can be cases where the GC needs to hear the reasons and have to treat the opinions of external law firms with care and respect in order to accommodate necessary changes. In sum, where it works, the flat-fee structure is fat-free for business health by creating a lean business structure.

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