A high-level panel of general counsel argue that value-based billing can deliver if it creates incentives for both client and adviser. Meredith Hobbs reports

Four top in-house lawyers say that alternative billing has become a reality for them, even though many law firms have been slow to pick up on the idea. But they agreed that a firm must receive a steady pipeline of work from its client for their interests to be aligned.

The lawyers – general counsel Thomas Sager (pictured) of EI du Pont de Nemours and Company, GC Amy Schulman of Pfizer, associate general counsel Joseph West of Wal-Mart and associate GC Murray Garnick of Altria Client Services – spoke on a panel at the American Bar Association's mid-year meeting in February. They were joined by David Boies, the chairman of Boies Schiller & Flexner.

Sager acknowledged that the major sticking point for firms over using flat fees is that closing a case quickly means having to find another one. That problem gives firms a natural incentive to hold on to work. One of the pioneers of alternative billing, Sager said that DuPont uses full or partial alternative fee arrangements on all its large matters and on 70% of its matters in general. In addition to flat fees, the mix can include contingency fees and holdbacks, where a portion of the fee depends on the outcome. "We like that," he said.

Alternative billing can be good for law firms, argued Boies, who said his firm's goal since its founding in 1997 has been to eliminate hourly billing. In 2010, he noted, the firm's alternative billing income made up 55% of its revenue. Boies said that hourly billing pits the interests of the firm against those of the client, while alternative billing can align their interests by bringing in more and better work for the firm. He thinks firms can gain "increased efficiency, more success in the practise of law, and client satisfaction" through alternative billing.

However, Boies acknowledged that for a new client or an unpredictable case, his firm would charge "a much higher flat fee to protect ourselves" or else would bill by the hour. Despite the potential advantages of alternative billing – and lawyers' dislike of having to track their time by the hour – firms have been slow to adapt.

In 2009, Wal-Mart placed a moratorium on hourly rates and asked outside counsel to pitch alternative fee arrangements. But of the 680 firms used by Wal-Mart at the time, only one submitted a proposal, said Joseph West, who heads the company's office of outside counsel management.

West said Wal-Mart started using flat fees for its employment work, which he said accounts for the company's largest percentage of spending on litigation by outside counsel. The US retail giant has gradually expanded the arrangement into tort litigation, real estate work and, most recently, intellectual property matters.

"Firms realise we're serious about this now," West said. "They're coming back with proposals that make sense."

Pfizer's Schulman said that since joining the pharmaceutical giant in June 2008, she has shifted all of its legal matters to a flat fee basis. She said her department has consolidated 75% of its work with 20 firms "committed to a longstanding relationship" with the company.

When Pfizer has increased the amount it is paying a firm, the company – and not the firm – initiated the increase, Schulman said. "If I don't penalise you for doing our work efficiently and in fact I reward you, then you are going to put the most efficient people on our matters, which will free you up to do other work," she explained.

Altria's Garnick admitted: "It can be difficult to create a structure that works to everybody's satisfaction." A firm is disguising hourly billing as value billing if it merely estimates the number of hours it would spend on a case and derives a flat fee from that, said Garnick, who joined Altria three years ago after 23 years at Arnold & Porter.

"With tight project management, value billing can work," Garnick maintained. And fixed fees can provide stability for outside firms if they promote a long-term relationship with the client, Garnick said. He added that he is increasing the percentage of his organisation's legal spend on such arrangements.

The panellists acknowledged that value billing arrangements can be at odds with law firm compensation systems that reward lawyers for the number of hours billed.

"We care a lot about how our firms measure value internally," Schulman said, adding that firms that track hours to assess lawyers' performance and compensation "are not getting our system". She advocated a "tiered competency" approach that uses factors other than hours billed for compensation.

Boies agreed that compensating lawyers based on hours billed is the "most corrosive way to judge performance". He said his 200-lawyer firm is adding other measures, such as the quality of assignments that the lawyer works on. But he acknowledged that switching away from tracking hours billed can be difficult at afirm with a lot of lawyers.

This article first appeared in Corporate Counsel, a US affiliate title of Legal Week.