While writing my article about alternative fees that recently appeared in the New York Law Journal, Download alternative_fees_ny_lj_april_17_2008.pdf
I thought about some of the ethical pressures of billing arrangements that are not based on chargeable hours. Both law firms and law departments face these conflicts.
Fixed fees permit law firms to enjoy windfalls – not unethical but it leaves a poor taste – and may cause them to slack off if the fee runs out before the work. Law departments may fail to disclose enough information for law firms to arrive at a reasonable flat fee for a bundle of work. Both sides shelter behind self-serving information asymmetry (See my post of Jan. 1, 2008: agency theory; Jan. 28, 2007: more on moral hazard; Dec. 23, 2005: asymmetric information and outside counsel; Sept. 22, 2006: challenges to rationality; Jan. 13, 2006 #1: asymmetric information in outside counsel relations; July 14, 2006: adverse selection; and Aug. 13, 2006: moral hazard and law departments.).
Blended rates may push firms to delegate too much work too low in the firm; law departments might expect too much time from partners.
Discounts lure law firms into padding hours, while law departments play fast and loose with claims for money saved (See my post of April 8, 2008: billing padding with 8 references.). A whiff of collusion can even be sniffed: “You promise me a 10% discount and I won’t check very hard to see what’s been billed.”
Unit billing encourages law firms to subdivide matters and game the system with HMO practices. As for law departments, they push to aggregate matters so that the unit cost covers more work.
With value-based arrangements, law firms might withhold effort if the payoff seems too remote or uncertain and law departments might take too short-term a view on costs over relationships and outcomes.
Having acknowledged some of the ethical holes in alternative billing, I know full well that hourly billing marches on in a swirl of ethical perils.