As law firms and businesses struggle to maintain profitability after the 2008 financial crisis and recession, corporate counsels have been looking for ways to gain more predictability in legal spend. One of the most popular ways to gain predictability in spend is through the use of alternative fee arrangements (AFAs). An increasingly common practice in AFAs is the request by the client for firms to submit “shadow bills.” “Shadow billing” is a practice where a firm submits a fee for an alternative billing arrangement along with invoices outlining the actual hours and work performed. This 2-part blog post reveals why shadow billing tends to be controversial, two scenarios where shadow billing is necessary, and how to get the full benefit from shadow billing.
Controversy around shadow billing
Clients requesting shadow billing in conjunction with a fixed price structure often meet opposition from law firms. This is due to the fact that some firms see it as a lack of trust in their ability to invoice fairly for the work completed. But, law firms need to be cognizant of the fact that clients are under the stress of keeping costs under control. Sharing information with the client as to the actual hours billed can build trust and allow for more transparency in the relationship. Additionally, in the beginning of a fixed fee arrangement, providing hourly information could help both parties. Looking at hourly costs versus the fixed fee can assist the firm in evaluating risk and managing the case to ensure that the client is saving money and the firm is remaining profitable. For the client, having access to the shadow bills allows them to make educated decisions on the benefits and drawbacks of fixed fee arrangements versus hourly billing. Shadow bills also provide clients a clear-cut way to manage cases; for example, the client will be able to see if the firm is spending too much time on a specific aspect of a case and ask the firm to adjust their time accordingly. Also, shadow billing allows the client to still use a fixed fee arrangement but track and report on data elements supplied by hourly billing.
When you need shadow billing with an AFA
Capped fees with shared savings
Capped fees, common in transactional work, are often proposed in highly competitive situations. With a capped fee arrangement, the client agrees to pay the law firm a flat amount unless their hours come in less. If the hours come in less, the firm charges the client the lower rate. In this pricing scenario, some argue that it incentivizes the law firm to bill as close to the cap as possible. However, clients gain the benefit of predictability in costs.
Next month, we will review another example of a pricing scenario that requires shadow billing along with a review of how to get the full benefit from shadow billing.