David Feldman's book, Reverse Mergers: Taking a Company
Public Without an IPO, now in its third printing, was published in 2006
by Bloomberg Press (available on http://www.amazon.com).
View David Feldman's reverse merger blog at www.reversemergerblog.com.
Joseph Smith and David Feldman are coauthors of PIPES:
Revised and Updated Edition - A Guide to Private Investments in Public Equity
(Bloomberg Press, 2005) available on http://www.amazon.com.
In the News
David
Feldman is quoted regarding the firm's
"flat fee" approach in Crain's
New York Business on June 16, 2003.
Lawyers
v. clients: Fee wars intensify Focus
on policy of billable hours
by
Tommy Fernandez
Ali
Rifai hates it when a law firm uses
seven attorneys to handle his company's
legal affairs when he could have sworn
he'd hired only one. He also hates it
when a firm insists on billing for a
minimum of 10 hours of work to prepare
a document that he could write himself
in five.
As vice president in charge of legal
counsel for Manhattan-based insurer
Centre Group Holdings (U.S.) Ltd., Mr.
Rifai constantly fights law firms over
their rising costs. He even fires them
if they refuse to make concessions.
"They just keep overstaffing projects,"
he says.
Corporate clients are pulling in the
reins on their law firms with an intensity
not seen since the recession of the
early 1990s. As in other tough times,
many buyers of legal services are conducting
fee audits, assuming more control over
project staffing and cutting ties to
the priciest firms. But now there's
a new litmus test: whether lawyers are
willing to modify or even eliminate
their billable-hours policy, which many
argue has been a chief culprit in fee
inflation for years.
The latest round in the battle to roll
back legal bills began two years ago,
shortly after the economy went sour.
Last year alone, 55% of corporations
either fired or considered firing their
outside counsel, largely because of
cost issues, according to a survey conducted
late in 2002 by legal consultants Altman
Weil Inc. and the American Corporate
Counsel Association.
Let's chat
That trend contrasts sharply with the
boom of the 1990s, when many clients
were willing to write blank checks for
legal services. Now, says legal consultant
Arthur Levin, company executives are
having long talks with their attorneys
about how the lawyers do their jobs,
how they build up costs and who handles
projects.
"Firms are going to have to operate
with a style that is more user-friendly,
providing services that are better thought
out and more focused to the client's
needs," says Johnnie M. Johnson, a legal
consultant who retired last year as
corporate counsel for Olin Corp. "Overstaffing
projects with multiple lawyers will
become a thing of the past."
Conflict of interest
The issue of firms billing by the hour,
a practice that dates back to the 1960s,
has generated the most heat in the tussle
over fees. Clients have long bridled
at the system, which they say gives
lawyers an incentive to rack up excessive
hours and use more staff than is necessary.
Those hours are pricey, too. Senior
partners at the city's top firms command
an average of $800 an hour, while associates'
rates are about $450, according to Manhattan-based
recruiting firm Strategic Legal Solutions.
At boutique practices, rates for partners
average $325 per hour and those for
senior associates are around $275.
"Billable hours represent an
inherent conflict of interest for the
lawyer," says David Feldman, managing
partner of Feldman Weinstein, a 14-lawyer
firm based in midtown Manhattan. "The
lawyer wants to run up as many hours
as possible."
Clients now have the advantage in pressing
their case, as the limping economy finally
cuts into demand for legal services.
In the past 15 months, the number of
hours billed by firms across the country
rose by just 3%, according to Dan DiPietro,
head of the law firm financial services
group at Citigroup Private Bank. That
compares with double-digit annual growth
rates that prevailed for almost all
of the 1990s.
Seizing their moment, some clients are
pushing for a return to the way that
lawyers charged in the old days: via
negotiated fees.
A number of law firms are happy to oblige.
Feldman Weinstein offers flat fees
for handling corporate transactions
like private placements, mergers and
venture capital deals. The fees are
established during initial consultations
in which lawyers gauge the complexity
of a case.
Paying for results
Carter Ledyard & Millburn, a 120-attorney
Wall Street firm, provides clients with
another alternative to billable hours.
It, too, uses a flat fee to cover costs,
but it adds a performance-related component.
If a client's deal succeeds, Carter
Ledyard gets a bonus. If the deal craters,
the firm takes a pay cut.
"Clients like it because your interests
are aligned with their interests," says
partner James Abbott.
Other firms now offer clients a mix
of fixed and hourly rates. Greenberg
Traurig, which has 200 attorneys in
its New York office, will perform many
"commodity" services, such as drafting
documents, under its standard monthly
retainer.
For more complex services such as mergers
advice that rely more heavily on a lawyer's
specialized knowledge to achieve the
maximum benefit, clients negotiate fees
based on what they believe the lawyer's
expertise is worth.
Killing the clock
"With a flat fee for access, the
client doesn't feel like the taxi meter
is running every time he gets on the
horn with me," says Edward Wallace,
head of the firm's government practice.
Not surprisingly, other lawyers insist
that efforts to do away with billable
hours will hurt clients in the long
run by giving them lower-quality legal
work.
"To be penny-wise ... with the
organization that is going to be intimately
involved with the most sensitive issues
of your company doesn't seem prudent
to me," says David Scherl, managing
partner of Morrison Cohen Singer &
Weinstein. "It is better to have a well-motivated
firm."
However, growing numbers of clients
are willing to take the risk of demanding
that law firms adopt more workable policies,
especially when it comes to basic services.
"In our business, if you offer
an insurance product to somebody, you
set a price," says Centre Group Holdings'
Mr. Rifai. "You don't go back to the
client to keep asking for more money."
