It may seem odd to jump from speaking about the “pinnacle” of the alternative arrangements (the fixed fee) to what many consultants believe is not an alternative arrangement at all, the blended rate. The reason for the jump is simple. I have had several recent debates with consultants and counsels alike on the merit of blended rates falling into the alternative category and I feel it is an important discussion to address. Do enough research and you will see a common theme on why many believe it is not an alternative, and is rather just another form of discounting. The basis for that argument does have merit. Blended rates by nature still hold onto the billable hour mentality and therefore do not provide absolute cost predictability for the client. Several consultants have taken an additional step and say that just like typical discounting arrangements, the blended rate provides incentive for firms to rack up additional hours and then leverage without passing along any savings to the client.
I think these arguments hold validity, but my opinion generally falls in opposition of the viewpoint that because of these factors the blended rate is not an alternative arrangement. In fact I think it is a very viable alternative arrangement for both firms and clients as they work to hone their project management skills. Furthermore it is an alternative arrangement that can be used for work that has inherent unpredictability. The idea that the blended rate does not provide absolute cost predictability to the client is true but it does provide predictability at least to the dollar placed upon the unit of measure that drives cost. I am huge fan of this arrangement especially in areas where firms and clients alike are figuring out the value delivered in an effort to get to a level where there is comfort for a fixed fee.
A blended rate does provide incentive to the firm to be more efficient as having high rate timekeepers working on low blended rates does not make sense, but I would also argue that both in-house counsels and the firm track the work that is being done. Trust must be built through any of these arrangements.
I recall a panel I was on about a year ago where one of the panelists said that there is no incentive for lawyers to watch their billable hours but plenty of incentive to rack up costs to the client. It is a very common statement and one that has some truth behind it, but I distinctly remember the reaction of a lawyer that I have come to respect who said that lawyers absolutely have an incentive. Their incentive is to have happy clients who are getting excellent service without paying too much for it. If lawyers don’t succeed with that because they hike up the costs those clients will move on. That point is also fair and has a lot of truth behind it especially in a down market. That is why I don’t subscribe to the idea that blended rates are just another way to rack up the hours. I think it is a way to provide the client some predictability, while providing incentive to the firm to be efficient and learn project management skills that will benefit both client and firm in the future.
Given that most outside and in-house counsels are very familiar with the hours and rate structure, the blended rate can be an early alternative arrangement to get both parties used to a new way of doing business. They are easy to negotiate, easy to track, and easy to manage. They also provide incentive for senior partners to leverage lower level timekeepers. This is a positive but can quickly turn to a negative. If the lower level attorneys are working more hours to make up for the lack of experience, then the benefit of the blended rate is lost. In addition there is a concern that the quality of work can suffer. It is up to the responsible attorney to ensure these negative side effects do not take place.
Although it is not my favorite alternative arrangement, the blended rate still falls into the category of alternatives. You simply cannot ignore that it is a viable option for firms and clients looking to begin a shift in their business model. It provides some predictability to the client and incentive for efficiency gains to the firm. It is also a fine alternative for those matters that have too much unpredictability causing both parties to be comfortable with the hourly rate structure.
I have had discussions with attorneys that there are certain matters or phases of a matter that just simply cannot have an alternative arrangement and must be billed hourly. My response to them is the blended rate; still hourly and still an alternative.