The Defence Materiel Organisation (DMO) is in negotiations with its legal panel over a possible alternative billing arrangement in a sign that the desire for fixed-fee and other non-hourly billing methods has spread from private-sector clients to public-sector clients.

“DMO does not have alternative billing arrangements with its panel firms but is exploring whether alternative arrangements could be established that would deliver better value for money, including possibly a fixed fee arrangement,” a Department of Defence spokesperson told ALB. The DMO is likely to be the first of many federal government agencies seeking to arrange a fixed fee billing after a report examining the Commonwealth’s procurement methods highlighted the benefits of the arrangement.

“In some cases the strength of the relationships with external service providers and the predictability of service requirements has enabled organisations to enter into fixed fee/risk sharing relationships with their external service providers,” the report says. “In essence this arrangement shifts the risk of inefficiency to the service provider, but the predictability of revenue enables the service provider to allocate dedicated resources to the particular client. It also holds out to the service provider the incentive of above-normal profits if the work can be carried out with greater efficiency.”

The first major fixed-fee arrangement came in November when Telstra and Gilbert + Tobin came to an agreement whereby Telstra will pay G+T a fixed fee – believed to be A$10m-A$15m – and receive as much legal advice as they need. The agreement includes conditions that would result in G+T receiving more money if Telstra uses more than a certain number of hours or providing Telstra with a rebate if the company uses less than a certain number of hours to ensure that neither party is taking on an open-ended risk but, for the most part, it represents a genuine fixed-fee arrangement. The deal is for four years with a price review after the first year.

The Telstra/G+T arrangement came as a result of Telstra issuing a tender to its legal panel seeking an innovative billing arrangement at the start of 2009. The company had been working on a fixed-fee basis on particular matters with a few of its law firms but never on the scale of the G+T deal.

“G+T came back with a very innovative proposal at a scale that, to be frank, I wasn’t initially expecting,” Telstra GC Will Irving says. “We were expecting a number of firms to come in with specific fixed-fee arrangements or blended rates or success based feesand they came in with something that was pretty much an across-the-board proposal.”

While Telstra does not reveal its exact arrangements with the law firms on its panel, Irving says that about 30% of the company’s external legal spend is accounted for by alternative billing. He says that the right balance would be about a 50/50 split of fixed and hourly billing.

G+T managing partner Danny Gilbert says that clients want to get the sense that they are receiving value for money. The deal with Telstra was possible, he says, because Irving understands law firms and was willing to negotiate a deal that was mutually beneficial.

“Where you’ve got clients that just want to win all the time on the pricing, it just won’t work,” Gilbert says. “Where you’ve got clients who just want to absorb your entire margin either through discounts or fixed-price arrangements then nobody wants to do their work – the relationship can’t blossom in those circumstances.”

Gilbert says that the arrangement with Telstra that has made the firm focus very hard on the management of relationships with clients. “I think it does focus the mind on efficiency because you don’t have the clock just ticking away,” he says. “You know that whether you spend an hour on a job or 10 hours on it, you’re going to get paid the same.”

In an interesting development, the focus on efficiency has spread from G+T to other firms on Telstra’s panel – those without fixed-fee arrangements in place. Because they are competing for work against a firm that has a very low cost as far as Telstra is concerned, the competing firms have to ensure that they provide attractive estimates.

“You bring a disruptive player into any market and you will change the economics for the whole lot and you will give people incentive to find better ways of doing things,” Irving says. A lawyer for one of the firms on Telstra’s legal panel told Irving that the firm is using the discipline it has learned from the Telstra experience when pitching new clients.

The disruptive force is likely to grow as other companies and government agencies follow the lead of DMO and Telstra. Beaton Consulting principal Joel Barolsky, who works with law firms to develop the billing and remuneration structures, says that an increasing number of clients have been asking about alternative billing methods and the best way to implement them, and that the deal between Telstra and G+T will only continue that trend.

“That’s a pretty radical alternative fee arrangement that was struck between one of Australia’s largest and most sophisticated buyers of legal services and a leading firm,” Barolsky says. “When in-house counsel sees market leaders like Telstra embrace alternative arrangements, they look to follow those early adopters.”

However, Barolsky says it is important to ensure that the arrangement is fair to both side. “We’ve seen arrangements that are significantly unfair to one side and, over time, those break down the level of trust between the parties and the relationship often sours as a result,” he says.

At the end of the day, it is a horses-for-courses situation. Some legal work lends itself nicely to fixed-fee billing, which can provide income certainty for law firms and risk sharing for in-house counsel. Other work is better suited for traditional hourly billing. A winning arrangement will be one that benefits both parties equally – that is why the Telstra/G+T arrangement is working so well.

“It’s working for Telstra and it’s working for us,” Gilbert says.

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