By LISA VAN DER POOL
Boston Business Journal

The way some people tell it, law firms have begun to sound more like used-car companies, offering up deep discounts and alternative-fee arrangements.

Alternative fees, discounted billing rates and fixed fees are becoming more and more common in the legal world, although it remains to be seen just how cost-effective those discounts are.

"It's incredibly easy to get discounts," said Jay Shepherd, founder of the Boston-based Shepherd Law Group. Shepherd has famously shunned the billable-hour model in favor of fixed-fee arrangements.

"I've talked to many in-house counsels who say, ‘I just make a phone call, and I get a discount.' Law firms are doing something that car companies did about a year ago, with the employee discount pricing," he said. "It becomes a frenzy of discounting."

But, according to Shepherd, hourly discounts can backfire for all involved.

"Discounting is stupid for law firms and clients," said Shepherd. "For firms, it sends the message that the services aren't worth what they're charging. It's foolish for firms because it devalues the work that they're doing. For clients, it's like shuffling deck chairs on the Titanic. In-house counsel can report back to the CFO that they got a discount. But it's a shell game. Law firms give you the discount you ask for, but they get you somewhere else with the inefficiency."

According to a recent National Law Journal survey, the number of law firms employing "alternative-fee arrangements" increased to 57 percent this year over last year. Even so, according to that same survey, most law firms hiked rates at the end of 2009, although the average increase was only 2.5 percent to $372 an hour.

The main issue - some say conflict - that comes into play is that law firms need to charge a certain amount to maintain profits, whereas clients are after value and quality. Once a rate is discounted, some lawyers call into question whether the legal services delivered will be as high-quality as they were at a higher rate.

It's tricky for law firms to discount rates more than 10 percent without cutting into profits, said Paul Clifford, principal at Law Practice Consultants LLC.

"Law firms are being dragged kicking and screaming" into doing alternative-fee or fixed-fee arrangements, said Clifford. "They would frankly prefer to do the billable-hour rate, because it's a heck of a lot easier to figure out. There's quite a bit of uncertainty around the economics of alternative-fee arrangements."

Clients "don't even have to look sideways" before a law firm offers a discount, according to Christopher Mirabile, managing director of the angel investment firm Race Point Capital Group LLC and president of the Association of Corporate Counsel's Northeast chapter.

Mirabile notes that because it costs more money to find a new client, law firms are willing to bend over backwards to keep an existing client.

"The basic disconnect is that the pricing of law firms is not connected to the value, it's connected to the cost of running a law firm," he said.

Law firms seem outwardly committed to figuring out what the new billing paradigm will be in the coming years.

"We've focused a lot on alternative-fee arrangements, including fixed fees and flat rates," said Matthew Holian, a partner in the Boston office of DLA Piper, which has 55 lawyers in its Boston office and total of 3,700 lawyers globally. "For alternative arrangements to work well, there has to be this depth of engagement."

Boston-based Sherin and Lodgen LLP, meanwhile, offers 15 percent discounts for green projects that are registered with the Leadership in Energy and Environmental Design program or LEED-certified.

"We're very thoughtful and selective about situations where we do give a discount," said Ronald Ruth, managing partner of Sherin and Lodgen, which has 45 lawyers.