Tag Archives: billable hour

Alternative Fee Arrangements – What and Why

The market of legal services is experiencing unprecedented and profound changes. In recent years, we’ve seen the rise of alternative legal service providers (ALSPs), and a rapid increase in the use of Artificial Intelligence. We now even have legal chatbots and robot lawyers, and some of them are offering free legal services. The legal consumers are embracing these changes: in a recent survey in the UK, seven out of ten respondents would prefer to use a robot lawyer to a human one! This should not come as a surprise, and the culprit can easily be found: Billable hours are one of the main reasons legal consumers are reluctant to consult a lawyer.

In the past, we have written about the death of the billable hour. With the current evolutions in the legal market, that demise is more imminent than before. And there are plenty of good reasons to kill it off, and to start focusing on Alternative Fee Arrangements (AFAs).

So, what are Alternative Fee Arrangements? There is not standard definition, but basically any arrangement where the client is not charged by the hour is an Alternative Fee Arrangement. (There is debate about whether volume discounts are an Alternative Fee Arrangement or not, but that discussion is largely academic).

There are different types of Alternative Fee Arrangements. In the article on the death of the billable hour, we payed attention to:

  • capped fees,
  • fixed and flat fees,
  • contingency agreements (where payment depends on the result),
  • holdback (payment in phases and dependent on whether certain conditions are met),
  • blended fees (lowering the cost of billable hours by delegating),
  • cost-plus model (cost plus reasonable profit), and
  • subscription billing (where the client pays a recurring fee to take care of its legal business).

Why opt for Alternative Fee Arrangements? All the arguments in favour of AFAs are the arguments against the billable hour.

From the point of view of the legal consumer, billable hours undoubtedly offer a lousy consumer experience. First, there is a fundamental double uncertainty: the client does not know in advance how much it will cost to address his or her legal issue, and if litigation is involved does not know what the end result will be. So the legal consumer is expected to commit to paying an undefined amount of money for an unknown result.

There also is the factor that being charged by the hour is always perceived as expensive. And the fact that the client is being charged for everything, including communications does not really make sense. Imagine you have a computer or car problem, have it fixed, and when you receive the bill, you are also charged for phone calls and consultations, on top of the actual repairs.

For lawyers, too, billable hours have negative side-effects that affect the overall productivity of a law practice. As you constantly have to keep track of everything you do, it necessitates a lot of extra administration. A survey published a year ago revealed that only 29 % of the time a lawyer spends working is billable, and that the rest was mainly administration, as well as some time spent on acquiring new cases. Add to that, as mentioned above, that the fact that clients are being charged for communications can easily become an obstacle for clear and essential communications.

Recent progress in the fields of Artificial Intelligence and process automation further illustrates that charging by the hour becomes less and less meaningful. How much time are you going to charge, e.g., for a contract that is compiled or reviewed by an AI system in seconds? Or what about eDiscovery, where computers can scan thousands of documents in minutes for relevant information, where it would take days to do the same manually?

In short, as the legal market is changing, the demand for Alternative Fee Arrangements is only expected to grow. In future articles, we will have a closer look at some of these Alternative Fee Arrangements.

 

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The Death of the Billable Hour

In recent weeks, several articles have been published that proclaimed the death of the billable hour. One author declared that he could confidently state that the “traditional” hourly billing is dead. Another even wrote a eulogy. Most of these articles refer to the 2017 Report on the State of the Legal Market, released on 12 January 2017 by Georgetown Law’s Center for the Study of the Legal Profession and Thomson Reuters Legal Executive Institute.

The publication of the report was accompanied by a press release that stated: “The billable hour model of decades past where law firms experienced little pushback on rates or number of hours spent is effectively dead, and the traditional law firm franchise is increasingly at risk after a decade of stagnant demand for law firm services.

In a comment on the report, the American Bar Association (ABA) Journal observed that “largely because of budgets and caps imposed by clients, 80 to 90 percent of law firm work is done outside of the traditional billable hour model, according to the 2017 Report on the State of the Legal Market.

The report itself explicitly says: “One of the most potentially significant, though rarely acknowledged, changes of the past decade has been the effective death of the traditional billable hour pricing model in most law firms, (…) Plainly, the imposition of budget discipline on law firm matters forces firms to a very different pricing model than the traditional approach of simply recording time and passing the associated ‘costs’ through to the client on a billable-hour basis.

The report found that the death of the traditional billable hour is due to the rise in so called “Alternative Fee Arrangements” (AFAs). The most common alternative fee arrangement, good for 65-70% of revenue in law firms, are capped fees, which means that cases are allocated a specific budget. Other alternative fee arrangements are being used, too, but amount to only 15-20% of revenues. Combined, this means that the alternative fee arrangements may well account for 80-90% of all revenues.

So, what are the alternative fee arrangements that are being used?

  1. Capped Fees: under a capped fee agreement, the client pays on an hourly basis, but the law firm agrees that the total bill will not exceed the capped amount. A cap is often accompanied by a minimum fee, which together are sometimes referred to as a “collared fee” agreement.
  2. Flat Fees / Fixed Price: the firm agrees to represent the client in exchange for a specified fee, i.e. at a fixed price, regardless of the number of billable hours. Because it can sometimes be hard to predict how a case will go, sometimes variations on the flat fee are used where parties agree, e.g., to a flat fee per stage, etc. Sometimes flat fees are combined with performance bonuses, where the law firm can charge an extra amount if the case is won, e.g.
  3. Contingency / “no cure, no pay”: in a contingency agreement, the law firm only gets paid if it wins the case. (Contingency agreements are illegal in some countries, like, e.g., Belgium).
  4. Holdback: traditionally, a holdback is a sum of money that remains unpaid until certain conditions are met. As an alternative fee arrangement, the law firm and its client agree on percentages of billable hours, where what is actually paid is determined by different criteria the parties set. (E.g., if the case is lost, only 75% of the fees will be paid).
  5. Blended Fees: with blended fees, the client pays the law firm a specified hourly rate, regardless of the individual lawyers’ hourly rates. This incentivizes the firm to appropriately delegate to less expensive attorneys rather than have its more expensive attorneys working at substantially reduced rates.
  6. Cost-plus model: the cost-plus model means that the client reimburses the costs the law firm makes, in addition to a reasonable profit.
  7. Subscription model: in a subscription model, the client pays the law firm a recurring fee to take care of all its legal business.

 

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