AFA | Lamiroy Consulting Blog

In our series on Alternative Fee Arrangements (AFAs), which focuses on alternatives to billable hours, this article deals with subscription billing.

What is subscription billing? Kimberly Bennett describes a subscription-based law firm as one that “offers clients legal services for a flat monthly fee. Clients ‘subscribe’ to a legal services plan. Depending on the firm and plans available, clients benefit from services such as unlimited legal advice, document review, and business planning.” Basically, the lawyer plays the role of an in-house counsel or legal department for clients who don’t need a full-time legal department.

Why would one consider offering subscription billing? What are the benefits? It turns out there are several.

A first set of benefits has to do with predictability, both for the clients and for the law firm. Unlike with billable hours, the clients know the exact costs in advance, and they know the value they will be receiving for that cost. And the law firm, too, knows in advance exactly how much it will be receiving from its clients with a subscription.

A second set of benefits is partly a result of this predictability. Subscriptions lead to better relationships and increased satisfaction. A client doesn’t have to worry about how long a phone call to his or her lawyer will take, or how often he or she can call a lawyer. As a result of this, clients can be proactive in understanding their legal options. They can reach out to get answers before a small problem becomes a big problem. By developing an ongoing relationship this way, a subscription-based law firm gets to know a client better, as it learns about their businesses needs. The lawyer becomes a part of the client’s team.

Subscription billing also eliminates the pressure to constantly be billing and performing billable hours. As a lawyer, you know how much time on average you’ll spend each month on each client, which in turn allows you to better plan your time, allowing to set time aside for research and development.

Last but not least, there is the aspect of scalability. With billable hours, there is a limit to the number of hours you can charge each month. If you start productizing the legal services you offer, and automating the workflows, there is no limit to the number of clients you can take on.

So, how does one go about setting up a subscription-based law firm? There are three aspects to pay attention to: determining a price model, productizing your offerings, and implementing technology to maximize efficiency. Let’s have a closer look at those.

Determining a price model and setting a price: there are several options. You could work with a fixed monthly flat fee that covers everything. This seems to be the most commonly used model. You could work with different tiers which entitle your client to different amounts or types of work. Some work with a fixed fee that entitles the client to a certain amount of work and charge separately if certain margins are exceeded. The safest way to then set the price is to consider the work you’ve already done in the past for this client and calculate the monthly average. It is probably a good idea to allow for regular evaluations in order to get to a system that everybody is happy with.

Productizing your offerings: it is important to determine the scope of what you are offering and what legal services are covered. E.g., is litigation included? If you don’t determine the scope, clients may try and take advantage of you. In this context, offering different tiers may again be a good option. With subscriptions, law firms often focus on a vertical niche, targeting specific clients with specific needs.

Implementing technology to maximize efficiency: you want to automate your workflow as much as possible, which will result in optimal productivity and profitability. Remember the scalability: greater efficiency allows you to take on more clients with little extra overhead.

Switching to a subscription-based law firm does come with its own challenges. Finding the ideal pricing model and price may take some effort. You also may have to overcome some client hesitations. And it isn’t always easy for lawyer to shift to a more modern mindset where they see themselves as a company that offers legal services.

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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?

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.
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.
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).
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).
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.
Cost-plus model: the cost-plus model means that the client reimburses the costs the law firm makes, in addition to a reasonable profit.
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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