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.