Aderant Think Tank: Is Time Running Out on the Billable Hour?aderantuser
Based on the evidence, it certainly appears that non-hourly billing alternatives are quickly gaining ground on the venerable billable hour in many U.S. law firms. In one of those bell-weather stories whose implications only become clear as time passes, the Texas Lawyer reported last year that so-called “alternative fee arrangements” (AFA’s) were being used by 89 percent of the law firms in their 2013 Salary and Billing Survey. In a more subtle undermining of the billable hour 80 percent of the Texas firms also reported offering discount fees or rates to their clients.
The Consero Group reported in their General Counsel Survey last year that “a majority of the survey participants also noted that they currently use alternative-fee arrangements with outside counsel, and that they plan to increase their use of such arrangements over the next 12 months.”
While this billing trend began before the 2008 financial crash, the tepid legal recovery that followed has hastened and expanded it. The most likely explanation is a marked increase in client leverage at the bargaining table. The Economist noted in January that “lawyers’ biggest customers are discovering that they can haggle”. The magazine wrote that since the financial crisis “the proportion of standard rates that firms collect in practice has been sliding.”
With change comes opportunity, however. Many firms have already used this moment to expand their fee offerings, and the complexity of client financial arrangements has increased dramatically. The graphic from the ABA Journal below shows that firms are largely satisfied with AFA’s and see big advantages in their growth, including cost control and client retention.
Moreover, consultants who advise law firms have already developed new and creative fee arrangements to supplement (or replace) the billable hour, including: fixed price, capped fees, billable hour plus floor and ceiling, blended rate, days rates/week rates, success fees, holdbacks, firmwide volume discounting, firmwide marketing discounting, litigation financing, hard-line estimates, settlement insurance.
In addition the use of “secondments”, or a seconded-attorney placed with a client at a fixed term and cost, is now fairly commonplace. These developments are largely driven by client-side economic considerations and law firms are having to adapt.
From my perspective I see this trend continuing and accelerating with client requests becoming even more complex. The winners will be those firms who possess the technology that easily and simply facilitates these new requests but more importantly enables the firm to proactively offer new creative billing arrangements that are profitable to the firm.
Do you agree? Is your firm embracing the AFA trend?