Even with the struggling economy as a potential catalyst, movement toward alternative fee arrangements—and away from the billable hour—continues to be fitful. That’s the overarching theme that emerges from a new report produced by Am Law Daily affiliate ALM Legal Intelligence.
The report, “Speaking Different Languages: Alternative Fee Arrangements for Law Firms and Legal Departments,” finds that while 62 percent of the law firms and half of the in-house legal departments surveyed say they have seen an uptick in the number of alternative fee arrangements (AFAs) employed since the start of the economic downturn, hourly billing remains the norm.
Indeed, just 6 percent of law firm respondents say they relied on AFAs for more than half of their legal work in 2011, while only 12 percent of in-house departments say they employed them for work given to outside counsel.
The report—conducted along with legal technology company LexisNexis—surveyed 194 respondents from Am Law 100 and NLJ 250 law firms and 141 respondents from legal departments at a range of companies about their experiences with fee agreements not tied to the billable hour.
As David Susler, associate general counsel of National Material LP, said in his response to the survey, alternatives to the billable hour aren’t new. “The hourly billing became king in this country only within the last 25 or 30 years,” said Susler, who added, “There are countries where billable hours are unheard of.”
Still, circumstances have forced law firms and corporate legal departments to consider alternative fee arrangements more seriously in recent years. The increased focus hasn’t, however, prompted a significant rise in the reliance on such arrangements, the report finds. As to why that is so, the report suggests a number of factors may be at play and indicates that legal departments and law firms are split on what they view as the reasons the industry has been slow to embrace AFAs.
Among the survey’s key findings:
• Legal departments say they mainly use AFAs to rein in costs and increase efficiency. Law firms say they use AFAs mostly to attract clients, as well as to simplify billing and operations.
• Most legal departments report using e-billing software designed for tracking alternative fees, while most law firms say they primarily used accounting software.
The report does show law firms and in-house legal departments agreeing on some points. For instance, 52 percent of law firm respondents and 61 percent of legal department respondents cite firms’ comfort with the billable hour as a top obstacle thwarting AFA growth.
Another area of consensus: 93 percent of law firm respondents and 89 percent of law department respondents cite flat fee agreements as their preferred alternative fee arrangement. Blended rates and capped fees are also popular with both in-house counsel and law firm partners.
The report also shows that competitive bidding and reverse auctions have begun to hit the legal sector. One in five legal department respondents say they have sought outside counsel for high-volume repetitive work via bids, while one in three law firm respondents say they have participated in such a process.
To download the full report, click here.