Robert D. Lang and Lenore E. Benessere (Courtesy photo)
The “billable hour,” often questioned by both attorneys and clients, but for different reasons, has long been the most accepted way for attorneys to charge their clients for legal services, especially civil defense attorneys. This fee-for-service model is simple and familiar. Clients in need of legal services retain law firms, who work on the clients’ cases and then bill them for the amount of time it took to complete various tasks. Attorneys and staff members are billed at different hourly rates, depending on their experience. Clients pay the law firms for the time spent litigating their case. Simple and straightforward, the billable hour model may always be the “norm” for service-based industries, such as attorneys, architects and accountants.
However, this is far from the only pricing model available. Some clients prefer, and benefit from, an Alternative Fee Arrangement (AFA). AFAs are broadly defined as “a fee plan that is anything other than straight, unlimited billing by the hour.”1 Accordingly, when we talk about AFAs, we are really talking about alternatives to the long-standing billable hour pricing model. One type of AFA is the flat or fixed fee arrangement common to transactional attorneys when drafting wills or representing clients during real estate closings. These arrangements are defined as a “set fee for an entire matter or specified portion of a matter.”2
Recently, those lawyers, especially defense attorneys, who have been sitting on the fence, somewhat afraid to try alternative fees, preferring instead to stay comfortably with the business model with which they grew up, have been jolted by Microsoft’s announcement last month that it will shift 90 percent of its legal work to AFAs within two years. The giant multinational technology company’s decision sent shockwaves through the legal community because it is yet another example of a large company rejecting the billable hour model for non-traditional pricing of legal fees.3 Coincidentally, on the same day the Microsoft decision was announced, there was also a published report of a law firm’s AFA’s experience with Uber, another leading technology corporation, where problems stemming from tight, but agreed-upon rates, including fixed fees for tasks such as answering a complaint or drafting a settlement agreement, caused the firm to terminate its relationship with Uber.4
Like Blockbuster succumbing to Netflix, Kodak film being replaced by digital prints or CDs giving way to iTunes, attorneys do not want their firm to become a case study at Wharton for how the billable hour was replaced by AFAs. Therefore, the immediate response of some attorneys, including major law firms, has been to reject the billable hour, which sometimes is said to reward inefficiency, as the only pricing model considered by law firms if they wish to attract and maintain large books of legal business.5 While the complete rejection of the fee-for-service model is probably an overreaction, practitioners should learn from the paradigm shift at Microsoft how to successfully enter into, and profit from, AFAs. If nothing else, the recent Microsoft and Uber developments show that, while AFAs may be increasing in popularity, they must be entered into carefully and executed with precision in order for both sides to derive benefits that lead to a long and productive relationship.
AFAs that are not carefully negotiated can result in one or both parties concerned that they have not received the full benefit of their bargain. One way to avoid this pitfall is to establish a relationship of mutual trust based on a true partnership between the law firms and their clients. Trust is essential because clients that choose a flat fee model with additional incentive bonuses for quick resolution of cases could believe, rightly or wrongly, that their attorneys are overvaluing cases merely to “get rid of them” and receive their bonus. Two ways to address this issue is to communicate with your clients openly and often and encourage a team-oriented approach. Both the law firm and the client should work together to devise and follow the desired litigation and settlement strategy. Attorneys must also focus on their roles as counselors and provide legal advice to their clients regarding why a certain value is appropriate to settle a claim and present their clients with facts to support the validity of that advice.
Attorneys should also use their own “special sauce” when preparing AFA proposals, taking into consideration the amount of work needed to achieve their clients’ goals. While litigation may be unpredictable, there are ways to evaluate your practice to quantify the capital needed to fund a flat-fee arrangement and employ safety gauges to ensure fairness. One such safety gauge is a “price collar”, which allows law firms to receive partial compensation if their actual fees rise considerably above an agreed upon amount.
Although AFAs may present challenges, in this increasingly metrics-driven world, they can provide benefits to both parties. Most obviously, predictability is beneficial for everyone. For the insurer/self-insured, there is confidence in knowing with certainty the “legal spend”, with no surprises at the end of the year when the projections or budgets are matched against the amount of money actually incurred on legal defense. For the law firm, there is certainty in the amount of money which will be paid to the firm for the defense, or over the course of the projected time period, again, holding no year-end surprises. With AFAs, lawyers will not be called on to implement the annual exercise of calling clients, claims examiners and supervisors to request for payment of outstanding invoices. In addition, the law firm will increase their market share with the client. This responsibility for an increased portion of their client’s business strengthens the attorney-client relationship and helps fortify bonds which can result in a long-term relationship between the law firm and the client.
Further, rigorous negotiation of AFAs can keep clients and attorneys aligned on a common goal by helping attorneys use the fee arrangement to better understand their clients’ objectives. For example, for a variety of reasons, some insurers and clients may want to settle cases quickly. When arranging their preferences, they place a higher value on having as little open lawsuits on their books as possible, even if that means paying higher settlement amounts than would be paid after protracted litigation. In this scenario, the parties may enter into a fixed-fee AFA that also provides additional payouts for successful performance, such as settling cases within 30 days. Alternatively, if a client prefers paying as little as possible in settlements, and places no value in a quick resolution, they can enter into a fixed-fee AFA with an incentive payment if the amounts paid to settlements are below a certain number.
The issues and questions raised by historical billing practices are here to stay and will not go quietly into the night.6 While AFAs are not a panacea to the weaknesses of the billable hour and may not be right for every client, and every law firm, they can certainly be beneficial in many instances. Attorneys who are not prepared to be flexible and open to new ideas risk losing business and becoming dinosaurs in an increasingly competitive market, where clients are ever mindful of their own bottom lines. The growing popularity of AFAs may provide the greatest opportunity for smaller firms, which can be more nimble than “Big Law” in managing alternative fee programs.7 Still, all attorneys should be prepared to not only discuss AFAs with clients who request them, but also identify clients that can benefit from them. Those lawyers who speak eloquently and write persuasive briefs but who do not have the same expertise in AFAs, will not necessarily flourish in alternative fee relationships as they do in the traditional billable hour model. Other attorneys, more open to change, may thrive under these new arrangements.
Although most lawyers have never gone to business school, we must remember that law firms are very much businesses, and the rigor of today’s world requires a mix of both legal and business acumen in order to succeed. If AFAs are truly the wave of the future, attorneys should be open to embracing them. When done properly and implemented fairly, they will reward both the client and the attorney, while also building a strong partnership for years ahead.
1. Rubin, “Alternative Billing Ideas,” 29 No. 2 Legal Management (April 2010).
2. Friedman and Freed, “Ethical Issues and Alternative Fee Arrangements: What to Do and What Not To Do,” New York State Bar Journal, 85-May N.Y. St. B.J. 10 (May 2012).
3. Reisman, “Microsoft’s Embrace of Alternative Fees Shows Wider Trend,” Law360 (Aug. 3, 2017).
4. Strickler, “Quinn-Uber Split Shows Hard Choices of GC Rate Pressure,” Law360 (August 3, 2017).
5. Rozen, “Jittery Firms Put on Brave Face as Microsoft Targets Billable Hour,” New York Law Journal (Aug. 10, 2017).
6. Rhodes, “Rivals Crowd Legal Playing Field Beset by Billing Woes,” Law360 (Aug. 4, 2017).
7. Rozen, “Smaller Firms’ Message to Big Law on Alternative Fees: Join The Club,” New York Law Journal (Aug. 14, 2017); Rozen, “Is Change Now Unstoppable in Law Firm Billing?,” New York Law Journal (Aug. 21, 2017).