O Billable Hour, Where Art Thou?
A blog post by attorney Wade Abed, via mnbar.org.
The billable hour is still around and from what I gather it is also still the dominant fee arrangement out there. There are alternatives though. Alternative Fee Arrangements (AFA) are becoming more and more popular as time passes and newer legal consumers demand more flexible fee arrangements. Many clients and lawyers I’ve spoken with over the years have expressed disdain for the billable hour fee model.
I guess my questions is why this didn’t happen sooner.
Who knows? However, I do know that AFA’s are here now and they are going to stay. The truth is that there are probably too many lawyers chasing a limited amount of clients with money. It has been a while since macroeconomics, but I still believe when the supply exceeds demand, prices usually go down.
HOW DO WE DEFINE AN AFA?
I’ve heard that any billing arrangement outside of the billable hour is considered alternative. One of my mentors that practiced law for over 45 years told me that hourly rates were not the norm when they started practicing law. The clients asked for more itemized bills. Then the clients demanded more itemized bills. I guess the prevailing way to bill was more about perceived value or what the lawyer perhaps thought the service was worth. Then the billable hour crept in and the industry really never looked back, until recently.
WHAT ARE ALTERNATIVE FEE ARRANGEMENTS?
- Fixed fees and flat fees. A fixed or flat fee is the price that a law firm or lawyer charges no matter how many hours its lawyers spend on the matter.
- Blended rates. The blend includes the lower rates of associates and the higher rates of partners.
- Contingent fees. This is the classic alternative fee arrangement to the billable hour. In personal injury cases, this fee is the percentage of the amount recovered for the injuries sustained by the client. The fees are tied to perceived value and shared risk of the lawyer and client.
- Reverse contingent fees. A reverse contingency allows for compensation based on an avoidance of exposure to liability. Most lawyers know how to value their cases and defense lawyers read reports, hear the rumor mills, and learn of damage awards to assess liability.
- Percentage fees. This alternative fee arrangement is a percentage fee, either constant or graduated and based on the amount of the transaction. Think of probates and bonds being based on the number of bonds sold or the size of the probate.
- Combined approaches. This is a mix of AFA’s. The most common AFA combined approach is a mix of contingency and hourly work.
ARE AFA’S A PASSING FAD?
For a little bit I thought the recession was pushing AFA’s because of intense increased competition. Then the recession passed (I think). In 2009, legal consulting firm Altman Weil said 28 percent of law firm leaders believed that non-hourly billing would be a permanent change in the legal industry. By 2013, the figure had jumped to 80 percent. Some firms are leading the charge. The law firm Holland & Knight, went straight fee based, in one group.
McDermott Will & Emery, did the same thing in its consulting subsidiary focused on lobbying, analytics, and policy. I thought the takeaway from these two bigger firms going fee based was stated nicely by Rich Gold, head of Holland & Knight’s public policy and regulation group, “Sometimes the most productive time is spent walking around people’s offices figuring out what’s going on.”
I think what Rich Gold was trying to say is that the time spent with people sometimes produces better outcomes than the time it takes to keep track of time.
THE CLIENTS WILL LEAD THE WAY
Whether or not AFA’s and billable hours will coexist for many years to come remains a mystery. I think the billable hour works. I also think AFA’s work. The clients will truly be the ones who drive the change on AFA’s. The truth is that if one of our biggest clients calls and demands non-hourly rates, then we will most likely try and accommodate that demand. Otherwise, we face losing our lifeblood (clients) as lawyers.
AFA’s will obviously be more easily used in certain practice areas. Real estate, probate, and estate planning practices come to mind. Litigation might be a bit trickier. There is more uncertainty in litigation; however, I think it can be done.
Wade Abed is a lawyer at the Knutson+Casey Law Firm, in Mankato, Minnesota. Wade and his wife Kellie have two sons (Miles and Lincoln) and one dog (Lovie). Wade practices in the areas of businesses, real estate, and estates.