What are Alternative Fee Arrangements and How Are They Affecting Law Firms?
The case for alternative fee arrangements amongst clients is obvious: they are sick of expecting a bill for some reasonable amount only to get hit with a bill that is many times larger. We’ve all been there, whether it be a lawyer, a plumber, or a medical bill. Clients love certainty.
But what about lawyers? We’ve used the billable hour for decades. Why on earth would we want to stop using something that works so well for us?
Alternative fee arrangements carry a ton of benefits for lawyers in law firms. For one, happier clients mean more repeat clients and more referrals. You may not maximize your revenue off of that single claim, but you will end up with a much healthier business and revenue stream if you carefully use alternative fee arrangements and end up with happier clients. Further, there are major lifestyle benefits to not having to live and die in 15-minute increments. Also, there is a strong motivator to work smarter, faster, and more efficiently when you no longer bill by the hour. Finally, many firms report higher profitability once they proactively switch to alternative fee arrangements as well – how nice would it be to be more profitable and never have to log a 15-minute increment again?
The many varieties of alternative fee arrangements
What comes to mind when you think of alternative fee arrangements? Probably flat fees. But it goes far beyond that. Here are just a few ideas:
- Contingency fees, including unusual ones: everybody knows about the regular contingency fee, the “you don’t pay unless you win“ of every personal injury commercial ever. But there are alternatives, such as a holdback or success fee, where the firm is guaranteed a portion of their fees no matter what and the rest is contingent on victory.
- Subscription: this fee arrangement is the new hotness in the legal blog space. It has a ton of benefits for law firms — predictable recurring monthly revenue, a huge incentive to automate and productize as many of your services as possible so that you can deliver them quickly, etc. Clients also love the predictable rates and the ability to reach out to the lawyer for small matters that can be quashed before they turn into big messes.
- Flat fees and menus: flat fees are probably the most popular alternative fee arrangement. For firms that have done enough volume of work that they can easily productize their offerings and offer work faster, and in more repeatable, predictable forms, this arrangement can be an absolute win-win. For firms with multiple flat-fee offerings, they can essentially offer a menu, especially for repeat customers.
- Hourly fee caps: this barely counts as an alternative to the billable hour. It is billable hours with a cap on the maximum potential fee. It is a dangerous arrangement when something could turn into litigation, so write your retainer agreements accordingly. It is also entirely upside for the client, with no motivation for the firm to work smarter or more efficiently.
- Retainer agreements: another classic, this one is a flat fee per month to secure your availability whether or not you actually have to do any legal work. If you adopt this fee structure, again, you will want to very clearly delineate the scope and limits of your work. You do not want to offer an all-you-can-eat buffet of legal services every month for a low fee. Instead, this is more appropriate for those smaller recurring tasks like reviewing purchase orders or contracts, or for drop-in consults on small legal issues.
How to set yourself up for success with AFAs
Every lawyer’s biggest fear of alternative fee arrangements is that they will get sucked into a vortex of a never-ending case and get paid a trivial amount for it. Fortunately, if you plan your arrangement carefully, this almost never happens.
For one, most litigation is a poor fit for alternative fee arrangements. The exception is, of course, the contingency fee and personal injury litigation. If you are offering alternative fee arrangements for matters that may end up in litigation, clearly delineating that your alternative fees stop when the litigation starts is a very important first step.
For transactional work, flat fees are pretty easy to implement so long as you have enough experience with the case types to know how often a case goes off the rails and ends up making you work for McDonald’s wages. For new attorneys, it might be best to work for a couple of years under a traditional billable hour model to get a feel for how long each case takes. Or, simply accept the fact that you will take longer to get the work done because you are new, and you may make a few bad deals because you don’t know all the ways in which clients can lose their darn minds.
And lastly, we would be remiss not to at least give a nod to the ethics rules. Read them carefully. Many states will not allow contingency fees in matrimonial matters, for example. Also, charging a monthly subscription fee or retainer fee can get tricky if the client never demands any services at all. Many firms will provide a bank of resources and webinars and other educational materials as a way to provide some service for those fees even if it isn’t traditional legal practice.
All the cool kids are doing it
A recent legal trends survey showed that 56% of lawyers have already started adopting alternative fee arrangements in their practices. That’s the majority for those of you reading at home. For corporate clients, Alternative Fee Arrangements (AFAs) accounted for $21.1 billion of outside counsel spending in 2015, per a BTI Consulting Group study.
Trying anything new is scary, and there is always the risk that you might end up working a case or two for less than your usual billable hour rate, but the benefits to clients and to you, especially with higher realization rates, are massive and worth giving alternative fee arrangements a try. If you don’t, you may find that more clients ask for it and fewer clients actually sign up with your firm. After all, it really does seem like all the other law firms are starting to do it.