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The billable hour has long been the bread and butter of law firm economics. But in recent years, clients have pushed back on the billable hour model, seeking alternative fee arrangements (AFAs) that offer greater cost predictability. According to a 2019 survey by the Association of Corporate Counsel, over 80 percent of in-house legal departments now use AFAs for at least some matters.
The rise of AFAs represents a seismic shift for law firms accustomed to the billable hour. Some firms have embraced the change more willingly than others. Early adopters implemented process improvements, technology, and data analysis to operate more efficiently under AFAs. For example, Littler Mendelson attributes its successful shift to AFAs to "new staffing models, matter management techniques, and technologies." The firm uses data to accurately forecast matter costs. Others automate repetitive tasks to eliminate inefficiencies. These innovations enable firms to maintain profitability even with flat or capped fees.
Firms initially resistant to AFAs have felt intensifying pressure from clients to offer alternatives. General counsel at companies like Microsoft have simply refused to pay hourly fees, forcing firms to acquiesce or lose business. The trends are clear: one report found that nearly 50 percent of law firm revenue is now coming from AFAs. As a result, AFAs are becoming less "alternative" and more mainstream.
Yet shifting from the billable hour remains daunting for many firms. It requires fundamentally rethinking how legal services are priced, staffed, and delivered. Some firms find themselves caught in a "hybrid trap" where they offer AFAs but haven't aligned internal operations to support their profitability. The key is implementing structural changes rather than just tweaking hourly rates. As AFAs become more prevalent, legal innovation and technology will be crucial to realizing efficiencies and accurately forecasting costs. Lawyers may also need to embrace new roles as project managers focused on efficiency.
For over 50 years, the billable hour has been the predominant model for law firm billing. But mounting frustrations with perverse incentives and lack of cost predictability have led both clients and firms to explore moving beyond the billable hour.
Many clients feel the billable hour rewards inefficiency and excessive billing. Partners are incentivized to maximize their billable hours, while associates feel pressure to record more time to progress their careers. This misaligns law firm and client interests"one GC complained of firms "running the meter." Firms also recognize the billable hour's shortcomings; a survey found only 23% of firm leaders thought it the best model for pricing legal services.
In response, clients have demanded alternative fee arrangements (AFAs) like flat, fixed, or capped fees. These arrangements shift some financial risk to law firms to incentivize efficiency. According to one report, nearly 30% of law firm revenue now comes from AFAs. Leading firms like Littler Mendelson generate over 80% of revenue from AFAs.
Yet transitioning fully away from the billable hour requires fundamental operational changes. Some firms find it difficult to accurately price AFAs without better timekeeping data. Others struggle to equitably compensate partners who originate less business but do higher quality legal work. There are also concerns that AFAs incentivize "quantity over quality" if not thoughtfully structured.
Despite hurdles, AFAs offer advantages for firms willing to adapt. With AFAs, firms can focus less on racking up billable hours and more on value-added client service. Streamlining operations to deliver services under AFAs boosts long-term profitability. The model also rewards cross-selling to existing clients over constantly pursuing new business.
For law firms, accurately tracking and recording time is crucial for billing clients and managing legal projects. Yet the traditional practice of attorneys manually logging billable time in timesheets is prone to inaccuracy and inefficiency. Lawyers frequently underestimate time spent on tasks or delay logging time until days or weeks later, resulting in timekeeping errors. The rise of alternative fee arrangements (AFAs) has also heightened the need for precise time tracking to forecast costs and set appropriate flat fees.
In response, many firms are exploring automated time tracking technology to boost accuracy and efficiency. Solutions from companies like ProfitSolv and Time Miner use advanced algorithms to track activities in real-time based on calendars, documents worked on, emails sent and calls made. Attorney time is logged automatically without the need for manual entry in timesheets. Some systems even monitor keyboard activity to assign time to the appropriate clients and matters.
The benefits of automated time tracking are multifold. Most importantly, it eliminates forgotten hours and improves time capture by up to 22%, according to some estimates. Automation also reduces time spent on administrative tasks, freeing lawyers to focus on substantive legal work. Analytics applied to time data can uncover inefficiencies and provide insights into individual and firm-wide productivity. Over time, the rich data enhances law firms' ability to accurately estimate future costs and set competitive AFAs.
While concerns exist around over-tracking and constantly monitoring productivity, automated systems aim to empower, not micromanage, attorneys. Lawyers can review auto-logged time and make any corrections or adjustments. Some solutions allow customizing tracking to only certain apps or work hours. There are also productivity benefits to giving attorneys enhanced visibility into how their time is spent.
As alternative fee arrangements become more widespread, law firms face increasing pressure to accurately price their legal services. Setting competitive flat fees or caps requires deeply understanding the costs and resources required for different types of matters. Here, leveraging data and analytics can be a game-changer.
Forward-thinking firms are tapping into their wealth of billing and timekeeping data to build predictive models for pricing. DLA Piper trained AI algorithms on over 10 years of historical data to forecast legal project costs based on factors like practice area, jurisdiction, matter type and more. This data-driven approach helped the firm set competitive flat fees with confidence. Other firms use data to categorize different types of matters based on complexity. Clients pay a set rate for each complexity tier, Scaling rates dynamically based on complexity provides consistency in pricing.
Some legal tech solutions like LexCheck allow generating data-driven quotes upfront based on metrics derived from previous similar matters. After answering questions about key matter details, the platform provides quotes complete with confidence intervals - invaluable for setting alternative fees. LexCheck's database of metrics draws on timekeeping data from over 50 participating firms. The more firms share data, the more precise the cost models become.
Data and analytics also facilitate prossessing pricing dynamically throughout a matter. Legility's Matter Management approach uses an interactive dashboard showing whether a matter is over or under budget. If costs start ballooning, firms can have informed discussions with clients about revising the fee arrangement. Data transparency keeps both sides grounded in financial reality.
A persistent client complaint around legal billing is errors and padding that ratchet up costs. Simple typos, block billing, inflated hours, and administrative task billing are just some of the issues that frequently arise in attorney invoices. Not surprisingly, a survey by legal tech company Brightflag found that only 27% of in-house counsel are "very satisfied" with the accuracy of law firm invoices.
The complexities of legal billing leave room for inadvertent mistakes, but sometimes padding hours and costs is quite intentional on the part of attorneys or firms. A review of over 900,000 invoices found that on average, attorney invoices contain 5-10 hours of padding per 100 hours billed. One client reported a law firm billed over 500 hours for a case with only 2 court appearances. Such billing practices undermine trust between client and firm.
To tackle inaccuracies and padding, some legal departments are turning to AI solutions that audit invoices and flag questionable billing items. For example, legal auditor Clocktimereview fed 9 years of legal invoices into machine learning algorithms to teach AI to recognize patterns in legit versus questionable billing. Now the AI reviews new invoices for red flags like block billing, excessive conferencing, and administrative task charges that should be written off. Anomalies get flagged for further attorney review, with potential savings of up to 10% of legal spend.
Legal tech startup REVEAL has pioneered an AI system that audits legal invoices and scores them based on risk of errors and overbilling. After analyzing thousands of invoices, their algorithms can recognize dubious billing down to specific attorneys and firms. The risk scores help clients allocate auditing resources to highest risk invoices. REVEAL"s AI also compares invoices line-by-line against rates, budgets and other data to detect inconsistencies.
Stuttgart Re uses AI in a managed auditing service for corporate legal departments. Their algorithms uncover duplicates, spot unreasonable hourly volumes like 24 or 36 billable hours in one day, and analyze time entries that are vague or appear unwarranted. Stuggart Re estimates that between 3% and 12% of law firm invoices have errors. With billions spent on legal services, leveraging AI auditing presents significant cost savings opportunities.
As alternative fee arrangements become more widespread, accurately forecasting the cost of legal matters is crucial for law firms to remain profitable. Setting a competitive fixed or capped fee requires intimately understanding how complex or resource-intensive a matter will be before work commences. Firms that fail to accurately forecast matter costs risk losing money on fixed-price engagements. However, mining data and tapping predictive technologies can greatly enhance firms" ability to estimate future costs.
Forward-thinking firms are using analytics on historical billing and matter data to build data-driven models for forecasting costs. International firm Ashurst developed machine learning algorithms that crunched 6 years of timekeeping data to predict matter time requirements based on attributes like practice area, matter type, jurisdiction and team composition. After training the algorithms on past matters, Ashurst could forecast fees for 60-70% of new matters within 10% of actual costs. Data-derived insights also enabled them to categorize matters based on complexity tiers and charge fixed rates accordingly.
Other firms are leveraging legal tech solutions like FTI Consulting"s Radar software, which uses natural language processing to digest case documents and assess the complexity level. Users describe key details of an upcoming matter, and Radar analyses its language database to estimate complexity compared to past matters. This allows generating a forecasted range of costs and resource requirements. According to FTI, Radar has forecasted legal spending for over 8,000 matters with over 90% accuracy. LexCheck also offers data-driven fee forecasts, leveraging metrics from its consortium database of over 50 firms. Solutions like these offer smaller firms access to predictive technologies previously only accessible to legal giants.
As alternative fee arrangements proliferate, law firms are realizing that one-size-fits-all pricing seldom works. Savvy firms are getting more creative about tailoring billing models to align with each client"s unique priorities and legal needs. This tailored approach strengthens relationships and ensures clients only pay for the exact services they value.
Some firms collaborate with clients to design customized pricing menus that empower legal departments to mix and match fee structures. For example, Davis Wright Tremaine devised five pricing categories including flat fees, capped fees, collared arrangements, contingent fees and value-based fees. Clients then select their preferred model for each type of work, allowing customization across a book of business. According to DWT"s CFO, this menu approach resulted in a 20% increase in AFA usage over two years.
Clients focused on budget certainty may opt for flat fees for repetitive matters and capped fees for litigation. But work like trademark registration with minimal variability may suit fixed fees best. Firms with deep data on past matters can tailor flat fees confidently. "Collars" around hourly fees also appeal to clients seeking cost protection. If total fees exceed a set upper limit, the firm absorbs the overage.
Other clients care less about cost predictability and more about aligning law firm incentives with their business objectives. Here, value-based pricing models that tie firm compensation to case outcomes are ideal. For example, FisherBroyles designed a fee arrangement for a client involved in multiple complex arbitrations. If the client won a case, the firm"s fee increased incrementally. But if they lost, FisherBroyles" fee dropped. This instilled confidence that the firm prioritized top-notch advocacy, not pumping up billable hours.
Firms must also accommodate clients on restricted budgets. Jackson Lewis provides legal services to startups in exchange for equity shares. For clients short on cash, this gains them access to top legal counsel. Lawyers benefit if their client eventually succeeds. Blend Legal adapts hourly billing for clients who can"t afford typical partner rates. Routine legal work is billed at lower associate rates, while partners efficiently handle complex aspects. The blended rates provide quality counsel at accessible pricing.
Transitioning to alternative fee arrangements (AFAs) requires a paradigm shift for law firms accustomed to the billable hour status quo. Moving to flat fees, caps, contingencies, and value-based pricing can seem daunting to firms without experience pricing and managing matters this way. However, embracing change opens new opportunities. Here are insights on getting comfortable with non-traditional billing models:
Understand that AFAs are here to stay. As Cisco"s former top lawyer Mark Chandler put it, "The billable hour is dead." Corporate legal departments will only increasingly demand AFAs"firms must adapt pricing and operations accordingly. View it as an industry-wide transformation, not just an isolated client request.
Start slow. Don"t overhaul your entire book of business overnight. Begin experimenting with AFAs for a handful of appropriate matters, such as highly repetitive work. Use lessons from initial AFA projects to refine pricing and processes before expanding further. Regularly communicate with clients to align expectations and gather feedback.
Get the math right. Firms must analyze historical billing data to accurately forecast how long various matter types require. Leverage legal tech solutions like FTI Radar to estimate complexity and augment estimates. Build in a margin of error"it"s better to complete a fixed-fee matter slightly under budget than go over.
Re-think staffing models. To remain profitable on flat fees, ensure the right resources are allocated at the right time. Move routine tasks to lower-cost resources to free up partner time for complex issues warranting their higher rates. Training junior lawyers in project management helps them understand staffing economics.
Embrace technology. Solutions like contract review AI can speed document analysis to fit timelines and budgets. Legal project management software provides real-time budget visibility to keep AFA matters on track. Timekeeping automation eliminates inefficiencies that cut into flat fee profitability.
Communicate internally. Partners accustomed to originations bringing in new business may need reassurance that AFAs tied to outcomes reward those doing the highest caliber legal work. Develop compensation models that balance incentives for efficiency and quality work.
Focus on value. Reframe thinking away from racking up billable hours and instead emphasize delivering maximum value within defined parameters to positively impact clients" legal and business objectives. View AFAs as an opportunity to strengthen client relationships through alignment.
As alternative fee arrangements proliferate, attorneys must adapt to new roles beyond traditional legal work. Lawyers act not just as legal advisors, but as project managers collaborating with clients to deliver maximum value under fixed, capped or contingent fee structures. This requires a mindset shift for attorneys accustomed to billing hourly and practicing law in a siloed manner. Firms leading the way in alternative billing emphasize cross-functional collaboration and thinking creatively about how legal services are delivered.
For example, construction law firm Peckar & Abramson adopted lean management principles to improve efficiency in serving clients under alternative fee models. Attorneys work closely with legal project managers who apply process improvements like standardizing documents. Partner Ron Tigner explained, "The goal is to increase value, not billable hours." This ethos permeates their collaborations with clients as well. Partners actively share law firm data on historical costs and staffing models to jointly build accurate budgets for flat fee projects.
Some firms develop hybrid lawyer-consultant roles focused on maximizing legal efficiency. Davis Wright Tremaine employs "legal process engineers" to continually streamline systems and leverage technology like automation for repetitive tasks. As CFO Greg Larkin commented, "The goal is to take the steps out of our operations." This culture boosts productivity internally while allowing DWT to price fixed fees competitively.
Alternative arrangements also require embracing legal talent supplementation models. Smith Anderson lawyers leverage lower-cost onshore legal providers for document review and other repetitive tasks. Says Chairman Matt Smith: "This allows us to handle large litigation or transactions on fixed fees while providing excellent client service." The firm also employs legal project managers to forecast costs and keep AFA matters on budget.
To transition to value-based billing, FisherBroyles empowered attorneys to become strategic advisors and business partners to clients. Their incentive compensation system rewards lawyers who proactively impact clients" bottom line. Managing partner Noel Lee explains, "We don't just solve legal problems but collaborate to meet larger business goals." This outlook change was essential in structuring win-win contingent pricing models aligned with client interests.