Hourly billing has traditionally been the most common way lawyers charge for their time and expertise. That hourly rate is often broken down into partial hours — as little as six minutes — to charge for a task like answering an email.
But competition in the market is changing the way law firms bill their clients.
“It’s a simple function of supply and demand,” says Julie Quinn, founding partner at Quinn Alsterberg. “There’s a lot of competition for the dollar and for legal clients, and there’s a lot of lawyers out there, so clients are able to demand more efficient billing.”
More efficient billing can mean any number of alternative fee arrangements (AFAs) — payment systems that differ from the traditional billable hour — and they’re growing in popularity.
The same way a mechanic can only provide an estimate on repair costs before he gets under the hood to see what’s wrong with your car, a lawyer can only estimate how much time they’re going to spend on a case before they dig in to the work. Hourly billing can make it harder for clients to budget for their legal fees.
“Clients don’t want an open-ended situation where they have to keep cutting a check for $6,000 or $10,000 every month on legal bills,” Quinn says. “They want an idea what their risk-reward is.”
That’s where AFAs come in. Steve Boutwell is the chief operating officer at Kean Miller. He says the first AFA he saw in his 30-year career was a simple volume discount, where a client is given a cheaper hourly rate because they’re doing such a large amount of business with a firm.
“Suppose a client sends you 1,000 hours of work a year,” he says. “They wouldn’t pay your regular fee of $300 an hour; they might pay you $275 an hour because they’re sending you a large volume of work.”
Another type of AFA is what’s referred to as a “success fee,” where a firm gets paid a bonus for winning the case, but less than their full rate if they don’t win.
“The client might say, ‘I want you to bill me at 75% of your standard hourly rate and if the deal closes, you’ll earn a premium of 125% of your standard hourly rate,’” explains Boutwell. “That’s an example of a success fee where a client is asking a firm to take on some of the risk as well.”
Fixed fees are a popular form of alternative fee arrangements, especially with trademark applications.
“No matter how long it takes you or how little time it takes you to get that trademark you’re paid a flat fee,” says Boutwell. “Clients like that because there’s certainty in the price.”
But fixed fees come with some risk for the firm, he adds.
“If the law firm is highly inefficient, under that scenario of $300 an hour, let’s say the firm takes 10 hours to do the trademark project. You’d think the time they have invested in that project is $3,000 but they’re only getting paid $2,000 because of the agreement with the client.” Boutwell says fixed fees can force law firms to become more efficient in how they provide legal services.
A more complicated AFA is budgeting a fee with what’s known as a “collar.” The collar protects both the lawyer and the client and keeps the charges within a certain range.
“Say my client and I agree to $10,000 for an Equal Employment Opportunity Commission charge, and when I add up all of my hours at my rate, it ends up being $15,000,” says Leslie Ehret, an employment lawyer with Frilot, L.L.C.. “The client only pays whatever my agreed-upon percentage is of the difference. We agree that if I go over budget, I’m only going to get paid 50% of the overage.”
Not surprisingly, Ehret says, “collars” make a lot of work for the accounting department, but they also allow clients to keep their legal fees within a targeted budget while providing lawyers with some flexibility to spend the time necessary to work on a case without losing money.
“Collars and flat rates give law firms more of an incentive to manage a case so that there’s not litigation overkill,” says Ehret.
Finally, a lot of firms bill what’s referred to as a “blended rate” — a type of flat rate that takes into consideration the difference in pay for work done by a partner, an associate and a paralegal at the firm. Essentially, the client pays one hourly rate, no matter who puts in work on the case. This provides some security for the client and requires the firm be judicious with its resources.
“It prevents a law firm from having a partner, billed at $400 an hour, look through documents just to get the $400 an hour,” says Ehret. “If you get the blended rate you would tend to push the work down a little more: An associate, at $200 per hour, can look through those documents.”
Boutwell says smart lawyers will see AFAs as an opportunity to build a relationship with a client.
“You’re able to demonstrate that you can do great work and still make money doing it,” he says, while cautioning, “If you don’t manage the AFA internally, it can get out of control.” Firms need to make sure attorneys understand the economics of the arrangement so they don’t put too much work into a matter and lose money.
Quinn says there are many pros to AFAs — they allow the client to relax and trust that the lawyer isn’t overbilling them by the hour, and they enable the client to budget. AFAs also incentivize lawyers to be more efficient and focused in their work.
Quinn says, however, that the other side of the coin is that clients might be limited in the amount of time that a lawyer can devote to their case.
“It’s possible that you’re not going to get as much of a deep-dive on an issue as you would otherwise,” she says. “Honestly, a lawyer is going to pay more attention to the files that are going to pay him or her more,” adding that there is a risk that lawyers might lose money.
Ultimately, she says AFAs are something that will take time for the industry to figure out.
“This phenomenon is going to continue to play itself out and refine itself just like any other evolution until everyone finds a happy medium that works for both sides,” she says. “I think once some other geographic areas really embrace this alternative fee arrangement and we see that it works, I think more firms here in Louisiana may be more open and willing to try it.”
