Are alternative fee arrangements (AFAs) catching on – or are they likely to remain one of those hypes that never really goes anywhere?
General counsels and other corporate law leaders seem more than ready to embrace AFAs. But are law firms willing to play ball? Yes – it appears that firms are gradually making the transition to new forms of billing.
The Northwestern University Law School’s Center for Career Strategy and Advancement reports that:
“The billable hour is not dead yet, nor will it be any time soon. However, in the face of client demands for cost containment and increased efficiency, firms are showing more openness to considering fixed fees, contingency fees, and other alternative billing arrangements, typically on a matter-by-matter basis…. We can expect that alternative fee arrangements will become even more common in 2012.”
In its annual survey of law firm leaders, American Lawyer found that in 2011:
- 92% of firms had accepted a flat fee for an entire matter
- 88% had billed at blended rates
- 83% had accepted an incentive or success fee
- 82% had agreed to collars or caps
- 74% had accepted contingency fees
Only 1% of firms responded that they hadn’t used any form of alternative billing.
So, looks like AFAs are the hot new legal trend, right? Well, yes and no.
You may recall that some months ago, I referenced an article in The Economist that mentioned “alternative fee arrangements continue to grow in importance, albeit slowly: they accounted for 16% of big firms’ revenue in 2010.” More recently, the 2012 Client Advisory prepared by Citi Private Bank and the Hildebrandt Institute reported that in 2011, just 11.8% of firms’ revenues were attributable to AFAs.
The current usage of AFAs appears to be “a mile wide and an inch deep.” Looks like an opportunity to me – and I’m not alone.
In the American Bar Association’s Law Practice magazine, Frederick J. Esposito, Jr. writes:
“[P]roper and thoughtful planning will be key to making AFAs, or any other billing arrangement, viable and successful. Law firms that preemptively think through the issues of internal efficiency and utilizing project management skill will be prepared to deliver projects more profitably….
“The big question many law firms ask is how many other law firms are actually achieving profitability by using AFAs? The short answer is some firms are making more profit, but many law firms repeatedly make mistakes that vastly reduce profits.
“Those that have been successful with AFAs understand the economics and understand the need to pay more attention to the mechanics of their practices through better planning, organizing and managing of their firms and engagements.”
In other words, if you can make your processes run as efficiently as possible, you’ll be in a much better position to know exactly what your limit is in terms of price. You’ll position yourself to proactively offer your clients AFAs that give them cost-certainty while enhancing your profitability.
Now, wouldn’t that give you a competitive advantage? You can get started by reevaluating your firm’s business processes and exploring BPM.