Billable hours are increasingly criticised for encouraging inefficiency and creating the wrong incentives for lawyers. Buyers of legal services are increasingly calling for alternative fee arrangements. In a recent report, Ӱ investigates if this is the end of billable hours.
When asked whether the clock is ticking on the billable hour, Georgia Dawson, senior partner at global law firm Freshfields Bruckhaus Deringer, the UK’s sixth largest firm by revenue, said, “The billable hour has been a foundational aspect of the way professional services firms have structured themselves for such a long period of time that any pivot away from that is naturally going to take time,”
She further added, “That said, over the last 10 years, there’s definitely been more of a pivot towards alternative fee arrangements (AFAs) and other structures, where clients are looking for more certainty of cost.”
Some 85% of law firms interviewed as part of the Ӱ report said they use alternative fee arrangements (AFAs) due to client demand.
• 81% of in-house legal teams said they request AFAs to save costs;
• 65% said they ask for AFAs for cost certainty; and
• 49% gave general efficiency as a reason to request AFAs.
Other reasons given by law firms for using AFAs include:
• Offering AFAs is positive for marketing - it places a law firm in a much better position when competing for new work.
“I would be hesitant to move forward with a firm that wouldn’t at least engage in the conversation to see if a fixed fee is appropriate for a matter,” said Bob Mignanelli, chief operating officer for legal at FTSE 100 consumer healthcare business, Haleon.
• AFAs provide revenue certainty.
Legal tech can help law firms provide more accurate estimates of how much a matter will cost and determine accurate AFAs. Fixed rates offer certainty.
• AFAs can improve efficiency.
“You’ve got to kick the habit of the timesheet as well as the billable hour, because as long as you keep telling people that more hours is a good thing, you’re going to get more hours—and that’s not good for the client, the lawyer, or the firm if they are trying to figure out how to add more value more efficiently,” said Alex Hamilton, CEO and founder of Radiant Law.
• In some instances, AFAs can save costs.
Sometimes a solution can be achieved quickly, and the client is happy to pay a fixed fee based on value to the client. In such cases, there is no need to clock up the billable hours. The solution is quick, the lawyer can move on to a different matter, and the “cost’ to the law firm is reduced.
Overall, Bloomberg’s 2022 Legal Operations Survey reports that external legal spending via AFAs is up 25% from a year earlier. Yet, 73% of lawyers said they still use billable hours.
For more insight into why clients demand AFAs, see the Do billable hours offer value for money? section of the Ӱ report.
While buyers of legal services are increasingly asking for alternative fee structures, and more law firms are offering AFAs, the Ӱ report indicates that the bulk of law firm work is still being billed by the hour.
Some of the arguments for billable hours include the following:
• Some legal work is not suitable for AFAs - there is no way of knowing upfront how much it will cost.
“If you’re a big firm doing debt capital markets transactions, you’re probably doing thousands of those and so you’ve got a very good idea of what your fixed charge ought to be,” said Stephen Denyer, director of strategic relationships at The Law Society of England and Wales. “On the other hand, if you’ve got a major, multi-party M&A transaction or a restructuring or a bit of litigation that could go in lots of different directions, you’ve got no realistic way of knowing what elements there are going to be and therefore what you ought to charge for them.”
• Sometimes, billing by the hour is faster and more convenient.
“There are times where you really just need the ability to get a quick piece of advice based on an hourly rate,” said Mignanelli.
• Billable hours can be the smallest cost.
“In some ways, the billable hour is the smallest possible fixed fee, and so often that’s what people revert back to just because it’s simple,” said Alan Guy, managing director of underwriting and value optimisation at top 200 US law firm Kobre & Kim, and who is responsible for negotiating AFAs on litigation matters. “A lot of the time, if you’ve started reaching for the lawyers, it’s usually because you have a problem that’s got some time sensitivity to it.”
• Certain courts use billable hours to assess costs.
“If you use an alternative fee arrangement, and there is a costs award in favour of one or other party, the English court’s costs assessment process still evaluates the fairness of that fee by reference to a billable hours metric,” said Dawson. “So there will be some areas where change will naturally be slower because the incentives aren’t there to drive change.”
Whether legal work is suitable for AFAs depends on how predictable the matter is. If you know the cost of a matter well, AFAs, such as a flat fee, are an excellent alternative to billing by the hour.
However, if the matter is unpredictable and you have no way of knowing the direction it will go or the final cost to your firm, billable hours are still the way to go. (And there are ways for the client to mitigate against the risk of fees spiralling out of control).
“There are times where you really just need the ability to get a quick piece of advice based on an hourly rate,” Mignanelli said. “So for us, it is really about identifying the right type of rate or fee structure for a particular engagement, and that really depends on the complexity, the projected length and the speed at which we need to get the advice.”
“We all have a crystal ball, but sometimes that crystal ball is a little blurry,” said Mignanelli. “If it’s a litigation matter, discovery could mushroom on us where we didn’t expect, or we could get additional parties that wind up joining a litigation. So you have to come back and sit down with the law firm partner and say, is this enough of a material change where we need to modify our economic arrangement for the matter.”
Despite all the emerging alternatives, it seems that billable hours are not disappearing any time soon.
Brad Wine, the global co-chair of litigation at top 50 US firm Morrison & Foerster, says, “I’ve been practising for nearly 30 years, and we’ve been talking about the death of the billable hour since I started, and I suspect we’ll be talking about the death of the billable hour long after I’ve retired.”
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