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Billing hours vs alternative pricing structures have been a debate for almost as long as law firms have billed their clients by the hour. While most law firms still bill by the hour - at least to some extent - a recent ������Ƶ report, Calling time on the billable hour, indicates an increasing demand from in-house legal teams for more flexibility around payment structures when engaging outside legal counsel. Clients want greater clarity and reduced costs. 

Billable hours vs. value 

“A law firm typically sees an alternative fee arrangement as a way to do better than an hourly rate, or at least as well as hourly, whereas clients are often really focused on how do I get the same services for less money,” 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.

He adds, “The really productive conversations come when, rather than thinking of it as a discussion about price, you think of it as a discussion about risk and value. Because for a client, they may think it’s worth $100,000 or $1 million to have a problem solved, and they are happy to pay that, even if it worked out more expensive than paying by the hour.”

Alex Hamilton, CEO, and founder of Radiant Law, which specialises in commercial contracts, said, “There is a massive value gap. Legal services are way too expensive, and if you have worked in the sausage factory like I have as a partner at a big law firm, there are a huge amount of activities that are not really adding value that are being charged to clients at huge rates.”

“By working on a flat-fee basis, Radiant’s lawyers are incentivised to work faster, delivering better value for clients”.

Georgia Dawson, a senior partner at global law firm Freshfields Bruckhaus Deringer, the UK’s sixth largest firm by revenue, says there’s been more of a pivot towards alternative fee arrangements in the last ten years.

However, the majority of law firms are still shying away from fulling embracing alternative billing methods.

Of course, not all legal services are suited to alternatives like flat, fixed or capped fees - this often depends on how predictable the outcome is.

What exactly is the billable hour model? 

In simple terms, a billable hour is an hour worked by the lawyer that is billed to the client. The fee is calculated at a set rate per billable hour that the lawyer dedicates to the client’s matter.

Although the billable hour has been the golden billing standard used by legal firms for decades, the  report highlights that it is not without criticism. Arguments against billable hours range from “some lawyers may lie about how many hours they have worked in order to appear more honest” to “billable hours create negative incentives”. According to the  report, a billable hour’s culture can also stifle innovation when it comes to adopting legal tech.

So, what are the alternatives? 

Common alternative pricing structures

Alternative pricing structures are loosely described as fee arrangements based on something other than the conventional billable hour model. In practice, there is a clear pivot towards wanting value-based fee structures when in-house legal teams engage outside counsel. 

When talking to law firms, lawyers, and clients about the pros and cons of the billable hour and the challenges of pricing matters when using AFAs, the ������Ƶ report revealed the following eight structures as the most commonly used. (Percentages indicate popularity based on the responses in the report.)

• Flat fees - 71%
  By far the most popular alternative pricing structure. Flat fees mean the client pays an agreed-upon fee. Flat fees are great for certainty of costs.
• Blended rate - 48%
  Instead of separate rates, the client is charged one blended rate for all work performed by the law firm regardless of the seniority of the staff member who performed the work.
• Retainer - 46%
  A fixed amount is paid for specific legal services provided for a set period. This fee structure is often used when there is a constant need for the same type of legal services. 
• Fixed fee by matter - 44%
  The client pays a fixed fee for a specific type of matter. If the firm, for example, handles lease agreements for property owners, each lease transaction will be billed at a fixed fee. This is most suitable for repetitive work.
• Fee caps - 43%
  Fees are billed at an hourly negotiated rate, but the client will only pay up to an agreed-upon capped amount. This structure provides certainty to the client whilst the law firm must absorb the risk of the fees exceeding the cap.
• Contingency/success fee - 39%
  The fee is a negotiated percentage of the client’s recovery or a fixed fee if a successful outcome is achieved. This type of fee structure is often seen in personal injury claims.
• Fixed fee by phase - 39%
  The parties agree on a fixed fee for each phase of the legal services. This structure is suitable for acquisitions, large transactions, and litigation. If the matter is settled, for example, before going to court, the client only pays up until that phase.
• Volume discount - 36%
  Discounts are given based on the volume of legal work assigned to the firm. Usually, the client pays the usual hourly fee until an agreed threshold is reached. After that point, the hourly rate is subject to an agreed discount. The higher the volume, the higher the discount.
  

To see the full list of alternative fixed fees, read our new report on the billable hour.

The way forward

Law firms resistant to change may ultimately be strong-armed into offering alternative pricing if they want to secure a spot on lucrative legal panels.

Bob Mignanelli, chief operating officer for legal at FTSE 100 consumer healthcare business, Haleon, has the following to say: 

“Our starting point is always an alternative fee arrangement, because it gives us price certainty,” We would expect that all our law firms, whether a panel firm or someone we’re engaging on a one-off basis, would at least have the conversation with us around some type of alternative fee arrangement, whether it’s fixed fee, milestone-based or success-based. 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.”

As more in-house legal teams seek alternative pricing arrangements, the “clock might indeed be ticking on the billable hour”. For a better insight into the pivot towards alternative pricing structures, read the full report here.