When it comes to law firm billing, hourly billing is still a mainstay of the legal industry. But the billable hour is no longer the only option for law firms. Alternative fee arrangements (AFAs) are becoming increasingly popular in the legal industry, and can fill gaps, complement your practice’s billing structure and benefit your clients and firm. AFAs may also help fill the access to justice gap. They do this by creating access to lawyers for clients who might otherwise be unable to afford legal services.
Unlike the traditional approach where attorneys bill their clients based on hourly rates, AFAs offer a different approach. These agreements encourage attorneys to bill based on the value they provide to clients rather than the time they spend on a case. In this article, we will explore how AFAs create value, the types of AFAs available and how attorneys can implement AFAs in their practices.
Although the billable hour is still the standard billing method, it’s not always the most transparent billing choice. AFAs provide more price transparency and therefore clearer expectations for clients. Moreover, with alternative fee structures like flat fees, a lawyer’s value to the firm isn’t measured by the number of hours billed. Instead, law firms measure lawyers by the results that they achieve for clients. Asking clients to pay for results instead of process incentivizes legal professionals to work more efficiently. However, for this fee structure to work, attorneys need to identify the resources required to produce a favorable result.
Lawyers can optimize their billing workflows through a combination of AFAs and law practice management tools. But that’s not all; using alternative fee structures and legal software can also improve lawyer wellness and help lawyers achieve long-term success. Billable hours requirements often fuel long lawyer working hours, which can quickly lead to lawyer burnout. By being more efficient and results-oriented, lawyers can focus on serving clients and achieve better work-life balance.
Flat fees are the most common form of alternative fee. Flat fees provide a single, unchangeable fee for either a predetermined number of hours, or the accomplishment of a specific task. Clients know what the representation will cost but they have little control regarding matter staffing or the seniority of the lawyers doing the work. The flat fee involves some risk for the lawyer, who may do more work than anticipated if the fee is linked to a specific task or completion of a stage of the case; by the same token, the client may pay more than if they had paid hourly if a task or stage of the case takes less time than anticipated. The mutual risk is the price of this kind of fee.
Like flat fees, capped fees are based on the hourly billing model with the addition of an agreed-upon maximum cost or “cap” for a specific matter. For example, a litigation attorney who bills $250 per hour could work on a contract dispute for a client with an agreement to charge no more than $10,000 total for all services related to the matter. This cap gives clients peace of mind and lowers their financial risk. Clients know that they can afford services up to the limit and don’t need to worry about an unmanageable, surprise bill. However, this type of legal fee does mean that firms should be able to reasonably predict the maximum cost of a given matter from the beginning. Otherwise, the firm could risk hitting the cap and having to complete work on its dime.
Blended fees offer another type of twist on standard hourly rates. When a law firm agrees to a blended hourly rate, they charge one average hourly billable rate for work on a client matter regardless of the seniority of the lawyer doing the work. For example, the firm may charge $300 per hour regardless of which attorney completes the work, but it doesn’t affect the number of hours worked on the matter. A blended rate helps shield clients from a higher-than-expected bill if a senior partner completes much of the billable work on their matter. However, if only lawyers with a lower hourly rate work on their matter, the higher cost could disadvantage clients.
Lawyers always want good results for clients. But some AFAs reward firms for meeting or surpassing predetermined goals. These performance incentives reward them for achieving a great result for clients and encourage resourceful efforts. With this fee structure, firms can pay lawyers for their strengths while also ensuring clients get what they want. For example, a success incentive could mean that an attorney will receive a certain agreed-upon amount for legal services whether they win or lose. However, if they win the case and meet specific predefined criteria, they may receive an additional payment based on that success.
A client with a legal issue sometimes can’t afford to pay for the full scope of necessary legal services. In these cases, offering unbundled legal services can provide a more affordable way to get clients the help they need. In this arrangement, the lawyer performs certain specified legal services, and the client works on specific tasks that they can handle themselves. In this way, clients pay for the services only lawyers can do. For example, unbundled legal services for a client involved with a divorce case could use an attorney to prepare the necessary court documents, while at the same time, the client manages negotiations with the spouse.
As previously noted, the most common reason clients don’t pay their bills is their inability to afford the whole bill at once. Offering payment plans can help. Let’s say you have a client who owes your firm $5,000. While the client may not have the funds to pay the entire invoice, they may be able to pay in installments of $500 a month. If you set up a mutually agreed-upon payment plan that works for you and your client, your client can pay the full amount over time.
While it’s preferable to have clients pay their bills in full, well-structured payment plans offer a solution that makes it easier for them to pay their bills over time. Instead of having to cut fees, the firm gets paid the full amount and improves its collection rate.
Payment plans also provide an opportunity for firms to deliver a better client experience. This could potentially lead to positive reviews and repeat future business. After all, as survey data in the 2020 Clio Legal Trends Report notes, 72 percent of consumers would rather pay their legal fees on a payment plan.
Subscription-based fees are monthly fees paid to access services when needed. Clients who subscribe to a predetermined legal services plan can benefit from affordable costs for ongoing legal services. For example, a business client could choose a plan to pay a flat monthly fee in exchange for unlimited legal advice, regular document review and ongoing brand strategy planning. The law firm gains predictable, consistent work and revenue while simultaneously developing an ongoing relationship with its client.
The idea of offering a subscription fee option may seem scary. But it’s important to note that you can and should tailor the concept of the fee model to solve the specific pain points of which your firm and clients are struggling. This means you and your firm can decide what this model offers and its costs to clients.
Finding the best fee arrangements for law firms and clients is essential to long-term success. AFAs allow lawyers to serve clients in an efficient and value-based way. At the same time, some of the AFA options empower clients to access the legal services that they need.
Adopting alternative fee structures doesn’t mean, however, that lawyers no longer need to track their time and project progress. In fact, when offering different fee arrangements, it’s more important than ever for firms to be organized and efficient. Tracking time gives firms the basis to assess whether their fees are adequate for the firm, yet reasonable for the client.
While hourly billing isn’t going anywhere, incorporating new AFAs as an option may give your firm more flexibility to serve a wider range of clients. It can also mean the firm has a higher chance of getting paid. They can be a win-win for your firm and for your clients.
