Law firms are changing how they charge for their services in response to client demand for lower costs and greater clarity, according to a LexisNexis UK investigative report, 'Calling time on the billable hour'.
The report, published this week, found that alternative fee arrangements (AFAs) are now the base for nearly half (46%) of all external legal spend. In order of popularity, the main alternative pricing models are pre-agreed flat fees followed by a blended rate, a retainer, fixed fee by matter, capped fee, success fee, fixed fee by phase and volume discount.
Moreover, 85% of law firms offering AFAs say they are doing so as a result of client demand as opposed to their own doing. Many of the general counsel, interviewed in-depth for the report, prefer AFAs as it gives them price certainty and allows them to compare costs. Law firms are therefore complying in order to win a place on lucrative legal panels, which can be worth millions of pounds.
‘In-house legal teams are under growing pressure to do more with less,’ says Dylan Brown, the report’s editor.
‘In today’s economic environment, greater certainty and transparency around legal spend is a must. Rather than using a high-touch approach to strengthen client relationships, lawyers would benefit most by demonstrating value added—and this is considerably easier with the right technology and tools in place.’
The report suggests firms should consider alternative billing models for routine work with a clear endpoint and stick to the billable hour for consultative, urgent or ongoing work, rather than changing their entire billing model. It highlights the main barriers to AFAs—estimating how much time and effort the work will require—discusses various approaches to overcome this, and recommends firms invest in pricing tech and skilled individuals.
Drawbacks to the billable hour model are also noted. First, nearly two-thirds of law firms say billing write-offs due to lack of proof or another reason are on the rise. Second, pressure to meet billable targets and long hours can take their toll on mental health. Third, it creates an incentive to be inefficient.
