As mindful of precedent as attorneys and the legal profession must be, change does not often come easily. For many, billing clients by the hour has become as much a staple of the practice of law as depositions and tassel loafers, such that generations of attorneys have been conditioned to measure productivity—both their own and a firm's as a whole—in the six-minute metrics of billable hours. As time marches on, however, so do clients' expectations, especially when it comes to industries that offer services rather than tangible products.
Alternative fee arrangements (AFAs), once merely rare accommodations to eccentric client requests, have evolved into a commonplace business strategy that affords innovative law firms a competitive advantage against their peers in a marketplace demanding fees that are not dependent on how much time an attorney spends on a matter, but rather reflective of how much value the attorney's efforts provides the client. AFAs have evolved to take on a variety of forms, but they all tend to be tailored to accommodate the client's needs and expectations.
Varieties of commonly utilized AFAs include:
- Fixed or Flat-Rate Fees. These fees entail charging a standardized amount for a prescribed and self-contained service, such as forming a trust or incorporating a business.
- Conditional Fees. Examples include contingency fees, which are based on recovery, and success fees, which are only applied when an underlying transaction is satisfactorily accomplished.
- Per-Task or Per-Unit Fees. These arrangements tie fees to specific tasks or milestones in a transaction.
- Percentage Fees. These arrangements calculate fees based on a schedule proportional to the amount involved in the matter being handled. They can be predetermined, as in a fixed percentage of a real estate transaction, or a graduated percentage of a performance-based metric, such as the issuance of a corporate bond.
- Value-At-Completion-Based Fees. Also known as retrospective fees, as the precise fee amount is not determined until the conclusion of the underlying matter being handled. Such an arrangement would set beforehand the criteria by which the final fee will be determined, sometimes including the establishment of a minimum or maximum fee amount.
- Statute- or Schedule-Based Fees. In some jurisdictions, the fee for certain matters are statutorily defined, or scheduled according to a prepaid legal service plan, or negotiated as such by volume purchasers of legal services.
- Hybrid Fee Arrangements. These include various combinations of other fee arrangements (e.g., fixed fee plus hourly, fixed fee plus success fee, reduce hourly plus contingency), fee collars (hourly rates with pre-established minimum and maximum fees), and blended hourly rate (one hourly rate for all individual fee chargers in a firm).
This progression from the traditional attorney-focused, hour-based fee structure to alternatives centered instead on the client's perspective and his or her perceived value of the services rendered is intuitively attractive; after all, there is far more certainty and peace of mind for a client in contracting an attorney to draft a contract for a fixed fee, or with maximum and minimum fees quoted at the onset, than to merely agree to an hourly rate and not know the number of hours needed—much less the actual cost of services—until invoiced. AFAs can also mean increased profitability for law firms and practitioners who develop efficient work processes that can garner a greater rate of return than pure billable hours. But perhaps the most useful aspect of AFAs lies in the increased transparency and commensurate reduction of misunderstandings in the calculation of legal costs, which helps both to keep clients happy, and keep them coming back.