Implementing Alternative Fee Agreements at Your Law Firm
“I need legal assistance, but how much does your firm charge?” Most legal clients have a budget and need to know whether a legal service will fit within their means. While every firm would love to have clients pay healthy retainers for services, that’s not what the average person in need of legal help can afford. Without transparent and predictable pricing, it can be hard to determine if the value aligns with the cost. It’s why alternative fee agreements (AFAs) are becoming widely expected in the legal industry.
78% of consumers say that lawyers should adopt pricing and payment models to make legal services more affordable. – Legal Trends Report
From the client’s perspective, AFAs offer pricing predictability, while putting the focus on the value of the service rather than the hours. Clients are also more likely to pay their bills on time when they aren't caught up in the nuances of your invoice. By taking a client-centric approach to fee structure, firms can easily improve their collections and appeal to a wider pool of potential clients.
Research backs this up too. According to Bloomberg Law client demand was the main driver of AFA use for 85% of law firms in the US. It also found that AFAs were used in 15% of matters last year and accounted for 20% of a firm’s revenue.
But AFAs don’t just benefit the client. With alternative billing, lawyers can utilize their time and resources more efficiently without being tied to hourly billing. The firm gains revenue certainty and smoother collections, improving profitability. Here’s a review of some of the alternative billing options becoming more popular within the industry. Rules around AFAs vary based on jurisdiction so it's important to check them regularly as you’re implementing them.
Types of Alternative Fee Agreements for Law Firms
1. Fixed fee billing:
The popular alternative to hourly billing, fixed fee is paid upfront for predefined tasks or services. It is best suited for services where the processes are repetitive, and the work is predictable for the firm. Clients tend to prefer this type of billing because it makes them feel in control of their legal expenses. Lawyers benefit too because they can focus on the case instead of explaining the billing hours and then collecting the fees later.
For cases where the scope of work is hard to predict, and a flat fee isn’t possible, firms can identify projects or part of a project that can be shifted to fixed payments. For a result-driven matter, for example, an attorney may want to pair a fixed fee with a success fee.
Benefits:
- Ensures efficient use of time and resources
- Easy to negotiate with clients and agree upon
- Encourages delegation to legal staff within the firm
2. Subscription-based billing:
A subscription-based billing is the same as how you pay for streaming services or memberships. The wide usage of this type of billing makes it easy for clients to understand. Law firms charge a monthly or annual fee to a client in exchange for a set of legal services. The number or type of services and what’s included in the subscription is set out in advance with agreement from all parties. If a case involves work outside the subscription, it could be billed in a different plan, e.g. flat fees.
This type of billing helps firms gain a more predictable and consistent stream of work while developing an ongoing relationship with their client. Importantly, you get financial projections for the year based on how many clients have committed to the subscription. This is best suited for firms that are regularly contacted by clients during a crisis, for example, for legal advice, reviewing documents, drafting papers, etc. It’s also suitable for firms that have a loyal customer base because this opens more opportunities for them to use your firm’s services.
Benefits:
- Generates a consistent stream of revenue and helps plan growth opportunities with that reserve.
- Helps scale the firm by attracting more customers that continuously require assistance for tasks without repeatedly providing their details.
3. Success or contingency fee
Under a contingency agreement, an attorney gets paid a certain percentage from a settlement or damages, if the case is successful. This makes the decision of whether to accept a case very important. The burden of risk is placed on the attorney and representation is mostly accepted only when there is an objectively meritorious claim. However, there is also the risk that you won’t get paid for your work if the case lands an unfavorable judgment. Injury lawyers are often seen advertising this type of fee structure.
Benefits:
- Removes obstacles to accessing legal services for clients at a time when they need it the most, for example injury victims face high expenses including medical expenses and lost wages.
- Frees an attorney to take actions that they think are necessary to move forward while establishing trust with the client.
4. Capped fees
This is hourly billing with a slight modification. With capped fees, you can place a predetermined limit on the hours that will be spent on a case. For example, an attorney charging $200 per hour could negotiate to cap the maximum costs for the case at $8,000. This gives the client peace of mind knowing that the meter won’t be kept running beyond what’s expected.
Capped fees work best for firms when the project can be scoped in advance or is similar to previous work completed for the client, or a similar client. However, failing to predict the maximum cost of the matter could mean passing the capped amount and completing the work at a lower margin.
Benefits:
- Promotes risk sharing between client and attorney on agreed terms.
- Encourages client satisfaction with cost predictability.
5. Unbundled services
When a client requires legal services but would prefer a limited scope of representation rather than every aspect of a matter, your firm could consider offering unbundled billing. With this type of fee structure, the client can pick and choose specific tasks that they want the firm to complete, and then handle other aspects themselves.
In small litigation matters, for example, lawyers can provide unbundled services like drafting documents, advising for negotiation, case evaluation, etc. As unbundled structures are offered a la carte, they tend to be more affordable than a traditional billing structure but puts more responsibility on the client to understand what needs to be done. It’s important to note that not all legal services are compatible with the unbundled billing model, for example cases related to a complex child custody case would not be appropriate.
Benefits:
- Offers legal services to clients who can’t afford full legal representation.
- Sets clear expectations right from the start about what tasks will and will not be performed and what will be charged.
- Improve access to justice for clients.
6. Blended fees
In this model, the firm’s time is billed equally on an agreed-upon rate, no matter who works on the project at the firm. For example, with blended fees, a client may negotiate their hourly rate to be $250 and leave it up to the firm to delegate work to a senior attorney whose hourly rate is $500, or a newer attorney who bills $100 per hour. It is best suited for matters that don’t require a wide range of expertise and when the work and tasks are well known.
Benefits:
- Encourages work delegation.
- Easy to understand and simplified billing for clients.
7. Payment plans
A payments plan allows clients to pay their legal fees in installments rather than all at once. This gives them better control and a customized pace of their payments that works for their budget. Since many consumers already use this type of billing to pay for other services like online shopping, it is much easier for them to understand and use.
44% of law firms say that clients don’t pay their bills because they lack the funds to pay it all at once, per the Legal Trends Report. Offering to let clients pay in installments can help solve this issue. Collections also become a smooth and more manageable process when you know when to expect payments instead of going back and forth with the clients about collections.
Benefits:
- Saves the back and forth with clients about collections.
- Attracts more clients and encourages referrals.
- Allows you to collect more by breaking down bigger bills into installments.
