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Could alternative fee arrangements be creating inefficiencies for law firms?

This LPS post is by Doyle Murphy, Vanderbilt Law School Class of 2018.

One aspect of the legal work landscape that we explored in Legal Problem Solving is the move law firms are making from the traditional billable hour pricing model to alternative fee arrangements. These alternative fee arrangements range from fixed fees, contingency fees, cost plus pricing, and many other options. The idea behind alternative fee arrangements is to give clients greater predictability and transparency when it comes to costs. Additionally, alternative fee arrangements create an incentive for law firms to work more efficiently since the amount of revenue they derive from a client is no longer tied to running up lots of billable hours.

I had heard of alternative fee arrangements but never really gave them much thought. Throughout law school I’ve talked to lots of attorneys who work at big law firms and some of them have mentioned how billable hours are the bane of their existence. Going to work for a big firm in private practice is a pretty common route that law students go down. When law students are researching firms during their preparation for the OCI process, most firms provide their billable hour requirements for associates. After reading more about alternative fee arrangements and how they work, I began to think how billable hours fit into the picture since they don’t play as big of a role in how a client’s fee is calculated.

The move to alternative fee arrangements is good news for clients but the billable hour mindset is still present in law firms. Many big law firms have billable hour requirements for their attorneys to be eligible for bonuses, which can be worth a huge amount of money. While not all firms have billable hour requirements to be bonus eligible, most firms still use billable hours as one of the main metrics for evaluating attorneys. Firms using alternative fee arrangements while still considering billable hours for evaluation could, ironically, lead to some major inefficiencies. Take, for example, a law firm that agrees to a fixed fee for a client, but the law firm still has a billable hour requirement to be bonus eligible. The incentive for the law firm is to do good work as quickly as possible so that the attorneys assigned to the client can go on to work on other projects and opportunities to make money for the firm. However, the attorneys working for that client don’t exactly have the same incentives as the law firm. The attorneys want to get as many billable hours out of that particular project so that they can get closer to hitting their billable hour requirement for the year and become bonus eligible. The attorneys are still working as if the client is paying the firm on the old billable hour model but the firm is only getting paid on the agreed upon fixed fee. A pricing model that was supposed to make a law firm more efficient actually made it more inefficient.

Throughout the semester in Legal Problem Solving we’ve explored legal design thinking. One activity we did was an HCDT boot-camp. We partnered up and identified a problem, brainstormed ideas to solve the problem, came up with a prototype for a solution, obtained feedback on the prototype, and created another iteration of the solution. We’ve also learned to consider the various stakeholders when trying to come up with a solution to a particular problem. Law firms could stand to benefit from utilizing design thinking when it comes to their pricing models.

It’s a good thing that law firms have started to use more alternative fee arrangements, however these fee structures were adopted because clients demanded more clarity and predictability with respect to what law firms were charging for their services. Law firms responded to these demands rationally by creating alternative fee arrangements that gave the clients what they were looking. It was an easy solution to a problem that clients, a stakeholder, had with fees. However, the attorneys who actually perform the work for clients are another stakeholder in the equation. If law firms want to actually realize the efficiencies of alternative fee arrangements they should consider how they award bonuses and evaluate their attorneys. One potential solution could be to tie the bonuses of attorneys to some sort of metric, potentially profitability of a practice group or amount of projects completed. This is where law firms could benefit from design thinking and going through multiple iterations to find something that works well. Whatever law firms decide to do, it seems like something will need to change if alternative fee arrangements are going to continue to be prevalent.

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