Although alternative fee arrangements (AFAs) have gained momentum with the financial crisis, will firms return to the traditional billable hour model once the economy picks up? According to a report by the Melbourne-based Institute of Knowledge Development, the likelihood that AFAs will continue to gather pace in the market beyond the economic crisis will depend on whether clients and in-house legal departments can maintain pressure on firms.
“There’s an irreversible trend of the legal market towards AFAs,” said Andrew Godwin (pictured, below left) from the University of Melbourne, a co-author of the report. “We’re seeing that it’s become more of a buyer’s market, in that clients have much more leverage than they used to have. Given this – and the pressure to manage legal spend – they’re in a much better position to sustain the momentum going forward [beyond the crisis].”
The IKD report found that in-house legal departments in Australia are using fixed fees for almost 40% of their external legal spend on a fixed fee basis – a growth which has accelerated in the financial crisis and impacted on client thinking. “Before the financial crisis law firms may have faced less pressure to offer AFAs, but now they are taking it much more seriously because they’re aware that the momentum has developed on the part of the clients,” he said. “There’s much greater expectation by general counsel, and law firms will be exploring much broader options on pricing.”
“General counsel will continue to look for certainty and flexibility,” added IKD’s Benny Tabalujan. “In a recent roundtable, it was mentioned that while the recovery may have started, they will look to embed AFAs with their law firms because of their experience ... during the financial crisis.”
The billable hour is closely tied to law firms’ remuneration structures, as it rewards lawyers if they clock more hours, and firms abandoning the lockstep model (see table, below) is evidence that remuneration structures themselves are changing.
“There’s an inevitable dependency on time billing as a performance measure and that flows into the way lawyers are remunerated. With AFAs you need to look at this from a different perspective. Value isn’t dependent solely on how much time they bill, but it may need to take into account the relationship with the client and the ability to win work,” said Godwin.
Outside influences are also changing the dynamic of pricing models within Asian firms as mergers – such as Norton Rose and Deacons, and potentially Lovells and Hogan & Hartson – take place. Deacons, for example, will likely inherit Norton Rose’s system of pricing. “Some UK and Magic Circle firms have been using fairly sophisticated tools to scope matters up front – for example, to generate fixed fee client quotes,” said Tabalujan. “This has not been done as widely, if at all, in Australia. I expect that Australian firms working with UK firms will obtain this know-how and be willing to work with these new tools.”
Moreover, the culture of discounting and engaging in rigorous up-front fee negotiations within law firms in Asia will also drive the market internationally. “There’s an increasing global integration with the Asian market. What’s been happening in Asia will find its way to Australia if it hasn’t already,” said Godwin.
“Some of the progress has been driven by sophisticated general counsel who’ve dealt with firms in Asia, and they see AFAs and fixed fees being used there and they’re wanting to use them here,” added Tabalujan (pictured, right).
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Firms abandoning lockstep
- Orrick, Herrington & Sutcliffe
- Shearman & Sterling
Howrey
- Bingham McCutchen
- Townsend and Townsend and Crew
- Freshfields
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