How profitable are alternative fee arrangements, in practice?
Photo of Victor Li by Saverio Truglia.
Alternative fee arrangements have been a reality for lawyers and law firms for several years now. But are they profitable? The answer depends on whom you ask.
It turns out that lawyers working in the trenches on actual matters and cases had somewhat different experiences with AFAs compared to lawyers operating at a bird’s-eye view.
In the last several months, two surveys have been released that deal with the effectiveness of AFAs. In July, the BTI Consulting Group and Law360 released the results of a survey that asked more than 750 individual, practicing attorneys from firms of all sizes about the profitability of AFAs. The survey found that more than 22 percent of those lawyers generated more profits from AFAs than under hourly billing. (See the Law by the Numbers infographic from the October issue of the ABA Journal.)
“That [22 percent figure] was a pleasant surprise,” says BTI president Michael Rynowecer. “It shows that the proof of concept is real. AFAs are here, partners are making money off of them, and they’re likely to stay.” According to him, the survey did not differentiate between different types of AFAs. However any rate-times-hours arrangements and pure discounts off traditional fees were excluded.
The results weren’t all rosy, however. The largest percentage of lawyers surveyed—39 percent—maintain that AFAs were less profitable than hourly billing. And nearly 22 percent responded that they did not know which method was more profitable.
Rynowecer is adamant that this doesn’t mean AFAs are less profitable, per se. Instead, he argues it shows a lack of commitment to them. “The fact that there’s a large group of lawyers that don’t make more money off AFAs shows that the partners that are turning profits have a competitive advantage,” says Rynowecer. “Clients like alternative fees. That’s not going away. And if you can show that you are better at doing something that clients like, then you’ll be ahead of the competition.”
The BTI results were slightly different compared to a May study released by Altman Weil. The consulting firm’s annual “Law Firms in Transition” report (PDF) found a majority of 304 law firm leaders at firms with 50 or more attorneys surveyed said AFAs were either more profitable or as profitable as billable hours. The individual breakdown: Nearly 16 percent of respondents found AFAs to be more profitable; approximately 40 percent said they were the same; and 30 percent felt AFAs were less profitable.
Tom Clay, a principal at Altman Weil, explains that his firm targeted law firm leaders because they are in a better position to evaluate the effects of AFAs on the entire firm, as opposed to individual matters or even practice areas. The Altman Weil study also shows that firms that are proactive in offering AFAs are far more successful in turning profits. Over 72 percent of firms that do this either make more or equal money from AFAs as compared to billable hours.
Meanwhile, the study found that proactive firms report profits in nearly 32 percent of matters, while reactive firms turned profits only nine percent of the time. “Our survey shows that, over the last five years, there’s been improvement every year in terms of profitability of AFAs,” says Clay. “They’re not unprofitable.”