Last week I was surprised by a column written by Bert Hokken on Dutch legal blog Advocatie. In short, his story boils down to the statement that public opinion on the relevance of alternative fee arrangements (AFAs) is exaggerating quite a bit. However, this conclusion is not based on facts.
AFAs are used more and more
More and more, lawyers use AFAs. AFAs are also increasingly relevant as they become a larger chunk of a firm’s revenue. Especially larger firms commonly use AFAs.
Luckily we have numbers available on this point. At 40% of the law firms, more than 10% of revenues is generated through AFAs. At over 10% of law firms this share of the revenue is even larger than 20%. And the use of AFAs is still increasing (see the graphic to the right), as appears from Altman Weil’s (2014) research.
Closer to home, in the UK, we see the same trend. The Citi Managing Partner Survey (2012) is crystal clear on it (see the graphic ‘AFAs as percentage of revenue’ to the right).
With these numbers, it is hard to believe that in the Netherlands only 3% of a firm’s revenue would be generated through AFAs.
It certainly looks like in the Netherlands the chunk of revenue attributed to AFAs will increase. At least the trend is not favorable to the hour times hourly rate business model. Young lawyers have spotted this as well; 80% of them thinks that the hourly fee won’t exist anymore in ten years time.
Alternative arrangements contain opportunities
AFAs provide lawyers with opportunities. The same 2014 research by Altman Weil shows that those lawyers that proactively offer AFAs to clients, are more profitable with AFAs than those lawyers that wait until the client asks for a fixed price.
It is understandable that firms are reluctant to radically switch to AFAs. A firm can only be proactive with alternative fee structures if it has proper insights into the building blocks and seniority structure of its matters. If particular elements of a project are very variable, maybe it’s not a good idea to come up with a fixed price. However, for the elements that are predictable in terms of costs, it might be worthwhile.
Only with that information at its fingertips can a lawyer be creative and entrepreneurial. Luckily, today’s innovative market has technology enabled solutions for these type of problems. There are tools available to extract this information from your time tracking systems.
Who ignores change, will be overtaken by reality
Hokken’s column almost suggests that the legal services industry will remain unchanged. Of course the hourly business model will not die the other day. However, who ignores the changes in technology and innovative business models that are redefining the legal landscape, will definitely be overtaken by those who embrace the changes.