“Hourly billing is dead.” I’ve seen yellowed '90s-era newspaper clippings touting such slogans. Twenty years later, hourly billing is alive and well and will put many lawyers’ kids through college before it is finally retired, if ever. Yes, despite massive efforts to kill it, hourly billing slouches onward, like some hideous, decaying creature from an AMC television series.
Why don’t people like hourly billing? They say it “creates the wrong incentives.” Hourly billing, the argument goes, incentivizes unimportant work. Therefore, their lawyers must be charging for a lot of busywork.
The leap in that argument is the assumption that just because somebody is incentivized to do unimportant work that they will do it. Hopefully, you do not believe your lawyers are doing a lot of unimportant work. If they are, call them up and point out some examples. By discussing the specifics, you can probably stop them from engaging in these activities.
You can use AFAs too, but they are no silver bullet. They provide different incentives, not better ones.
For fun and illustration, here are some nefarious activities that different kinds of commonly used AFAs incent:
- Cut every corner. Use the extra time to pursue hourly work, where you get paid for effort. If you are forced to do more work than you feel like on the matter, complain to in-house counsel and argue it should be converted to hourly.
- A lot of times, the case will be resolved more quickly than anticipated. Try to make that happen as often as possible, but don’t draw attention to the fact that you are getting repeated windfalls.
- Minimize communication with in-house counsel since you are not being paid any extra for it.
- Work the matter normally until it hits the cap. Then, do the bare minimum. As above, use the extra time to pursue hourly work.
Cap and tail
- Work the matter normally until it hits the cap. Then, do the bare minimum until the tail kicks in. At this point, you are basically on an hourly billing arrangement, so bill the matter up to the eyeballs.
- Negotiate the rate as if there will be lots of involvement from high-billing partners and senior associates on the matter. Then, minimize those very same people. Staff the matter full of summer associates, first-years and other “warm bodies” who are now billing at the same rate as a partner with 20 years’ experience. Pile on as many as possible, because this is the highest profit margin you will make off them in their entire careers.
- Start billing at your rack rate, a made-up number that usually means nothing. Any “discounts” are calculated off this number, meaning they aren’t “discounts.”
- Manage the matter so as to conclude the bulk of work prior to when the “discount” becomes effective. Then, minimize your best people on the matter and instead have it be an easy way for your less in-demand attorneys to meet their annual minimum billing requirements.
- Work hard on the matter until the returns of further work seem like they are going to diminish for you. At that point, persuade your client to strike a deal, even though you could get an even better deal for the client if you pushed. There are other cases you could work on that would be more profitable for you going forward.
The point is not that lawyers exploit incentives as described above. The point is: AFAs will not save you. Like standard fee arrangements, AFAs have different pros and cons. Those are not always obvious and need to be carefully analyzed. The belief that “AFAs = cost savings” is not always true, particularly since it ignores the question of what, if any, effect switching to AFAs might have on quality and outcomes. The truth is a poorly deployed AFA program will sink your financial ship just as quickly as a poorly deployed hourly program. The overall quality of your administration and relationships with outside counsel probably have a lot bigger impact on cost and quality than the particular methods used.
Doing AFAs right is a lot of work, just like hourly billing. Extensive analysis of data pulled from different sources, like the reporting tools available in Wolters Kluwer’s e-billing systems, needs to occur. Even then, you may find the data is subject to many different interpretations. And some of the most prominent experts in legal operations believe that even a well-run AFA program will save no more than 10%.
So why even do AFAs? The biggest benefits may not come in the form of cost savings but in intangibles, like cost predictability and simplicity of administration. Those benefits will only accrue after significant investment in pricing strategy, process, and change management – and corporate law departments who don’t want to put in the work won’t gain any benefit at all.