SOURCE: ALM

April 04, 2011 11:05 ET

ALM Legal Intelligence Survey Finds Alternative Fee Arrangements Accounted for Just 16% of 2010 Revenues at Large Law Firms in U.S.

AFAs Slow to Take off in U.S. but Firms Project Steady Growth Through 2015

NEW YORK, NY--(Marketwire - April 4, 2011) - A survey released by ALM Legal Intelligence finds that alternative fee arrangements (AFAs) -- billing methods based on metrics other than an hourly rate -- accounted for only 16 percent of revenues at the nation's largest law firms in 2010. This suggests that the billable hour remains entrenched, despite widespread reports that clients are dissatisfied with the practice.

And although smaller law firms were more likely to be paid according to an AFA, the survey found that AFAs accounted for only a quarter of the 285 law firm respondents' total revenues last year.

However, nearly all law firms surveyed said they believed that AFAs have become a permanent fixture in the legal services industry, with 88 percent of respondents saying that AFAs are "here to stay." In fact, U.S. law firms anticipate 34% growth in the volume of AFA billing in 2015 compared with 2010.

"There are superior payment methods than billable hours for an industry that prides itself on close ties between law firms and clients," said Nigel Holloway, vice president of research at ALM, who heads up the ALM Legal Intelligence division. "Both clients and law firms should work together to find better formulas for remuneration."

According to Holloway, other findings from the survey included the following:

  • Firms' use of AFAs rose or remained constant at most firms in 2010. Forty-six percent of firms said their use of AFAs increased, while 49 percent said the level of use was unchanged from 2009. Only 4 percent of firms said their use of AFAs decreased in 2010.
  • Flat fees, blended rates, and contingencies are the most frequently used types of AFAs. More complex arrangements, such as flat fees with shared savings, defense contingencies and holdbacks are more apt to be used by larger firms than small ones.
  • Discounting of hourly rates is common at the largest law firms. Fifty-nine percent of extra-large firms said they discount their rates more than half the time, while 39 percent of large firms and 42 percent of midsize firms do. Small law firms are much less apt than larger firms to discount their hourly rates -- only 23 percent of them said they provide discounts more than half the time, while 32 percent of them said they grant discounts 10 percent of the time or less.
  • Fifty-seven percent of small firms initiate the discussion about AFAs with clients, as compared to just 16 percent of large firms and only 8 percent of extra-large firms.
  • A sizable proportion of firms (11 percent) cited a lack of billing history as their main obstacle in implementing AFAs, and only 54 percent use billing software that can capture non-hourly billing arrangements.

About the Survey
In November 2010, ALM Legal Intelligence conducted a survey of legal professionals to examine the use of AFAs by law firms of varying sizes. A total of 285 respondents, primarily managing partners, lawyers, firm administrators, and chief financial officers, took part in the survey. Respondents came from small firms (46 percent), midsize firms (16 percent), large firms (21 percent), and extra-large firms (17 percent). Small firms were defined as those with fewer than 25 lawyers. Midsize firms were those with 26-100 lawyers, large firms were those with 101-499 lawyers, and extra-large firms were those with 500 or more lawyers.

About ALM
ALM, an integrated media company, is a leading provider of specialized business news, research and information, focused primarily on the legal services industry and commercial real estate. ALM's market-leading brands include The American Lawyer, Corporate Counsel, GlobeSt.com, Insight Conferences, Law.com, Law Journal Press, LegalTech, The National Law Journal and Real Estate Forum. Headquartered in New York City, ALM was formed in 1997. For more information, visit www.alm.com.

ALM, The American Lawyer, Corporate Counsel, GlobeSt.com, Insight Conferences, Law.com, Law Journal Press, Law Technology News, LegalTech, The National Law Journal and Real Estate Forum are trademarks or registered trademarks of ALM Media Properties, LLC.

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