Has the Hourly Billing Model Become An AFA?

In a telephone conference earlier today with a client talking about legal project management and alternative fee arrangements, I was struck by a statement by one of the partners on the call. Although he recognized clearly that AFAs, especially fixed fee matters, makes project management more urgent in today's legal world. He went on to say that that even if the firm was billing on an hourly basis, the client was treating the fee as an AFA. WHAT? I was thinking, and then he explained: "With write-offs and write-downs, the client is imposing a fixed fee." The client simply will not pay more than the figure she or he thinks is right. That fact shows up in the realization rate.

Today I also ran across a post on In Search of Perfect Client Service by Patrick Lamb that raised the question about how the realization rate according to Hildebrandt's Peer Monitor Index (PMI) continues to decline. It seems that law firms merrily go about raising rates, while clients summarily go about paying less.

In part, here is what Lamb gleaned from the PMI:

"But that increase (in billing rates by 3.5 percent from a year ago) is marginalized by the fact that firms' 'realized rate' -- the rate they are actually paid by the client -- reached an all-time low this quarter. Net collected realizations fell slightly, to 85.4 percent, which also represents an all-time low."

He suggests that it would be better for a firm to have a sit down with clients and talk about NOT raising rates or even lowering them, if the client will help the firm with their realization.

Another option is for the law firm to become more efficient - whether on hourly billing or a fixed fee. That's where legal project management comes into play. It can increase value for the client, and improve the firm's bottom line.

As Lamb concludes: "But whatever firms do, simply doing what they used to do (increasing rates) is a fool's errand." Not to mention poor marketing.

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