The Hourly Rate Is Dead – Long Live the Hourly Rate

I always wondered what the phrase, “The King is dead. Long live the King” means. If the King is dead, why are the next words, “long live?” According to Wikipedia, the phrase is a traditional proclamation made following the accession of a new monarch. I am reminded of this phrase every time I read about the death of the hourly rate and presumably the “accession” of the alternative fee arrangement (AFA). Well, to paraphrase Mark Twain, “the reports of the death of the hourly rate have been greatly exaggerated.”

Yes, I am well aware of the statistics indicating the growing use of AFAs. However, a closer look shows that the hourly rate, while not as healthy as in the past, is in no danger of being placed on life support. First, some people wrongly label discounted and blended rates as AFAs. That’s hardly alternative; the rate is still based on an hour’s work. Real AFAs can include (1) fixed fees, (2) a blend of flat, hourly or contingency, (3) success fees, or (4) a fee formula somehow tied to value. Second, the statistics indicate that those who do use AFAs do so infrequently.

Now, I am hardly a fan of the hourly rate. I agree with its critics that it provides no incentive for lawyers to work efficiently or to seek a quick resolution of legal matters. Further, I applaud the notion that AFAs typically align attorney’s risk with the client’s, bear some relation to value and provide cost certainty. However, three “Ts” stand in the way of any seismic shift toward AFAs: Tradition, Time and Trust.

Tradition

The hourly rate has outlived kings. Our profession is slow to change. We practice law the way we do because that’s how it has always been done. End of discussion. That mentality is hard to break irrespective of the merits of why change is needed.

Time

Law firms need to mine and analyze a variety of data regarding historical costs of matters in order to propose an AFA that makes economic sense. That takes time. In many instances, firms either can’t or don’t want to invest the time. It is simply easier to stick with the time-honored hourly rate.

Trust

Without trust, both attorney and client frequently fear that any AFA involves taking an unreasonable risk. The lawyer fears that the normal profit margins built into the hourly rate will not be realized once a matter is concluded. The client fears that a matter may be resolved in such a manner that the law firm gains a windfall compared to what would have been earned under the hourly rate. If there is trust between the parties, those fears can be overcome and not create a barrier to an AFA. In today’s “what have you done for me lately” legal market, however, I question whether there is any sort of critical mass of requisite trust between lawyers and clients.

AFAs – a risk worth taking

When I coach lawyers on AFAs, I always recommend a calculated analysis of the feasibility and benefit of an AFA. In these modern times, law firms would be wise to consider the merits of AFAs in the new competitive legal environment. Unfortunately, in many instances, one or all three of the “Ts” stand in the way.