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 after 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 “adherence” of the alternative rate arrangement (AFA). Well, to paraphrase Mark Twain, “reports of the death of the hourly rate have been greatly exaggerated.”
Yes, I am well aware of the statistics indicating the increasing use of AFA. However, a closer look shows that the hourly rate, while not as healthy as it has been in the past, is in no danger of being placed on life support. First, some people mislabel discounted and combined rates as AFA. That is not an alternative; the rate is still based on an hour of work. Actual AFAs may include (1) fixed fees, (2) a combination of flat, hourly, or contingency fees, (3) success fees, or (4) a fee formula somehow tied to value. Second, the statistics indicate that those who use AFA do so infrequently.
Now, I’m not a fan of the hourly rate. I agree with its critics that it provides no incentive for lawyers to work efficiently or seek speedy resolution of legal matters. Furthermore, I applaud the notion that AFAs typically align attorney risk with client risk, bear some relationship to value, and provide cost certainty. However, three “T’s” 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 the law the way we do because that is how it has always been done. End of discussion. That mindset is hard to separate from the merits of why change is needed.
Time
Law firms need to mine and analyze a variety of data on the historical costs of matters to come up with an AFA that makes economic sense. That takes time. In many cases, companies cannot or do not want to invest the time. It’s just easier to stick to the traditional hourly rate.
Trust
Without trust, both attorney and client often fear that any AFA involves taking unreasonable risk. The attorney fears that the normal profit margins built into the hourly rate may not materialize once the matter is concluded. The client fears that a matter will be resolved in such a way that the law firm will earn a windfall compared to what it would have earned at the hourly rate. If there is trust between the parties, those fears can be overcome and not create a barrier to an AFA. However, in today’s “what have you done for me lately” legal market, I wonder if there is some kind of critical mass of trust required between lawyers and clients.
AFA: a risk worth taking
When training lawyers on AFA, I always recommend a calculated analysis of the feasibility and benefit of an AFA. In these modern times, law firms should consider the merits of AFAs in the new competitive legal environment. Unfortunately, in many cases, one or all three “T’s” get in the way.