Law firms traditionally charge their clients through billable hours. Partners, associates, and paralegals are tasked with logging their hours throughout the day and billing their client at some established intervals (e.g. monthly or quarterly) or at the closing of a transaction. As clients rely more on in-house counsel and seek to control service provider fees, it is no surprise that the billable hour is going the way of Blockbuster. Clients are changing the landscape of the legal industry by demanding alternative fee arrangements, otherwise known as AFAs, and considering their enhanced bargaining power, law firms are increasingly moving toward this structure.
The major problem with billable hours, and one of the largest complaints of clients, is the fact that time is billed the same regardless of complexity. The simplest of tasks or even repeat deals can still demand a significant amount of time. As any real estate attorney can attest, mundane tasks that might not require a highly specialized legal expertise — such as due diligence on multi-property financing — can nonetheless result in exorbitant fees via billable hours. For instance, reviewing title, survey or zoning are not necessarily complex, yet significant amount of time might be required to sift through numerous easements and other encumbrances on properties that might even entail the eyes of several associates or paralegals.
Another drawback of the billable hour structure is its impact on law firms and profitability. Clients are asking for discounts and competition in the industry is fierce, particularly for work that is considered commoditized. Non-bespoke billing arrangements leave firms at risk for decreased profitability by failing to collect fees for time billed. This not only affects the firm but has a deleterious effect on each lawyer’s individual metrics for profitability as well (subsequently impacting their standing within the firm for both compensation and advancement purposes).
Instead of wrestling with how to adapt to savvy clients and an evolving market, innovative firms are relying on data and technology to guide their business decisions. With the development and adoption of solutions to increase the productivity of associates and paralegals and decrease hours spent on ministerial tasks, firms are chipping away at the time lawyers and support staff spend on administrative work, allowing them to focus on real fundamental lawyering. Although such tools might be fewer hours spent per matter, there are nonetheless two positive results here: firms will be able to scale to take on more matters and lawyers be exposed to more substantive work earlier in their career. Technology has forced the rethinking and transformation of numerous business models from banking to retail, and, while late to the party, it is time for the legal industry to enter the 21st Century. And in the case with other industries incorporating technology into their operations, adopting these new systems will enable law firms to more easily, and affordably, adapt to AFAs by increasing overall efficiency.
With all of that said, not all transactions fit neatly into AFAs. Every lawyer has, at some point, been told “pencils down” on a deal that was otherwise going full steam ahead. Then, when the deal ramps back a few weeks later, lawyers have to waste time reviewing old emails, if not replicating previous work to piece an entire transaction together. This is not only inefficient, but the resulting high bills upset clients and forces firms to write-off time to maintain their relationships. The issue, then, is considering the unpredictability of transactions, how can technology remove the risk of losing money when clients want an AFA?
One tool solving that problem is ProDeal: a transaction management tool that, in just over a year, has already simplified and expedited over $25 billion worth of transactions on its platform. ProDeal’s interface is designed as a real-time checklist to itemize and organize closing documents and foster collaboration among parties to a transaction. ProDeal eliminates duplication of efforts and one-off requests because it is a single source for all parties to a transaction. Whether you need the latest draft of the loan agreement or want to report to the higher-ups when they ask “where are we at?”, ProDeal’s flexibility and broad feature set keep everyone informed. Making an AFA work means effective time management and efficiency, which are the hallmarks of ProDeal.
AFAs may not completely replace billable hours but with heightened competition and more fastidious clients, firm’s will need to get creative with billing structures. Particularly in the last decade, the digital transformation has required all businesses to rethink, if not completely reinvent their business models, and the legal industry is not immune to such disruption. Law firms would be wise to adapt to this new landscape and innovate to both maintain their edge and their relationships. Failing to avail themselves of this new technology will not only leave them at a competitive disadvantage but will alienate clients and force them to seek more efficient counsel elsewhere.