Debunking the Myths About Alternative Fee Arrangements: Interviews with Three Practitioners
“Alternative fee arrangements are inferior to traditional hourly billing.” “Fixed fees are only for routine work, like drafting standard contracts.” “You have to bill by the hour in litigation – how can you know how long a dispute will take?” How true are these perceptions about alternative fee arrangements (AFAs)? While a lot has been written about how clients are rejecting the billable hour and how lawyers should adopt AFAs, less has been written about the experiences of practitioners who have already made the switch.
Earlier this year, the Law Society’s Knowledge Management Department (recently renamed Legal Research & Development Department) spoke to three lawyers who not only have experience using AFAs, but also bill most of their work on an alternative basis.1 We drew our interviewees from personal contacts who 1) had experience using AFAs and 2) were willing to give us an interview. We interviewed the three lawyers at different times and combined their responses into one article. (Two of the three have given up hourly billing entirely!) We spoke to:
- Mr S Doraraj – sole proprietor of Raj Govin Law Practice, specialising in criminal cases.
- Mr Arvin Lee – partner at Wee Swee Teow LLP, focusing on international arbitration for clients from Southeast Asia and China.
- Mr Nicholas Lum – partner at Ince & Co Singapore LLP and Head of the China Practice in the Singapore office, specialising in dispute resolution.
Kenneth Goh and Stella Chen (KGSC) sat down with them to learn about the kinds of AFAs they offer, why they departed from the traditional time-based billing model, and what effects offering AFAs has had on their practice.
What kind of AFAs does your firm have? How did your firm determine what level to set the alternative fees at?
Doraraj: My firm charges fixed fees. I do about 90% criminal cases, and I’ll break down a matter into stages. For each stage I charge a fixed fee. I use the hourly rate as a guide – I’ll estimate how many hours each stage takes, then multiply by the hourly rate to fix the fee.
Arvin: I charge fixed fees based on milestones. For each milestone I would estimate the time needed based both on the case complexity and the claim amount. If I multiply the time needed by my charge-out rate, I can estimate my time costs for each milestone, and likewise for each fee-earner on the file.
Nicholas: I typically offer three types of AFAs – fee caps and fixed fee quotes, discounts off my hourly rate or off my final invoice, and retainer arrangements. I generally use fee caps or fixed fee quotes for more straightforward cases, and discounts off my hourly rate or total invoice for larger-scale matters, for example an international arbitration matter. These discounts off hourly rates and issued invoices are usually pegged with an agreement by clients to make prompt payment, which certainly helps with the firm’s cash flow. Retainer arrangements are more common for clients from China.
KGSC: Doraraj and Arvin, both your billing models sound very similar. Can you tell us about how you break down a matter into milestones or stages?
Doraraj: For me, the first stage of a criminal matter usually includes taking instructions and first mention in court, the second stage includes sending representations and court appearance during the pre-trial stage, and the third stage is trial.
Arvin: I do international arbitration, so the first milestone might be filing the Notice of Arbitration, the next milestone reviewing the Response to the Notice of Arbitration, and so on.
KGSC: Thank you, that’s very clear. Another thing we notice that for both of you, your fixed fees are still based on your estimated time costs – in that sense, it’s similar to hourly billing.
Arvin: Yes. Clients don’t quibble about fees being linked to how much time a matter takes. They tell me “I understand you charge X hundred dollars per hour, I think you’re worth it, that’s why I came to you.” They just don’t want the uncertainty as to whether you’ll spend 100 hours or 100,000 hours – that’s where fixed fees help.
How long has your firm offered AFAs?
Doraraj: Since I started my firm last July.
Arvin: The way I set fees is personal to myself, not my firm. I’ve charged fixed fees since I first became a partner
Nicholas: I’ve had over 10 years of experience with AFAs.
How often do you enter into AFAs with clients? For example, what percentage of clients or how many cases per year?
Doraraj: We only offer fixed fees – we don’t bill by the hour.
Arvin: I mostly offer fixed fees and fee caps because of requests by my clientele. If a client requested hourly billing, I would certainly accommodate!
Nicholas: About 70% of my work is billed using AFAs. I do a lot of work for clients from China, who are generally more uncomfortable with hourly billing and would like more certainty regarding the fees they are paying.
Why did you start offering AFAs? How did you determine whether AFAs would be suitable for your firm?
Doraraj: In my previous firm I was already using fixed fees. When I started my current firm, from day one we did not want to bill on an hourly basis – keeping time sheets is very tedious. Fixed fees bring about cost certainty for the client and help to avoid fee disputes.
Arvin: I started because I had a client who was very, very cost-conscious. I met him soon after I became a partner and gained the ability to set my own fees.
I knew fixed fees would be suitable because I specialise in clients from China and Southeast Asia, who tend to want what in Chinese is called “da bao jia” – package rates or fixed fees. Since my clientele is cost-conscious, I try to build long-term relationships – the money you may not make in one particular piece of work is made up for by the volume of repeated work.
Nicholas: Similar reasons to Arvin. Like I mentioned previously, my Chinese clients generally prefer alternatives to hourly billing.
KGSC: It’s interesting how the three of you had different reasons for adopting AFAs – either due to client demand, or to lessen the burden of keeping timesheets and handling fee disputes.
All of you do dispute resolution, which is traditionally said to be one of the hardest practice areas to implement AFAs. Have you had difficulties where after you fix your fees, something new (outside the agreed scope of work in the matter) comes in and you have to do more work?
Doraraj: I’ve had pro bono criminal cases where fresh charges come in as the case progresses. Because of this experience we tell paying clients “Our fee is for the charges you are facing now, any new charges will be billed separately.”
Arvin: When I set my fees at a matter’s start, I explain that the fees are based on the complexity level as I understand now. If something new comes along, since I’ve done the initial assessment with clients, I have the basis to recommend adding more hours to a certain milestone. If the client has no cash flow issues, they normally agree.
KGSC: What if they do have cash flow issues?
Arvin: I try to be helpful. Then we look at alternatives – can you pay me when the money comes in? If not, but I can get repeat work out of it, I might just tell them “I’ll do the work for you at no extra charge for this matter, but I hope that you’ll instruct me for your next dispute.”
KGSC: That’s a very pragmatic and commercial approach.
Arvin: This assumes that I exceed the agreed fee because new work comes in. If I exceed because I underestimated the level of work – and I could and should have foreseen it when quoting my initial fees – I would absorb the loss. On a recent case, our fee estimate was S$180,000, but our actual time costs were S$240,000. I stuck to the fee quote because a deal is a deal. Until now, the general counsel stays in touch with me on social media. I know that the next time his company needs advice, he would come to me.
Nicholas: For me, one of my biggest concerns when I started offering AFAs was having that difficult conversation with clients if we do exceed the agreed fee. “I know we’ve agreed only $5,000, but certain things that are not the client’s nor the practitioner’s fault have gone beyond the initially-contemplated scope of work, so instead of $5,000 we’re looking at $7,000-$8,000.” Many lawyers may not want to haggle, or think it is a waste of time given that the fee has been agreed.
But I would urge every lawyer to have that difficult conversation. Even if the outcome is no, it’s important that the client knows “I’ve gone the extra mile for you, and I’m taking the hit financially because I want to build a long-term relationship with you.” It leaves a good impression on the client and it’s a good way to start a new business relationship or cement an existing one.
How has offering AFAs affected your firm’s client retention, client intake and profitability?
Arvin: I think that repeat work is driven by a lot of factors, but it doesn’t hurt that I give them certainty of financial exposure. I had a CEO client who once told me “Arvin, you are watchful of my costs and I’m going to come back to you.” Often you get repeat work when clients go around saying good things about you.
Nicholas: I agree with Arvin – it doesn’t hurt client intake and retention when you’re flexible in offering fee structures that align with what the client wants. Financially you may take a hit in the short term, but most practitioners would tell you that profitability is tied to long-term relationships with clients. If you act for a client in many small matters and build a long-term relationship, you become the go-to person if one day they have a big matter.
Doraraj: Let me answer that by sharing my firm’s fixed-fee package for sending out letters of demand. The market charges X dollars for sending out one letter of demand, but since the amount is so low, there’s no value for me in doing this work. Instead I charge, for example, 4X dollars for a package: I will send up to 3-4 letters of demand if the other party doesn’t respond, and I will follow up with them and try to settle the matter amicably.
KGSC: How is this package different from what other law firms are doing?
Doraraj: Normally after sending the letter of demand, the client has to come back to the lawyer if the other side doesn’t respond. The lawyer’s role ends after sending out the letter of demand. But now I take care of everything – I will follow up with the other side if they don’t respond, and I will try to settle the matter.
So it’s a win-win situation. The client benefits because they don’t have to worry. And I benefit because I can charge higher to justify the extra work done for my letter of demand, and I can build a relationship with the client. If you send only one letter of demand, you don’t build a relationship.
KGSC: So the package improves both your client retention and your profitability.
How has offering AFAs affected your working practices? For example, some commentators have suggested that moving away from billable hours will promote efficiency/make lawyers better project managers – do you agree?
Nicholas: I definitely agree that fixed fees require you to work more efficiently. Delegation to juniors is key – not all enquiries require a partner’s attention, so you should try to understand the client’s needs. Cross-referring work laterally also improves efficiency. For example, if a client has a sector-specific question which is not within my expertise, I would refer them to a partner in my firm with the relevant expertise, rather than spend time dealing with the matter myself. You don’t have to know everything, and you can’t be an expert in every sector, but it is crucial that you are the go-to person for your client and can guide them to colleagues with the necessary expertise.
Arvin: I agree that delegation is crucial. The CEO client I mentioned who praised me for being watchful of his costs, he said that because he saw how I delegated work to my associates rather than doing everything myself.
And this is not really an effect of fixed fees, but I believe that we must never lose sight of the Pareto principle: 20% of the time you spend gets you 80% of the value. Clients, especially sophisticated institutional clients, prefer to get a competent product in a reasonable period of time rather than a very good or perfect product in a considerably longer time. They like getting a competent work product in 40 hours for consideration, rather than hearing “I’m still working on it, and by the way here’s my bill for 200 hours.”
Could you share any other pros and cons of offering AFAs?
Doraraj: Like I said earlier about why I started offering fixed fees, it reduces any misunderstanding between the client and solicitor as to legal costs – the client knows how much we will charge them. My warrant to act contains the various stages of a matter and my fee for each stage, and I explain these to the client before they sign it.
Also I think it helps to build the personal relationship between the lawyer and client when you don’t have to charge them every time you see them. If you have a personal relationship with your client, you become “their lawyer”. But the relationship can only build if you see them often, and that’s harder if you charge them whenever you meet.
KGSC: That’s true. Relationship-building and avoiding fee disputes could well be overlooked benefits since they’re difficult to quantify.
Arvin: This is specific to international commercial arbitration, but I find that my offering fixed fees makes it easier for my client to get a third-party funder. Funders appreciate counsel who charge fixed fees because they can estimate their legal costs upfront. And as the claimant, having a third-party funder signals to the other side that another team of lawyers looked at your case and thought there was at least a 70% chance of success.
One last question – what advice would you have for law firms that are considering whether to offer AFAs?
Arvin: This advice is more for individuals, not firms. First, see if you have profitability KPIs where you need to realise, i.e. actually collect, a certain percentage of recorded work-in-progress (WIP) each year, because if so you might find it harder to offer fixed fees. Also look at your firm’s overheads, because sometimes billing targets are there because the firm has high overheads.
A senior practitioner I worked for once shared some very good commercial advice: “A law firm is like a commercial airliner. It’s going to take off whether or not you fill all the seats, but you still have to pay for the fuel, the crew and the food on board.” It’s better to give everyone a discount and fill up all the seats, than refuse to budge and have few or no passengers.
Nicholas: I tend to agree with that philosophy. You may get squeezed financially when you first start offering AFAs, but the alternative is unfortunately not getting the client at all.
KGSC: Playing the devil’s advocate here, what’s to stop a client from “shopping for lawyers”? If a client knows that a lawyer will give them a discount the first time to get their business, what’s to stop them from going to different lawyers and saying “My previous lawyer gave me this much, so I want you to go even lower”?
Nicholas: You’re absolutely right – clients do shop for law firms. But looking at it from a “glass half-full” perspective, it’s precisely because of “law firm shopping” that clients can ultimately judge what kind of lawyer they’re dealing with. I’ve asked many clients why they come back to me, and they tell me they have certainly encountered law firms that are cheaper, but one, they have a relationship with me, and two, they’re happy with my service. Why AFAs matter is because – like what I said earlier – being flexible with your fee structure never hurts client satisfaction.
So regarding “shopping around”, if clients are used to you and like you, I think they would hesitate to try someone totally unknown just to save a couple of bucks. What distinguishes you from someone who offers lower fees must ultimately be your relationship with your client and the value (and value-addedness) of your service.
KGSC: This would be a good point to wrap up our interview. Doraraj, Arvin, Nicholas, thank you for speaking to us.
Doraraj, Arvin and Nicholas all specialise in dispute resolution, yet they use fixed fees or fee caps as their primary or exclusive method of billing. While Arvin and Nicholas transited to AFAs due to client demand, Doraraj adopted AFAs for the benefits to his firm – he wanted to spend less time keeping timesheets and dealing with fee disputes.
During the course of the interviews, it became clear that for these practitioners, AFAs do not simply involve billing differently, but defining “value” in a different way for their clients. Moreover, AFAs can help lawyers work more efficiently and provide certainty on costs. Above all, all three practitioners reiterated the importance of investing in long-term relationships with clients.
Perhaps it is time to move beyond debating the pros and cons of hourly billing, and ask instead how lawyers can best deliver value to, and build long-term relationships with, their clients.
Endnotes [ + ]
|1.||↑||We drew our interviewees from personal contacts who 1) had experience using AFAs and 2) were willing to give us an interview. We interviewed the three lawyers at different times and combined their responses into one article.|