Analysing Alternative Fee Arrangements for the Legal Profession
What value do lawyers bring to the table when clients are faced with a dispute or a transaction needing our legal advice or representation? How is this value measured and, in turn, weighed against the costs that our clients pay to have their problems solved?
It isn’t uncommon for lawyers to be thought of as “expensive” service providers. When clients have their problems resolved and get the outcome which they had hoped for, all is well and lawyers have no issues having their bills honoured. However, increasingly, clients may fail to see the lawyer’s value especially if they are billed on an hourly basis. Today’s clients look for predictability, efficiency, transparency, targeted legal advice, more access to alternative fee arrangements (AFA) and, above all, value for money.1Frederick J. Esposito, Jr., “The Alphabet Soup of Law Firm Pricing: Alternative Fee Arrangements, Behavior, Cost-Predictability, Demand and Efficiency! (Part 1)”, produced by the Thomson Reuters Legal Executive Institute, at http://www.legalexecutiveinstitute.com/the-alphabet-soup-of-law-firm-pricing-part-1/.
In this article, we set out the benefits and ways in which AFA has been implemented elsewhere. We highlight various AFA options and offer some practical proposals on how AFA may be implemented in the Singapore legal profession.
A. Hour-based Billing (HBB)
Benefits of HBB
Having endured through the ages, there must be valid and beneficial reasons for HBB:
- A simple way of measuring productivity
HBB makes it simple to measure the relative productivity of a law firm, which is calculated by dividing a lawyer’s billable hours by the total hours worked.
- Tends to be more profitable for law firms
Under HBB, the law firm’s legal fees are paid regardless of the outcome of the case.
- Familiar for lawyers
For decades, lawyers have used hourly rates as the way to bill clients for time spent on work done. HBB is therefore easy to explain to clients and does not cause confusion.
Adverse Effects of HBB
However, there are several downsides to HBB:
- Rewards inefficiency
HBB penalises lawyers who are able to close cases quickly. It also penalises the more experienced lawyers with greater professional knowledge and skill who may work at a more efficient rate. Hence affecting the quality of legal services provided.
- Creates budget uncertainty for clients
When using HBB, it is difficult to give clients a clear estimate of the costs due to the uncertainty of the time needed to handle a matter. This is one of the main factors causing clients’ frustration, which may impact on the public’s access to justice and on the profession’s reputation.
- Stressed and overworked lawyers
The ongoing “chasing” of billable hours and maximising of billing targets in the culture of HBB in the legal profession has caused mental health concerns. This remains a key issue that affects junior lawyers’ morale. Many are choosing to leave the profession in search of a less demanding work life2Steve Mark, “Analysing Alternatives to Time-Based Billing and the Australian Legal Market”, 18 July 2007 at http://www.olsc.nsw.gov.au/Documents/analysing_alternatives_to_time-based_billing_july_2007.pdf..
B. Alternative Fee Arrangements
The American Bar Association summarises what AFA is about:
“AFA are not about charging more than what an hourly rate might be—they are about charging an appropriate fee based on what value the client receives and how that client perceives value. Alternative billing should be based on what is fair and reasonable both to the client and the lawyer. Keeping track of time should be the lawyer’s measure of cost, not necessarily a measure of the value he or she is providing the clients in their legal needs.”3Mark A. Robertson, “Marketing Alternative Fee Arrangements”, Volume 37, Number 5 cited at https://legaltrek.com/blog/2015/09/alternative-fee-arrangements-a-comprehensive-law-firm-guide/. [Emphasis added]
Benefits of AFA in General
AFA provides many benefits that appeal to today’s clients:
- Encourages firms to be efficient
AFA incentivises lawyers to be proactive in handling their work by removing any pressure to spend long hours on a case. It aligns the interests of lawyers and clients towards efficient management of the clients’ matters.
- Reduces fee disputes with clients
Regular negotiations between lawyers and clients promote open communication, allow lawyers to assess their clients’ expectations and reduce disagreements over fees.
- Budgeting predictability
By being upfront about fee arrangements, clients are able to estimate and budget for the payment of legal costs. This helps clients to minimise financial risk, which is especially significant for extending legal services towards lower income clients, and hence grants the public greater access to justice.
- Pricing reflects the value of the work done
AFA highlights the value of the lawyer’s work, which allows billings to reflect sophisticated strategic concerns and hence improve the quality of legal services provided.
Benefits of AFA in Singapore
In October 2018, the Law Society of Singapore (the Law Society) and the Singapore Academy of Law conducted a survey (Survey) to, inter alia, determine in-house counsels’ (the Respondents) perspectives on legal technology made available by external law firms.
Among other findings, the Survey surfaced interesting and encouraging data which lend support to promoting the use of AFA:
- 99 per cent of the Respondents value firms being transparent in their pricing;
- 90 per cent of the Respondents value flexible payment schemes that align with the value that the legal work brings to them;
- While 64 per cent of the Respondents use a variety of AFA, they still need hourly rates to compare law firms; and
- 44 per cent of the Respondents agree that more than half of their outsourced matters to law firms are based on AFA.
The Survey also revealed that:
|The Respondents already use the following AFA||Capped fees||88%|
|The Respondents’ preferred AFA|
|Fixed / flat fees||25%|
Ultimately, by using AFA, firms are no longer limited by concerns over the time spent on a case, and are able to innovate and invest in automation and technology to improve their productivity.
C. Implementing AFA in the Singapore Legal Profession
While the Survey results presented above show a prevalence of capped and fixed/flat fees, it is also worth considering other AFA options which have been less explored domestically but which have been adopted in other jurisdictions:4These categories have been derived from various cross-jurisdictional commentaries.
|Type of AFA||Description||Benefits||Limitations|
|Fixed or Flat Fee||The client is charged for a pre-defined service at a fixed or flat rate.
This AFA may apply to the total engagement or a portion of the services provided.
Particularly applicable for commoditised areas of practice which adopt heavy usage of templates, such as estate planning, wills and conveyancing.
|A fixed fee is easy to administer and enables agreement between the lawyer and the client on the service(s) to be provided.
For the lawyer, the fixed fee provides greater freedom in case management.
For the client, the fixed fee arrangement provides some predictability in knowing exactly how much the matter will cost.
|To set a fixed or flat fee, a law firm needs a good grasp of its costs, including labour costs.
Acquiring such information may be time consuming and may even require an initial capital outlay.
|Capped Fee||This arrangement uses a “ceiling” for all fees for a particular matter.
Under this method, a law firm may charge an agreed hourly rate for the time required to complete the matter but may not exceed the ceiling in the total fees for the services provided.
|Statistics indicate that this method, commonly referred to as “event-based costing”, has gained popularity with firms in Australia, the United Kingdom and the United States.||This method may be disadvantageous to litigators who cannot adequately anticipate matters that may subsequently become complex.|
|Percentage Fee||This method is based on a schedule of fees related to the amount involved in the matter being handled.
The amount may be pre-determined, such as a percentage of a loan amount being negotiated or the value of real estate being purchased, or it may be based on the amount of a bond issue.
The percentage rate may be consistent or graduated.
|Examples where this method is used include bond issues and purchasing real estate, where the fees would be percentages of the number of bonds sold or purchase price of the property respectively.||This method should not be applied in litigation and/or contentious proceedings, to ensure that it does not amount to contingency fee arrangements that are prohibited under Rule 18 of the Legal Profession (Professional Conduct) Rules 2015 (PCR).|
|Retrospective Fee Based on Value||This method is determined collaboratively between the lawyer and the client, and should set forth the factors to be considered in setting the final fee.
In some instances, a minimum or a maximum fee may be outlined in the engagement agreement.
|This method depends on a close and trusting relationship between lawyer and client.||The exact amount of the fee is not known to either the lawyer or the client until the matter is concluded – this may to some, be considered a disadvantage.
Again, this method should not be applied in litigation matters and/or contentious proceedings, to ensure that it does not amount to contingency fee arrangements that are prohibited under rule 18 of the PCR.
|Relative Value Method||This method involves creating schedules that separate the lawyer’s services by subject matter and by task, and assigning a “relative value” or multiplier to each.
Each fee charger can be assigned a different basic rate or charge, which is then factored into the equation.
|Inherent in this approach, is a determination of the value of each component service or task.
This assumes that tasks performed by a lawyer differ in value; an assumption that is appreciated by sophisticated modern-day clients.
|This method clearly requires a determination of value in the production of legal services which may or may not coincide with the client’s perception of value.|
|Task- or Unit-Based Billing||This method is designed to report the cost of legal services by identified tasks rather than by the chronological approach which law firms are familiar with.
Under a task-based billing arrangement, law firms report their time used in billing codes, which describes particular tasks.
The lawyer is requested to provide a budget in advance of performing the particular task and may not (without prior agreement) exceed the budget.
|This method may be used in complex litigation or transactional matters where budgeting is required by the client.||May be time-consuming for lawyers to have to provide a budget in advance of performing a particular task.|
There is no specific AFA model that can be applied across the board, as one size really does not fit all! Each AFA option has its own set of merits and limitations, and may be suited for different types of legal services. The suitability of AFA depends on the client and matter at hand. To maintain or increase the level of profitability, “partners must select which clients and practice areas to make available for alternative billing arrangements and to invest their time to manage each practice area. [Lawyers], paralegals and administrative personnel must then be trained and substantive practice areas systematised and automated to the extent possible.”5Joel A. Rose, Certified Management Consultant and President of Joel A. Rose & Associates, Inc., in his article “Implementing an Alternative Billing Program” at http://www.joelarose.com/articles/managing_billing_systems.html. [Emphasis added]
Learning from Success Stories
A small Sydney law firm successfully implemented AFA by applying a new practice management system and engaging an independent consultant to review the cost of every matter that went through the firm. This process allowed the firm to successfully implement capped fees or “event-based costing” throughout the firm for all services provided by them.6K. Gibbs. “Firm’s budgets behind billing fraud”, Lawyers Weekly, 18 November 2005 cited at http://www.olsc.nsw.gov.au/Documents/analysing_alternatives_to_time-based_billing_july_2007.pdf.
Some larger firms in Singapore have already been similarly engaging such independent consultants to review their firms’ matters. Independent consultants can also offer large group training sessions and bespoke consultancy sessions to aid law firms, especially smaller law firms, in their implementation of AFA.
When deciding whether to adopt AFA, law firms of all sizes would be well-served to consider the following:
- Creating databases, whether with or without the help of independent consultants, to track their history with certain kinds of cases. This would be helpful for the firm in deciding how to price the legal work and convince a client that the firm’s proposal is fair;7Joel A. Rose in his article “Alternatives to Hourly Rate Billing” at http://www.joelarose.com/articles/alternatives_hourly_billing.html. and/or
- Reviewing AFA guides and/or adopting AFA programmes that the Law Society plans to roll out to educate lawyers and/or law firms on the implementation of AFA.8As an example, please refer to the guides and programmes made available by the Association of Corporate Council, which has developed a Value Challenge Programme to promote the use of AFA, at https://www.acc.com/valuechallenge/.
Finally, a reasonably drafted agreement between a lawyer and his client must be reached. Matters to be stipulated in any engagement letter should include the following:9See John W. Toothman Esq, “Alternative Billing: Living with the Uncorked Genie”. 7(3) Accounting for Law Firms, 1994 and Mark A. Dombroff, “Helping Clients Understand the Billing Process” in Richard C. Reed, Beyond the Billable Hour: An Anthology of Alternative Billing Methods, both cited at http://www.joelarose.com/articles/alternatives_hourly_billing.html.
- The billing schedule and the client’s right to request some other schedule if desired;
- The people in the firm who will be working on the matter;
- A suggestion that the firm’s personnel department perform certain tasks under the lawyer’s supervision such as document collection and production;
- Advising the client that their matter will be closely monitored and that regular meetings should be scheduled to protect against duplication, non-productive work and over-billing;
- Advising the client that the disbursements will be closely monitored; and/or
- Ascertaining what travel or other expenses the client will or will not pay.10Steve Mark for the Legal Services Commissioner of New South Wales, “Analysing Alternatives to Time-Based Billing and the Australian Legal Market” cited at http://www.joelarose.com/articles/alternatives_hourly_billing.html.
In due course, the Law Society will organise a variety of CPD events to assist lawyers in becoming more open to the use of AFA:
- Workshops on pricing, marketing and business development;
- Talks by independent consultants on how lawyers, especially those in small and medium-sized law firms, can go through their files to review the costs of matters that the firm has gone through, to create a database to track their history with certain kinds of cases;
- Talks by Singapore lawyers and/or in-house counsel to share their experiences and expertise on their effective use of AFA; and/or
- Addressing any ethical concerns arising from the use of AFA and how to avoid any pitfalls.
In light of the changing Singapore legal landscape and the enhanced technology now available to the legal sector, the Law Society encourages Singapore law firms of all sizes to consider the various AFA options already available in the Singapore market, and to consider implementing AFAs in their own firms.
|↑1||Frederick J. Esposito, Jr., “The Alphabet Soup of Law Firm Pricing: Alternative Fee Arrangements, Behavior, Cost-Predictability, Demand and Efficiency! (Part 1)”, produced by the Thomson Reuters Legal Executive Institute, at http://www.legalexecutiveinstitute.com/the-alphabet-soup-of-law-firm-pricing-part-1/.|
|↑2||Steve Mark, “Analysing Alternatives to Time-Based Billing and the Australian Legal Market”, 18 July 2007 at http://www.olsc.nsw.gov.au/Documents/analysing_alternatives_to_time-based_billing_july_2007.pdf.|
|↑3||Mark A. Robertson, “Marketing Alternative Fee Arrangements”, Volume 37, Number 5 cited at https://legaltrek.com/blog/2015/09/alternative-fee-arrangements-a-comprehensive-law-firm-guide/.|
|↑4||These categories have been derived from various cross-jurisdictional commentaries.|
|↑5||Joel A. Rose, Certified Management Consultant and President of Joel A. Rose & Associates, Inc., in his article “Implementing an Alternative Billing Program” at http://www.joelarose.com/articles/managing_billing_systems.html.|
|↑6||K. Gibbs. “Firm’s budgets behind billing fraud”, Lawyers Weekly, 18 November 2005 cited at http://www.olsc.nsw.gov.au/Documents/analysing_alternatives_to_time-based_billing_july_2007.pdf.|
|↑7||Joel A. Rose in his article “Alternatives to Hourly Rate Billing” at http://www.joelarose.com/articles/alternatives_hourly_billing.html.|
|↑8||As an example, please refer to the guides and programmes made available by the Association of Corporate Council, which has developed a Value Challenge Programme to promote the use of AFA, at https://www.acc.com/valuechallenge/.|
|↑9||See John W. Toothman Esq, “Alternative Billing: Living with the Uncorked Genie”. 7(3) Accounting for Law Firms, 1994 and Mark A. Dombroff, “Helping Clients Understand the Billing Process” in Richard C. Reed, Beyond the Billable Hour: An Anthology of Alternative Billing Methods, both cited at http://www.joelarose.com/articles/alternatives_hourly_billing.html.|
|↑10||Steve Mark for the Legal Services Commissioner of New South Wales, “Analysing Alternatives to Time-Based Billing and the Australian Legal Market” cited at http://www.joelarose.com/articles/alternatives_hourly_billing.html.|