TMG's Take...on The Impact of Alternative Fee Arrangements
A perspective on legal management issues from The McCormick Group.

It appears that one notable outgrowth of the recent economic recession on legal practice is the increase in alternative fee arrangements. While the trend may be overstated----most observers believe that the majority of engagements will continue to be on an hourly basis---it does appear that the increase in AFA, as they’re called, is real and palpable.

The increase in AFA is likely to have some profound effects on the practice of law. For example, they will:

Increase the importance of practice group directors and business managers in law firms. One reason that hourly billing has been predominant is the virtual guarantee of sizable profits.  Though staffing mix and other factors affect matter profitability, with the mark-up most firms charge, losing money on hourly work requires real effort. With AFA, that dynamic changes.  Firms now need professionals with strong business/economic backgrounds to analyze both the risks and rewards of various alternative arrangements and to accurately forecast real ROI for the firm.

Increase the significance of technology as a potential game-changer for firms. Hourly billing provides little incentive for technological improvements in law firms, since accomplishing various tasks more quickly had a negative impact in terms of hours billed. Now, firms that have a strong hold of technology can offer both better deals for their clients and more bottom-line profits.  As Ron Friedmann, Senior Vice President of Integreon and former CIO at Mintz Levin, says: “The billable hour has always been the enemy of innovation and tech investment.  Firms that embrace AFA will find that tech is their friend – they can deliver the required result at lower cost, which means higher profit.”

Offer a potential solution for what to do with junior associates. With engagements based on value, not hours, the oft-repeated refrain of “no first-year associates on my matters,” will understandably come to an end. Of course, that doesn’t mean that firms can willy-nilly assign junior lawyers (and even paralegals) to do the work. Law firms need to ensure quality outcomes and in-house counsel will remain vigilant about who is staffing their matters and how they are being used. But firms that can institute effective training programs and can show how junior lawyers are adding value can recoup more of their investment in these newer attorneys.

TMG's Take is a regular e-mail advisory produced by The McCormick Group. The company's Law & Government Affairs and Law Firm Services groups combine the expertise of more than 15 Consultants to help law firms fulfill all of their lawyer and administrative recruiting needs. TMG's Take covers topics across the spectrum of law firm management, including associate and partner compensation, growth strategies, marketing and business development, operations and facilities management, finance and accounting, professional development, and technology. Please direct all inquiries to Steve Nelson, Managing Principal at (703) 841-1700 or snelson@tmg-dc.com.