A recent Law Technology Today story, “What is, and is not, an Alternative Fee Arrangement,” reports on the structures of alternative fee arrangements. This is part one of a two part blog series. The story states:
Fee agreement promote specific behaviors. For example, billing based on time causes people to spend more time on matters. That fact doesn’t change if the hourly rate is discounted, blended, or rack. In a truer sense, alternative fees are about relationships with clients that are not based on how many six-minute increments it took to complete a task. Hourly rate billing is cost-plus billing. In the broadest sense, alternatives are those billing methods that are not cost-plus. But to be more precise, here are the definitions I use throughout the rest of this post:
Structures That Are Not Alternative Fee Arrangements
Hourly rates. Clients are billed for the amount of time a given lawyer works, whether in hours, tenths of hours, or some other fraction of hours, multiplied by an hourly rates. Most firms have standard rates, book rates, or rack rates for all of their lawyers.
Hours x Rate = Revenue
Discounted hourly rates. Clients are billed for the amount of time a given lawyer works, whether in hours, tenths of hours, or some other fraction of hours, multiplied by an hourly rate that is less than the lawyer’s standard, book, or rack rate. Most firms will discount hourly rates for many of their larger clients.
Hours x Discounted Rate = Revenue
Blended hourly rates. Instead of using each lawyer’s standard, book, or rack rate, a common or “blended” number is used. For example, if the standard hourly rates for lawyers on a matter are $800, $600, and $400 per hour, the negotiated blended rate may be $550 per hour.
Hours x Rate = Revenue if (and only if) Revenue ˂ Cap Amount
Why are these not alternative fees? All of these fee structures incentivize lawyers working under them to bill more time. More time yields more revenue. As a rule of thumb, if the term “hourly rate” appears in the fee structure, the fee is not alternative, regardless of what adjective precedes “hourly rate.”
Discounted hourly rates, blended hourly rates, uncollected hourly rates, or Thursday hourly rates are all hourly rate structures, where more time spent equals more revenue. None of the approaches based on time fundamentally change the behavior of lawyers to the client’s benefit. The “more is better” mentality that so infects the legal system is not limited or altered in any meaningful way.