Fixed Cost In Break-Even Analysis Refers To The Cost That The Hourly Rate Is Dead – Long Live the Hourly Rate

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The Hourly Rate Is Dead – Long Live the Hourly Rate

I’ve always wondered what the phrase “The King is dead” means. Long live the king.” If the king is dead, why are the next words “may he live?” According to Wikipedia, the phrase is a traditional proclamation made after the accession of a new monarch. I am reminded of this phrase every time I read about the death of the hourly rate and the supposed “joining” of the Alternative Fee Agreement (AFA). Well, to paraphrase Mark Twain, “reports of the death of the hourly rate have been greatly exaggerated.”

Yes, I am well aware of the statistics showing the increasing use of AFA. However, a closer look shows that the hourly rate, while not as stable as in the past, is not in danger of being put on life support. First, some people mislabel discounted and mixed fares as AFA. This is hardly an alternative; the rate is still based on one hour of work. True AFAs may include (1) fixed fees, (2) a combination of fixed, hourly, or contingency fees, (3) success fees, or (4) a fee formula tied in some way to value. Second, statistics show that those who use AFA do so infrequently.

I’m hardly a fan of the hourly rate. I agree with its critics that it provides no incentive for lawyers to work efficiently or to seek quick resolution of legal issues. Furthermore, I welcome the idea that AFAs generally align the solicitor’s risk with that of the client, have some relation to value and provide certainty of costs. However, three “T’s” stand in the way of any seismic shift to AFA: Tradition, Time and Trust.

Tradition

The hourly rate has outlived the kings. Our profession is changing slowly. We practice law the way we do because it always has been. End of discussion. This mentality is hard to break, regardless of the merits of why change is needed.

time

Law firms must extract and analyze a variety of data on historical cost of matters in order to propose an AFA that makes economic sense. This takes time. In many cases, companies are either unable or unwilling to invest the time. It’s just easier to stick to the time-honored hourly rate.

Trust

Without trust, both attorney and client often fear that any AFA involves taking unreasonable risk. The attorney fears that the normal profit margins embedded in the hourly rate will not be realized once the case is over. The client fears that a matter may be resolved in such a way that the law firm earns a windfall compared to what it would have earned at the hourly rate. If there is trust between the parties, these fears can be overcome and not create a barrier to AFA. In today’s “what have you done for me lately” legal market, however, I doubt that there is any critical mass of necessary trust between attorneys and clients.

AFAs – a risk worth taking

When training attorneys on AFAs, I always recommend a calculated analysis of the feasibility and benefit of AFAs. In these modern times, law firms would be wise to consider the benefits of an AFA in the new competitive legal environment. Unfortunately, in many cases, one or all three T’s get in the way.

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