The hourly rate is dead – Long live the hourly rate

I always wondered what the phrase “The King is dead. Long live the King” means. If the King is dead, why are the next words “long live”? According to Wikipedia, the phrase is a traditional proclamation made after the ascension of a new monarch. I am reminded of this phrase every time I read about the death of the hourly rate and presumably the “adherence” of the alternative rate arrangement (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 indicating the increasing use of AFA. However, a closer look shows that the hourly rate, while not as healthy as in the past, is not in danger of being placed on life support. First, some people mistakenly label combined and discounted rates as AFAs. That is not an alternative; the rate is still based on one hour of work. Actual AFAs may include (1) fixed fees, (2) a combination of flat, hourly, or contingency fees, (3) success fees, or (4) a fee formula in some way linked to value. Second, statistics indicate that those who use AFA do so infrequently.

Now, I’m not a fan of the hourly rate. I agree with its critics that it does not provide any incentive for attorneys to work efficiently or seek speedy resolution of legal matters. Furthermore, I applaud the notion that AFAs typically align attorney risk with client risk, bear some relation to value, and provide cost certainty. However, three “T’s” stand in the way of any seismic shift towards AFAs: Tradition, Time and Trust.

Tradition

The hourly rate has outlived the kings. Our profession is slow to change. We practice law the way we do because that’s the way it’s always been done. End of discussion. That mindset is hard to separate from the merits of why change is needed.

Weather

Law firms need to mine and analyze a variety of historical case cost data to come up with an AFA that makes economic sense. That takes time. In many cases, companies are unable or unwilling to invest the time. It’s just easier to stick to the traditional hourly rate.

Confidence

Without trust, both attorney and client often fear that any AFA involves taking an unreasonable risk. The attorney fears that the normal profit margins built into the hourly rate may not materialize once the matter is concluded. The client fears that a matter will be resolved in such a way that the law firm will make a windfall compared to what it would have made at the hourly rate. If there is trust between the parties, those fears can be overcome and not create a barrier to an AFA. However, in today’s “what have you done for me lately?” legal market, I wonder if there is any kind of critical mass of trust required between attorneys and clients.

AFA: a risk worth taking

When I train attorneys on AFAs, I always recommend a calculated analysis of the feasibility and benefit of an AFA. In these modern times, law firms should consider the merits of AFAs in the new competitive legal environment. Unfortunately, in many cases, one or all three “T’s” get in the way.