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An article on a recent legal market survey suggested a new trend in legal pricing: a trend away from Alternative Fee Arrangements (AFAs). Trend may be too strong a word, but in any event, the survey results bear consideration.
Offline I received a number of reactions about the survey result. Most people were concerned it might be viewed as a sign things are returning to the Old Normal. Yet at the same time, no one suggested they were seeing signs of such a return.
So what does it mean?
I never thought AFAs were going to sweep through the market and eliminate hourly (a.k.a. time and material) billing. As much as hourly billing has been pilloried as the demon of the profession, it will retain a role in the market as along as clients find it useful. So it would only be a matter of time before some new equilibrium of pricing approaches was established. This new balance would likely include a greater variety of types of billing arrangements and over time the balance will always be adjusting to market conditions. But maybe we are reaching a point where AFAs have peaked in their natural share of the market?
In looking at various surveys and market data, I see a possible explanation. As clients continue to seek ways to reduce the cost of legal services, some surveys and commentators rightly suggest that clients have been asking for AFAs, and then settling for bigger discounts. Market data seems to confirm this, as rate increases are moderating and realization against standard rates continues to drop. As well market surveys show firms in the second and third tier of the market (AmLaw 200 and Mid-level firms) have been doing relatively well, compared to the top tier (AmLaw 100).
This all suggests clients are moving work to lower rate providers instead of embracing AFAs. So a survey stating AFAs may have peaked seems reasonable to me.
Looking past the various surveys, I see two other market movements afoot. The first is a growing recognition from clients that not all work needs to be handled by top tier firms. In the past, this was the classic “you can never go wrong choosing IBM” approach. Clients sent a vast majority of their work to top tier firms as a means to protect themselves. No one wanted to take the risk of a bad legal result. With cost savings pressure increasing, in-house counsel now have the cover they need to take those risks. Saving money takes precedence over legal risk. Or at least we might make that assumption based on the market behavior.
The second market movement I suggest is afoot, is yet to fully materialize. Moving work to lower rate providers may or may not save clients money. It is easy to claim credit on cost savings with a 10% reduction in billing rates, but does it actually save money? The answer is: we’re not sure. Which is not a great answer. We see a number of providers entering the market bent on helping answer this question.
Adding the two movements together results in clients taking on greater legal risk without a clear cost savings result. I think this issue will come into focus over time. At that point clients may do one of two things: #1 – They may re-engage on AFAs, or #2 – They may increase their attention to efficiency and effectiveness. With #1, clients will be shifting their focus to cost savings at the fee level over the rate level. This approach should result in more quantifiable cost savings. With #2 – clients will more deeply engaged with their law firms to focus effort on value. Of course some combination of #1 and #2 is even more likely.
At the top level, I sense the market is just trying to find its way to new ground. AFAs were originally held up as the best path towards cost savings. In reality, they are merely a tool. Achieving cost savings goals requires more than different pricing approaches. So the market will continue in its struggle to find the right mix of tools and approaches to meet that overriding goal. I suggest it is an overriding goal in the market, given the consistent focus on reducing legal fees across the market.
In the meantime, I predict we will continue to see such trends, within trends.