Hourly Billing vs. Alternative Fee Arrangements

Pat Lamb at the Valorem Law Group is a huge proponent of alternative fee arrangements and has made that fee structure a core part of the firm’s marketing effort. On his blog, Pat recently posted on the subject again proclaiming the virtues of AFAs. I was a little cautious about posting a comment because I had done so once previously but for some reason a decision was made to not post my comment. Nevertheless, I decided to try again and I replied to his most recent post. My comment and Pat’s response to the comment can be found here: http://tinyurl.com/y8cnegr

I didn’t want to have an endless reply/response game on Pat’s blog, so I thought I’d post my thoughts on the matter here.
 
Pat is a good litigation lawyer, and litigation lawyers often spend a great deal of time rewriting the opponent’s arguments and shooting down these “strawman” arguments. It’s good litigation strategy but it does not serve the pursuit of truth. I know that AFAs are all the rage now, but we should at least have a genuine discussion about them.
Pat starts out his reply by saying:

“Let’s begin with a fundamental truth: in any fee structure, a client gets what it pays for. If you buy hours, you will get hours. If you buy efficiency, that is what you will get.”
 
Of course, that is not at all the issue to be dealt with and although it is glib, the statement is hogwash. One can just as easily say “If you buy good, high quality, valuable work to be done by your attorney but only that work, then you’ll get exactly that. If you want to buy an attorney who will decide what to do, when to do and how much to do on your files, then that is what you will get.”
The very end of Pat’s reply is the real key to understanding his enthusiastic marketing of AFAs. He says this:
“While there are, as I have said many times, examples of firms who bill by the hour who are not caught up in maximizing hours, there are too many stories and too much data to dispute the conclusion that a shift from hourly billing to well-thought out AFAs produces materially greater value in the eyes of the client.”
 
I’ve highlighted the significant language: “well-thought out AFAs” because proponents of AFAs usually attempt to make an extremely poor comparison between AFAs and hourly billing. The contrast is usually set out as:
(1) unethical law firms who abuse hourly billing with clients by overbilling for activities which do not advance the client’s interests and in matters in which the clients do not supervise the lawyers,

               versus

(2) “well-thought out” AFAs in which the client and law firm go into great detail about the work to be done, the work which should not be done, the expected outcome of the matter, and the costs to be accrued.

The problem with this type of biased comparison is it assumes the worst possible scenario with hourly billing and the best possible scenario with AFAs. Shouldn’t the proper comparison be between the more likely instances of the two billing systems, and assuming the same degree of client involvement in the matter management and billing process? Of course, that was the point I made in initially posting a comment on Pat’s blog: If clients would put the same interest and work into matters handled under the hourly billing system as they would under an AFA, there is absolutely no reason why the results for the client under an hourly billing structure cannot be far better than the AFA system.

Most client disputes with law firms regarding billing relate to misunderstandings between the two regarding expectations; very few relate to malicious, intentional churning of files. Of course, Pat feeds into the worst case scenario by stating the following:

“That they spend their time avoiding being taken advantage of by their own counsel, however, is something I see as an indictment of the hourly billing model. Protecting your client from being ripped off by your outside lawyer is a waste of resources, certainly not the highest and best use of the inside lawyer’s time and talent. This “policing” approach also assumes that in-house counsel has the time needed to carefully review and monitor all bills.”

Using terms such as “being taken advantage of” and “being ripped off” by outside counsel improperly attempts to lump all hourly billing attorneys into a coven of horrible, unethical ambulance chasers while at the same time elevating all AFA lawyers as cherubic, beneficent halo-wearing professionals who don’t concern themselves with pedantic interests such as money.

The reality is that any corporate client which decides to pursue AFAs has a great deal of work ahead of it, not the least of which is continuing to monitor matters handled by outside AFA counsel to ensure that the proper work is being done. On this point, Pat acknowledges the argument that AFA counsel might put in less needed work in order to enhance the firm’s bottom line, but he again glibly dismisses it by suggesting anything could happen and that “I know of no examples where a firm devoted inadequate resources in the presence of a success incentive.”

Respectfully to Pat, the hourly billing model has existed since lawyers began doing work (including the many years he practiced under such a system and under which he managed to practice ethically and have clients value his assistance). AFAs, for the large part, are a relatively recent creation. To properly address it, we at least have to consider the possibility something will occur. Further, although Pat wants to dismiss it, I guarantee that clients in AFAs are thinking about it, as they should.

Pat and I agree that clients want value, which does not mean the lowest possible cost; it means a mixture of things, including costs, results, expectations, and everything else which clients care about.

To be clear, I have absolutely nothing against AFAs and would happily work with my clients to find mutually beneficial arrangements; I’ve done them in the past. Pat and I disagree, however, on whether a client can obtain “value” in an hourly billing model.

I suspect it is because Pat’s law firm has gone full bore with AFAs as a marketing method, rejecting hourly billing systems. Unfortunately, he absolutely refuses to acknowledge that hourly billing lawyers can provide value. I have a very long list of clients who would disagree with him as they are people and companies with whom I have been deeply involved and who know and trust I will ethically carry out their wishes for their benefit. Certainly there have been disagreements between some lawyers and their clients over billing (although I have not had any), but I pointed out in my comment to Pat the recent lawsuits between AFA lawyers and their clients, so AFAs should not be expected to eliminate controversies.

Client direction, understanding and supervision are critical to ANY successful relationship with lawyers, whether it is in a traditional hourly billing model or a new AFA model.

I believe that the recent surge toward “value” is actually a movement of clients saying they want to work with their lawyers and be certain lawyers and clients are on the same page for the best interests of the client. For that, I say “great!”

As for AFAs versus hourly billing, I say: “Can’t we all just get along?”

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