The Billable Hour vs. Alternative Fee Arrangements: What’s Best for Your Firm

For decades, the billable hour has been the foundation of law firm economics. It provides a clear, quantifiable way to track attorney time, ensuring firms are compensated for the work performed.

But as in-house legal teams face growing pressure to cut costs and demonstrate value, many are questioning whether the billable hour is still the best model-or if it's time to explore alternative fee arrangements (AFAs).

Law firms that understand and embrace flexible, client-aligned pricing models may discover not only stronger client relationships, but also greater operational efficiency and financial stability. So what's the right approach? Let's explore the trade-offs, the rise of AFAs, and how your firm can make the right decision for its practice.

The Pros and Cons of the Billable Hour

Despite its critics, the billable hour remains dominant for good reason. Below are some of the key benefits and challenges firms should consider.

Pros:

• Revenue Alignment - Income directly reflects the time spent on client matters.
• Operational Flexibility - Firms can scale or pivot mid-matter without renegotiating fees.
• Clear Performance Metrics - Billable hours offer a standardized way to measure attorney productivity and contributions.

Cons:

• Efficiency Concerns - The model rewards time spent rather than outcomes achieved, which can unintentionally lead to inflated hours and overbilling.
• Cost Uncertainty - Without upfront pricing, clients may struggle to budget legal spend accurately.
• Wellness & Burnout Issues - High hourly targets can lead to stress, burnout, and attrition-especially among associates.

Why Do Firms Still Rely on the Billable Hour?

Even with mounting objections, the billable hour remains deeply embedded in legal practice.

In fact, according to a recent Legal Value Network survey, most firms still handle 75% or more of their work on an hourly basis. One key reason? Lack of client familiarity with alternative models-87% of firms say their clients don't know how to properly evaluate non-hourly fee structures.

In-house legal departments worry they'll overpay their outside counsel, while firms fear they'll be undercompensated. The result? A status quo where neither side takes the first step toward change.

Alternative Fee Arrangements: A Smarter Way to Bill?

Alternative fee arrangements (AFAs) offer a range of billing models outside the traditional hourly rate. When structured well, they can improve alignment between firms and clients, encourage efficiency, and even enhance profitability.

Common AFA Models:

• Fixed Fees - A set price for a defined scope of work.
• Blended Rate - A single hourly rate for all attorneys, regardless of seniority.
• Capped Fees - A maximum fee with a standard hourly or blended rate applied until the cap is reached.
• Success-Based Fees - Fees tied to outcomes, with additional compensation for achieving agreed-upon results.

Why Consider AFAs?

More firms are beginning to see AFAs as not just viable-but strategic.

• Predictable Costs for Clients - Easier budgeting for legal departments.
• Stronger Client Relationships - Moves away from transactional relationships and toward partnership.
• Efficiency Incentives - Encourages firms to staff and manage matters with intention.
• Competitive Advantage - Firms offering flexible pricing may stand out in a crowded market.

Overcoming the Challenges of AFAs

While AFAs hold promise, they're not without complexity. Many firms hesitate due to concerns about scope management, profitability, and client expectations.

The key to a successful AFA? Clear structure and communication.

• Define Scope Upfront - Outline exactly what's included and what's not.
• Budget Collaboratively - Set expectations early and align with client goals.
• Maintain Visibility - Build in check-ins, progress updates, and clear reporting.
• Experiment & Adjust - Consider piloting AFAs on specific matters before expanding firm-wide.

Which Model Is Best for Your Firm?

There's no one-size-fits-all answer. For some firms, hourly billing still offers the right mix of flexibility and financial alignment. For others, AFAs provide an opportunity to strengthen client relationships and offer a more value-driven approach to legal services.

Many forward-thinking firms are blending the two-using traditional billing for certain matters while piloting AFAs where they make strategic sense.

Ultimately, the best model is one that aligns with your firm's goals, client expectations, and practice area dynamics.

Need Help Navigating A Changing Legal Landscape?

At LHH, we understand the evolving demands of today's legal market-because we've lived it. Within our Legal division, 86% of our team has practiced law, and 81% have firsthand experience in law firms.

We partner with firms to stay ahead of emerging trends, adapt to shifting client expectations, and build strategies that keep your team competitive and future-ready. Let's work together to move your firm forward.

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