What percent of legal revenue is derived from alternative fee arrangements?
Over the last few years, surveys have consistently found that the use of non-hourly alternative fee arrangements (AFAs) is slowly growing. In Altman Weil’s 2012 Law Firms in Transition Survey, 47% of firms reported that their AFA revenue had increased in the past year. In the 2012 ALM Legal Intelligence Survey, 50% of law departments and 62% of law firms reported that there was an increase in the volume of AFAs in the preceding year. And in the American Lawyer’s 2012 Law Firm Leaders Survey, 68% said more clients are requesting AFAs.
While it is crystal clear that the use of AFAs is growing, it is difficult to be sure exactly what percent of law firm revenue they currently represent. There are many reasons this question is hard to answer, including disagreements over the definition of the term “alternative fee arrangements,” law firm secrecy about finances, and the fact that many firms simply do not know.
When I conducted the LegalBizDev Survey of Alternative Fees in 2009, one of the questions I asked AmLaw 100 decision makers was, “Does your accounting system code alternative fee projects separately, so that you can easily look up the exact percent of last year’s revenue from alternative fees at your firm?” At that time, only about one in four could look up AFA revenue. (66% answered no, and another 7% did not know.) When I asked decision makers in that same survey to estimate the average revenue percentage for the AmLaw 100 as a whole, answers were all over the map, ranging from 1% of revenue to 25%.
While the answers would be more precise if that survey were repeated today, there is still no definitive revenue data in many firms. Last week, I talked to one lawyer who had recently helped conduct a confidential study to determine the AFA percent at her own AmLaw 100 firm. They had come up with a number, but she did not trust it. She felt that some lawyers were including blended rates and discounts in AFAs while others were not, and many true AFAs had been completely missed.
The best data to date was published two weeks ago in the 2013 Client Advisory from the Hildebrandt Institute and Citi Private Bank. It was based on a series of surveys of 176 large law firms (79 from the AmLaw 100, 47 from the second hundred, and 50 additional firms), and shows a slow but steady increase. In 2011, 16% of law firm revenue came from non-hourly AFAs. In 2012 it was 17%, and for 2013 they are predicting 19%.
While in some ways 19% may not sound like much, it is important to emphasize that this implies that the AmLaw 100 alone will perform over $13 billion worth of legal work this year on a non-hourly basis (assuming their total gross revenue stays around $70 billion). And while we may never know whether this percentage is exactly correct, there can be no doubt that it is going up.
This post was adapted from my new book Legal project management, pricing and alternative fee arrangements.