The Firms

June 22, 2010 6:43 PM

Study: For Law Firms, Cost-Cutting and Alternative Fees Here to Stay

Posted by Victor Li

Correction: An earlier version of this story incorrectly stated the number of firms polled by Altman Weil for its latest survey and omitted information about what percentage of revenue most firms are now getting via alternative fee arrangements, according to Altman Weil principal Tom Clay. We regret the errors.

The economic downturn some have dubbed the Great Recession is forcing many law firms to adapt on the fly—by tinkering with internal structures, for instance, and revising billing practices—in a bid to maintain profit margins. And, according to a report released Tuesday by Pennsylvania-based legal consulting firm Altman Weil, these changes are likely to stick long after the economy recovers.

Altman, which surveyed 787 firms, found that nearly all of the 218 firms that responded--including 95 of the country’s 250 largest firms--now offer their clients alternative fee arrangements. Many firms, the survey found, also plan to continue to streamline their ranks by offering fewer partnerships, keeping summer and first-year associate classes low, and outsourcing or contracting legal work in the near future.

“The primary impact on law firms of the recent recession will be a greater focus on efficiency and productivity driven by client demands for cost control,” Altman Weil principal Tom Clay said in a press release. “But most firms are still in the early stages of figuring out how to successfully institutionalize those changes in their organizations.”

According to the survey, 94.5 percent of the responding firms now offer some form of nonhourly billing, while all firms with 150 or more attorneys do so. The survey also found that firms are increasingly relying on centralized decision-making bodies to approve such alternative billing arrangements and—in a sign that control costs is a driving factor in the shift toward nonhourly billing--using a cost-analysis approach to setting such fees.

Clay believes that the alternative fee trend is here to stay. “We don’t see why the clients would ever want to go back to the way things were,” says Clay. “Why would they want to? These alternative fee arrangements are being driven by large corporate clients, and as they become more experienced with them, they like them.” (Clay says a few top firms are now getting 40 percent of their revenue from what he calls AFAs; at most firms, he says, alternative fees now account for between 8 and 12 percent of revenue.)

That doesn’t mean law firms are enthusiastic about this method of billing. The Altman Weil survey found that while most firms are willing to consider AFAs if asked, they don’t voluntarily offer them to their clients.  Additionally, half of all firms believe alternative fees are either less profitable or aren’t sure about how they compare to traditional billable hours.

“We’re seeing some systemization, especially in larger firms, but there is a long way to go before alternative fee programs are business-focused and profit-driven rather than being seen as concessions to clients,” said Clay in a press release.

Cost control is also the primary factor behind the recent movement toward streamlining the workforce at law firms. According to the survey, nearly 40 percent of responding firms made fewer partnership offers in 2009, and half of all responding firms expect that trend to continue in 2010.

Additionally, the survey found, over 60 percent of responding firms shrank their summer programs in 2009 and 54 percent anticipated doing so this year. The long-term future of associates, meanwhile, is less clear: 42 percent of responding firms expressed a belief that smaller first-year classes are here to stay, while 45 percent said things will eventually return to normal.

In another dose of bad news for associates, the survey found that law firms appear to be relying more on contract attorneys or outsourcing their legal work. A majority of responding firms expect that contract lawyers will become a permanent part of their firm’s structure; 28 percent expect outsourcing to become permanent, compared to 10 percent of firms who said that a year ago.

Ultimately, Clay says, these changes are more than mere blips. “I think over the next three to five years, unless you’re an incredible optimist about the economy, this will be permanent,” says Clay. “As firms become more comfortable with contract lawyers, AFAs, fewer partners, and whatnot, they’ll see it as a way to deliver services more efficiently to their clients.”



Make a comment

Comments (0)
Save & Share: Facebook | Del.ic.ious | | Email |

Reprints & Permissions


Report offensive comments to The Am Law Daily.

The comments to this entry are closed.

By: TwitterButtons.com

From the Newswire

Sign up to receive Legal Blog Watch by email
View a Sample