Death of the Billable Hour: Are Subscription Agreements a Viable Fee Alternative?

Aderant Think Tank

Death of the Billable Hour: Are Subscription Agreements a Viable Fee Alternative?

Alternative fee agreements (AFAs) are now commonplace and widely accepted in the legal industry. According to the Washington Post, 80% of law firm leaders now believe that these non-hourly billing options are a permanent change to the legal industry—compared with only 28% in 2009. The Post also noted that a few major firms have now eliminated the billable hour model altogether for entire teams of their lawyers. For instance, Jackson Lewis announced at the end of 2014 that they will eliminate the billable hour as an evaluative tool for their associates.

With the traditional billable hour under attack, many firms and legal consultants have been experimenting with various creative pricing structures. Flat-fee billing models appear to be the most popular option to date, but so-called “subscription agreements” have also been attracting attention.

As the Law Insider pointed out last March, a subscription model could be appealing to the legal industry because of the scaling problem with billable hours. They wrote that “The definition of the billable hour, whether in law or massage therapy, is value delivered in measurable and monetizable quantities. One hour of my time is worth $X. One inherent limitation of the billable hour is it lacks scalability. You can charge more per hour, or bill more hours, but you can’t scale delivery beyond hiring more high priced associates.”

While the Law Insider report didn’t see much potential in law for scalable billing models, the Lawyerist was more optimistic about the future of subscription fees. In their article titled How to Offer Subscription Fees, they argued that subscription fees can in fact be “great fit” for legal services. More specifically, “Recurring fees are revenue you can count on, and clients who sign up for a subscription can become your best, longest-lasting clients. The current concept of subscription pricing is inspired by the movement from software as a product to software as a service.”

As imagined by this software-service model, subscription fees would be designed around clients with predictable, recurring legal needs. “When the work is regular and predictable, it is usually easy enough to come up with an average and set a monthly fee, almost like negotiating a salary. Those clients are easy, as long as your retainer agreement carefully describes the scope of the services you are providing.” The subscription approach also provides a great source of predictable recurring revenue for the firm and is simple to bill unlike some complex AFAs.

Obviously not all client needs will be regular and predictable, but if designed properly subscription agreements can still be flexible enough to work. The Lawyerist suggests that “The most sustainable way to offer subscription fees is probably to offer limited valuable services for a limited monthly fee.”

Whether subscription agreements are the answer for your firm, what can’t be disputed is that the new billing landscape is forcing lawyers to imagine new fee arrangements that wouldn’t have been considered even five years ago.

Join the discussion on LinkedIn or Twitter @Aderant and let us know what you think!