Written by: Marcus Wolter, Elizabeth Bestwick and Crystel Saraie
As client demand for cost predictability and flexibility grows, law firms are shifting away from the traditional hourly billing model and adopting Alternative Fee Arrangements (AFAs). AFAs offer a range of billing options, including fixed fees, capped fees, and retainer agreements, all designed to provide more certainty and flexibility than hourly billing.
According to LexisNexis’ 2021 analysis, pricing models were identified as the third-largest challenge for law firms, with 21% of respondents citing dissatisfaction with traditional billing methods.[1] Since then, AFAs have gained traction as clients increasingly prefer predictable costs. In 2022, 20.6% of legal revenue came from AFAs, and this figure is expected to rise to 72% by 2025.[2] Smaller firms, in particular, are using AFAs to attract new clients, leveraging their flexibility compared to larger, more traditional firms. LexisNexis’ Bellwether 2023 report found that only 8% of small law firms bill exclusively by the hour, making them early adopters of AFAs.[3]
One key driver behind the rise of AFAs is the increasing use of AI and technology in legal practice. AI tools are streamlining legal tasks such as billing, research, and document review, making it easier for firms to offer fixed or capped fees. In fact, 84% of professionals believe that AI will significantly boost efficiency in these areas.[3] However, while smaller firms are leading the adoption of AFAs, they often face challenges in keeping up with the latest technology that could further enhance their efficiency.
AFAs and technology-driven efficiencies are the future of legal billing, and firms that embrace these changes are well-positioned to thrive. Caldwell is at the forefront of this shift, offering flexible billing options and integrating AI and technology seamlessly into our business processes to maximize efficiency and productivity.
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[1] Olsen, E. (2021, November 29). What are law firms’ 10 biggest client retention challenges? LexisNexis. https://www.lexisnexis.com/community/insights/legal/b/thought-leadership/posts/top-10-law-firm-client-retention-challenges?srsltid=AfmBOooXUfUuEeON8Ag5BqSkucZGyOFhnzTCrn90W0zeHe1EvubXYApM
[2] Rusanow, G., & Hildebrandt, B. (2024). 2024 Client Advisory (p. 5). Citi Global Wealth.
[3] LexisNexis Bellwether. (2023). Bellwether 2023: Bold Ambitions?. Lexis Nexis. https://www.lexisnexis.co.uk/insights/bellwether-2023-bold-ambitions/index.html