Making AFAs Work for Your Small to Mid-Size Law Firm
Since the 1980s, legal industry insiders have warned about the death of the billable hour. But for most lawyers, it’s become something of a “cry wolf” scenario. While there has been a gradual shift toward value-based pricing in recent decades, many still view hourly billing as the industry default.
But this time, the wolf is here. While there will likely always be a place for the billable hour, clients increasingly want more efficient, value-added services and predictable pricing from their law firms. This has accelerated the popularity of alternative fee arrangements (AFAs)—in fact, according to Bloomberg, 84% of firms offer them in some form.
And today, with the rise of game-changing artificial intelligence (AI) tools, AFAs are dramatically more viable. These tools make cost forecasting, project scoping, and budgeting not only more precise, but also quicker and easier. What’s more, the automation of many tasks that previously took unpredictable amounts of human billable hours further supports cost predictability. In a competitive legal market where clients insist on this kind of transparency, enterprising firms are already beginning to meet the demand for increased AFA options. A solid AFA strategy is not only a smart move; it’s essential to ensuring firms’ long-term survival.
The good news is that adopting AFAs is now more achievable than ever for small to mid-size law firms. Implementing the well-tested principles of Lean Law, along with the latest AI tools, can help your firm deliver legal services more efficiently, predictably, and profitably.
In this guide, we’ll show you how to get off to a running start and capture the first-mover advantage of offering expanded AFA options.
Hire an Esquire, Guide: Contract Attorney and Paralegal Hourly Rates
The Rise of AFAs: How We Got Here
The Backstory
The notion of AFAs began materializing decades ago in response to rising legal costs, client demands for pricing transparency, and inefficiencies inherent with the billable hour.Here’s a rough timeline of AFAs’ evolution:
- Globalization and market pressures (1970s-2000s): Legal budgets remained protected, but eventually faced pressures from globalization and corporate cost-cutting. Clients began seeking cost control and value-based pricing.
- The Great Recession (2008-2010): Legal operations came under the spotlight as firms demanded more budget certainty and sought cost-effective alternative staffing models.
- Post-recession trends (2010-present): Demand for law firm services stagnated, leading to increased reliance on legal vendors and in-house counsel.
Today, AFAs—such as fixed fees, contingency fees, and performance-based pricing—instill trust by giving clients more cost predictability and transparency over hourly billing. These arrangements also tend to create better alignment between legal costs and outcomes.
For law firms of all sizes, alternative billing models can mean more predicable revenue and fewer billing disputes. AFAs also reward efficiency. They encourage firms to streamline processes, use technology, and assign the right people to the right tasks, thereby cutting costs and increasing profit margins. They’re also a powerful differentiator, especially at a time when many corporate legal departments are being squeezed by budget constraints.
What’s more, as productivity-boosting technologies evolve, clients expect their outside counsel to offer more pricing flexibility. In a recent piece for Thomson Reuters, Jason Winmill, Chair of the Buying Legal Council, wrote: "The emergence of GenAI is already leading many general counsel (GCs) and other legal department leaders to start zeroing in on the fundamentals of the current law firm business model, including the billable hour."
Changing Law Firm-Client Relationships: Then & Now
THEN:
A companyʼs business was more likely to go to the same law firm for decades. There was less budget scrutiny, and executive leadership and shareholders weren’t laser-focused on cost trimming.
NOW:
Clients are firmly in the driver’s seat, with many more options in legal service delivery. They demand better efficiency, predictability, and cost-effectiveness.
Deloitte, "Perspectives: Alternative fee arrangements for outside legal counsel"
How Do We Define an AFA?
The definition of an AFA can be quite broad. But pricing professionals agree that a true AFA—one that genuinely moves away from the traditional billable hour—should include key elements like clear project scoping, shared risk, and aligned incentives between clients and law firms.
Common AFA structures include:
- Portfolio pricing: Related legal work is bundled into a single price, covering a set time, transaction, or practice area. Pricing is based on contingencies, work volume, or duration.
- Unbundled legal services: Clients pay only for the specific legal services they need (e.g., document drafting and preparation).
- Success-based fees: This is common in personal injury cases, where lawyers risk loss for a percentage of the settlement. Firms now use this for transactions, earning a share of the closing. Risk is managed by diversifying across multiple cases.
- Fixed fees with collars: This fee model sets a budget with an upper and lower limit. Clients pay the difference if costs fall below, and receive a discount if they exceed. It offers cost certainty, aligns incentives, and protects both parties.
- Payment plans: Clients pay their legal bill in set increments over time, which increases cash flow for the firm and makes prompt payments more likely.
- Subscriptions: Clients pay a recurring monthly fee to access legal services (e.g., document review). This is most suited to those within ongoing needs.
- Reduced hourly rates + success fee: The firm sets a flat fee based on estimated time. They earn a success fee if the case or deal succeeds, sharing risk with the client.
- Reverse contingency: Designed for defendants, this model works when potential exposure is clear. The client pays a percentage of the difference between their risk and the final settlement or judgment.
Now that we’ve covered AFAs 101, let’s explore a critical component of implementing them successfully: running a lean law practice.
The Evolution of Lean Law
Law firms don’t sell products—they provide essential, expertise-driven services that help clients navigate complex legal challenges. At their core, boutique to mid-tier firms thrive on trust, deep relationships, and the ability to solve high-stakes problems. But like any business, profitability matters. To stay competitive and deliver exceptional value, firms must strike a balance between personalized service and operational efficiency. That means refining workflows, reducing bottlenecks and redundancies, and leveraging the right tools to boost productivity—all without compromising the client experience. This idea of performance optimization is at the core of Lean Law.
How Did Lean Law Come to Be?
Lean Law is rooted in lean thinking—a philosophy of continuous improvement stemming from the automotive industry. Developed by Toyota in the 1940s, lean thinking built upon Henry Ford’s assembly line principles to streamline production. In the 1980s, Motorola developed Six Sigma, a data-driven methodology similarly focused on improving processes by reducing defects, minimizing variability, and enhancing efficiency.
Lean Six Sigma combines Lean and Six Sigma principles to help organizations streamline workflows, improve quality, and enhance customer satisfaction. And when we utilize Lean Six Sigma in the context of a law practice, we have Lean Law.
Lean Law applies Lean business principles as a means for continually improving legal services delivery. It’s built on five core principles:
- Defining value: Identifying services that are most important to clients and delivering them efficiently.
- Mapping the value stream: Analyzing all steps in legal service delivery to identify waste.
- Creating flow: Ensuring smooth workflows by eliminating bottlenecks and inefficiencies.
- Establishing a pull system: Initiating work based on client demand, rather than arbitrary deadlines.
- Pursuing perfection: Continuously tweaking processes to enhance efficiency and bolster client satisfaction.
By identifying and eliminating wasteful activities, small to mid-size firms can vastly tighten up their workflows. This streamlining is even more important as firms face mounting client pressure for greater efficiencies and alternative fee arrangements.
How Small to Mid-Size Firms Are Actively Incorporating Lean Law
How are small and mid-sized law firms incorporating Lean Law principles as a framework for refining their operations and serving their clients better? At a high-level, key strategies include:
- Optimizing resource allocation: Analyzing staff and resource utilization to ensure efforts are focused on profitable activities and that lawyers' time is used effectively. Hiring contract attorneys on an ad hoc basis can alleviate overages and seasonal swells in billable work without permanently increasing overhead.
- Streamlining processes: Using the process mapping technique to identify and eliminate bottlenecks and inefficiencies in areas like client onboarding, case management, and document review.
- Improving technology adoption: Leveraging AI and other technologies to automate tasks, improve communication, and enhance data set analysis.
- Aiming for continuous improvement: Fostering a culture of ongoing process evaluation and refinement built around the feedback of employees and clients.
Streamline Your Workforce
Staffing represents a big chunk of a law firm’s operating budget. That’s why flexible staffing models are another vital aspect of Lean Law. Legal process outsourcing (LPO) and hiring contract attorneys and paralegals allow firms to trim overhead costs and scale their operations up or down without long-term commitments.
Below is a look at common ways firms can better align staff with their business needs.
Legal Process Outsourcing (LPO)
Legal process outsourcing shifts specific legal tasks to external companies or paraprofessionals instead of relying on in-house staff. These tasks can range from document review, legal research, and administrative support to more complex matters like litigation and compliance.
By using LPO, law firms can:
- Reduce overhead costs: When it comes to tasks that may not require a permanent staff member, these “leaner” solutions allow firms to avoid the lofty expenses associated with hiring and maintaining full-time employees.
- Access specialized expertise: Firms can engage professionals with specific skills and experience for particular projects or case types—for example, eDiscovery specialists or foreign language legal experts.
- Scale resources as needed: Firms can stay agile by quickly adjust their staffing levels to meet changing workloads and client demands without the long-term commitment of permanent hires.
- Free up attorneys: LPO leverages dedicated teams to complete tasks more quickly. Lawyers, in turn, can stay centered on providing outstanding service to existing clients and developing new business.
The global LPO market is experiencing significant growth. According to a new report, this market was valued at $17.45 billion in 2023. It’s expected to grow by 31.4% to reach a value of $117.89 billion by 2030. This highlights the increasing importance of LPO in the legal industry and its role in enabling law firms to operate more efficiently.
Freelance or Contract Attorneys and Paralegals
In addition to LPO, temporary (or contract) attorneys and paralegals provide a valuable resource for firms seeking to maintain a slimmer workforce while addressing specific needs or workload variations. Contract lawyers and paralegals can be engaged to handle:
- Workload fluctuations: These professionals can offer support during peak periods or when full-time staff are unavailable.
- Special projects: Contract lawyers can provide valuable, on-demand expertise for specific projects requiring specialized knowledge or skills.
- Niche expertise: Temporary talent can be used to fill gaps in a firm's expertise for specific case types or legal areas.
Fractional attorneys are another option that allows small to mid-size firms to access a broad range of legal expertise without high overhead costs. These are generalist or specialist attorneys who provide contractual, part-time support and counsel for clients.
With rates ranging from $20 an hour for entry-level legal services to $200+ an hour for seasoned talent, contract attorneys and paralegals bring on-demand expertise from across a range of practice areas and industries. This makes them a natural fit for lean law firms.
As with any lean law execution, how you engage the strategy is key to success. Legal hiring platforms that lock you into minimum hourly usage agreements can eat into the profits and savings you gain from working with contract attorneys. Flexibility is paramount to scaling up and down to maximize profits. This is why Hire an Esquire allows firms to set the hours, rates, and terms when they hire contract legal professionals.
Rise of the On-Demand Legal Workforce
Legal Process Outsourcing (LPO) Delegating legal tasks (e.g., document review, legal research) to external service providers.
Temporary/Contract Attorneys Hired on a short-term or project basis to handle specific legal tasks; not permanent employees.
Fractional Attorneys Provide part-time or as-needed legal services without being a full-time employee. Niche specialists advising on a matter.
It’s clear flexible staffing models can support legal operations efficiency by providing the right talent at the right time. Now, let’s discuss another Lean Law game-changer: AI.
Achieve Leaner Workflows With AI
Thomson Reuters Institute, 2024 Report on the State of the U.S. Legal Market
OpenAI’s generative AI tool, ChatGPT, burst onto the world stage in 2022. Since then, AI technologies have disrupted businesses and industries worldwide in profound ways.
The legal sector is no exception. While generative AI’s introduction has been met with a mix of excitement and skepticism, its impact on legal service delivery cannot be ignored. In the law practice setting, AI tools can augment human capabilities, improve accuracy, predict costs effectively, and empower firms to deliver greater value to clients.
In fact, AI adoption in law firms has surged dramatically, with generative AI usage surging from 11% to 41% since July 2023 according to a LexisNexis report.
Legal Professionals’ Reaction to AI
45%
Say AI will enhance productivity and efficiency
38%
Say AI will free up time for higher-level tasks
Thomson Reuters Institute, 2024 Report on the State of the U.S. Legal Market
How Are Small to Mid-Size Firms Leveraging AI Tools?
Generative AI is a powerful tool for law firms looking to further enhance efficiency and streamline operations within a Lean Law framework. This and other types of AI-powered tools can automate a wide range of tasks, including:
- Cost estimation: To help with pricing AFAs, AI can provide predictive pricing models by analyzing history and provide accurate cost estimates. It can also track work performed and suggesting fair pricing models.
- Predictive litigation analytics: AI can speedily assess past case outcomes to determine the likelihood of success.
- AI-powered risk assessment: Law firms use AI to analyze legal risks and align pricing with case complexity.
- Document drafting: Generative AI can generate initial drafts of contracts, briefs, and other legal documents based on predefined templates and client requirements. This allows lawyers to save time and focus on reviewing and refining the documents rather than starting from scratch.
- Legal research: AI can quickly analyze large volumes of legal data to identify relevant precedents and summarize key information. It can also sift through vast databases of case law and statutes to provide lawyers with the most pertinent citations for their cases, significantly reducing research time.
- Deposition preparation: AI can analyze transcripts and assists in preparing for depositions by identifying key themes and potential lines of questioning.
- Contract review and eDiscovery: AI tools can identify potential risks and inconsistencies in contracts, ensuring compliance and accuracy. It can analyze contracts for clauses that may be problematic or require further negotiation, helping lawyers to mitigate risks and protect their clients' interests. AI is also able to expedite discovery processes and reduce costs.
- Case management: AI tools can help manage cases, track deadlines, and organize information, improving efficiency and reducing the risk of missed deadlines.
- Client communication: Quick and accurate responses to common legal queries can be obtained through AI-powered chatbots. This can improve client satisfaction by providing immediate answers to basic questions and freeing up lawyers' time for more complex consultations.
- Marketing and business development: AI allows firms to analyze consumer behavior and trends and provide targeted marketing strategies, allowing them to reach potential clients more effectively.
Benefits and Challenges of AI in Law Firms
Like with any novel technology, there are pros and cons to implementing artificial intelligence tools. Let’s look at both sides of the coin.
The Benefits: Automation at Its FinestBy automating time-consuming legal tasks, AI in essence serves as a virtual legal assistant. This frees up a firm’s lawyers to shift their attention to higher-tier work that requires real human expertise and judgment.
The time savings AI brings also has the potential to substantially improve work-life balance for legal professionals. Data from Thomson Reuters reveals that within one year, AI could free up to four hours per week of work time for legal professionals. This translates into roughly 200 freed-up hours over the course of a year.
Other benefits of AI include:
- Improved cost forecasting: AI tools can review historical data to identify patterns in time spent, resources used, and outcomes. This helps firms forecast workloads and estimate costs for similar future work with greater precision, which aids in the creation of effective AFAs
- Enhanced accuracy: AI reduces human error by automating legal research, contract analysis, and document drafting, ensuring greater precision. By cross-referencing vast legal databases, these tools can reduce the risk of oversight and inconsistencies in legal documents
- Cost reduction: Automating mundane legal activities with AI—such as document review, contract management, and e-discovery—means firms can rely less on manual labor and lower their operational costs.
- Better decision-making: AI-driven research tools provide comprehensive data analysis, giving lawyers insights into past case outcomes and future trends. One of the key benefits of AI technology is its ability to enhance creative analysis and identification of persuasive precedents. By automating routine tasks and freeing up time for higher-level thinking, AI allows lawyers to focus on developing innovative legal strategies and providing more insightful advice to clients.
- Scalability: AI-powered tools can handle high caseloads with great efficiency, allowing firms to quickly process and analyze large volumes of legal documents. This is especially useful in litigation, corporate law, and regulatory compliance, which involve extensive paperwork and time-consuming discovery requests.
- Enhanced client service: AI can improve service efficiency by providing real-time updates, automating routine inquiries, and ensuring faster response times.
Just like any legal tech, the successful implementation of AI-driven workflows in small to mid-size law firms requires addressing the challenges associated with its use. AI presents a range of obstacles that call for careful consideration and responsible implementation:
- Ethical concerns: As AI becomes more integrated into legal practice, firms must make sure it’s used responsibly and ethically. This includes addressing biases embedded in AI algorithms, which can lead to unfair or discriminatory outcomes. What’s more, since AI tools often process sensitive legal information, maintaining client confidentiality is critical. Firms need to set clear guidelines and establish oversight to ensure these tools align with ethical and professional standards.
- Accuracy and reliability: From a law firm perspective, one big concern with AI is the potential for malpractice claims due to "hallucinations," where AI generates plausible-sounding but inaccurate or fabricated information. Rigorous review and fact-checking are essential to mitigate these risks. AI is no substitute for due diligence—lawyers still need to verify AI outputs to make sure legal arguments, contract clauses, and case law citations are correct, reliable, and legally sound.
- Data security and privacy: AI tools often require access to confidential client information, raising concerns about data privacy and regulatory compliance. Firms must implement strict security measures to protect sensitive legal documents and client communications. Compliance with data protection laws (e.g., HIPAA) is key to preventing unauthorized access and breaches.
- Integration with existing workflows: To maximize efficiency, AI tools must be seamlessly integrated into legal workflows—from document review and contract analysis to case research and litigation support. Firms should choose solutions that complement their existing case management systems and allow for smooth collaboration between attorneys, paralegals, and other legal professionals.
- Training and education: Another challenge is the lack of understanding and fear surrounding AI advancements among lawyers and law firm support staff. Law firm leaders have a critical role to play in overcoming fear of new technology by providing education and training on the responsible and ethical use of AI. Yet while there’s a growing consensus on the importance of Gen AI training, many law firms still lack such programs. Addressing this gap is crucial for ensuring that legal professionals can effectively utilize AI tools while upholding ethical standards.
- Job displacement: The rise of AI has many people worried about job losses, especially for junior lawyers and paralegals who traditionally handle routine legal tasks. To ease fears, firms should invest in upskilling initiatives that give employees paths to higher-value roles. Rather than a replacement for humans, AI should be viewed as a tool that complements the services firms provide
The AI journey is in its infancy, and for now, firms are still trying to wrap their arms around issues like data security, data accuracy, and ethics. But the revolution is happening, and it will only gain momentum as legal and logistical issues are resolved. Over the next three to 10 years, these technologies are destined to irrevocably transform traditional law firm structures and business models.
Now that you have a better grasp on how AI enables greater efficiency, accuracy, and cost predictability, let’s review how firms can lay the groundwork for providing alternative fee arrangements.
Looking ahead to 2024 and beyond, it’s obvious that clients are likely to continue to be quite aggressive about moving work to more cost-effective law firms, given the potential savings they could see. Law firms looking to retain clients in this environment will need to focus on emphasizing the value and efficiency their work provides to the client while avoiding the pitfalls of devaluing work by emphasizing price.
Thomson Reuters Institute, 2024 Report on the State of the U.S. Legal MarketImplementing AFAs: Best Practices
Whether it's fear of change, concerns about profitability, or worries about how clients will react, instituting alternative fee arrangements can be met with some resistance within smaller law firms. That’s why it’s important to move forward in a thoughtful manner and take things slow. Below are some practical strategies for adopting AFAs in your firm:
- Send a clear message from the top: Your firm's leaders should communicate directly to their respective teams to make a clear business case for implementing AFAs. Everyone needs to be on board.
- Determine which work is best suited to AFAs: For many types of law, AFAs are more viable than hourly billing, since they align better with both client expectations and a firm’s efficiency goals. To begin, aim for routine, low-volatility legal services that are repeatable, predictable, and outcome based. For instance, flat fees work well for work like contract drafting and real estate closings. Subscription-based models suit businesses that need ongoing legal advice and compliance reviews.
- Dig into previous data: Take a look at how your firm has delivered this type of legal work in the past. Explore AI tools that can analyze past case data to estimate time, effort, and resources needed for similar matters. This will give you meaningful insights that can be used to customize mutually beneficial fee arrangements.
- Understand the client’s definition of success: What specific kind of value is your client looking to obtain under the AFA? Key performance indicators (KPIs) to establish may include work quality, speed of service, accuracy, and other metrics.
- Make sure terms and conditions are explicitly defined: AFAs are most effective when both the firm and client fully understand the scope of work, pricing, and payment structure up front. Clearly outlining due dates and payment amounts to your clients will help ensure a smooth and stress-free billing experience and lessen the risk of disputes.
- Start simple: Implementing AFAs is a learning curve. That’s why it’s a smart idea to begin with basic AFAs (like fixed fee arrangements) and apply them to one or two matters as a “pilot.”
- Track projects carefully: Use project management tools to keep tabs on your firm’s active AFA projects, identify inefficiencies, and ensure work remains within the agreed-upon pricing structures. AI-powered dashboards and analytics tools can be used to help you track budget usage, reducing the chance of overruns. These insights can be leveraged to refine your pricing models for future AFA engagements.
Implementing AFAs
BEST PRACTICES- Determining which matters are most suitable for AFAs
- Collaborating with clients to understand value and to price fairly and accordingly
- Using high-quality past data on hours and project costs
- Using project management and lean law practices
- Using discounts as loss leaders
- Using poor or incomplete billing data to predict pricing
- Not collaborating with clients on pricing
- Not scoping out projects, lack of project management/ lean processes
- Offer “shadow billing” (when clients ask to see bills’ line items after fixed-fee work has been completed)
WORST PRACTICES
Closing Notes
AFAs not only give small to mid-size firms a competitive edge; they enable a higher-performing, more profitable, and truly client-centered law practice.
In Thomson Reuters Institute's “2024 Report on the State of the U.S. Legal Market,” the authors talk about how failure to respond to airline industry changes ultimately led to Pan Am’s downfall and bankruptcy. It’s an ominous bit of history that bears an important lesson for law firms:
“Law firm leaders today must understand this change in client expectations and adapt to focus on value provided, efficiencies gained, and expertise offered if they are going to flourish in the years ahead. In short, they must do what the leaders of Pan Am did not—understand their customers’ desires were changing and pivot their service to the marketplace.”
Like the airline industry, the legal sector has seen fundamental shifts in the last 15 years, and its evolution shows no signs of slowing. Law firms that cling to outdated billing and service delivery models risk falling behind. Those that boldly embrace AFAs—with the help of Lean Law practices and AI—will not only survive; they’ll thrive in this era of change.
Now is the time to reimagine what’s possible for your firm.
Ready to explore contract staffing solutions that help keep your workforce lean and efficient?Book a demo today to learn how Hire an Esquire instantly matches law firms like yours with vetted, experienced contract attorneys and paraprofessionals.