Shifting Business Models: From Hourly Billing to Fixed Fees and Alternative Fee Arrangements

Professional services used to live and die by hourly billing. Time was the product. If a matter took longer, the invoice went up, and that was the end of the story.

Clients no longer accept that so easily. Since the 2008 financial crisis, in-house teams and business owners have pushed hard for predictable costs and value based pricing, which has driven the rise of alternative fee arrangements (AFAs) in law, consulting, and other advisory work. 

This article breaks down the shift from hourly billing to fixed fees and other AFAs, and sets out clear pros and cons so firms can choose models that work in the real world.

The Shift From Billable Hours To Alternative Fee Arrangements

For decades, the billable hour was the default way to charge for legal and advisory services. Firms tracked time in small increments, multiplied by an hourly rate, and issued a detailed invoice at the end of the month. Clients valued this model for its transparency around effort and for the ability to ramp work up or down as needed. 

After the 2008 recession, corporate clients started pushing back. Legal budgets were cut, procurement functions became more involved, and buyers demanded cost certainty and better alignment between fees and business outcomes. This pressure accelerated experimentation with AFAs across North America, Europe, and other markets. 

Today, most surveys show hourly billing remains dominant, but a growing share of matters use some form of non-hourly or hybrid pricing. AFAs are no longer a novelty. They are part of mainstream pricing strategy for competitive firms. 

What Are Alternative Fee Arrangements

Alternative fee arrangements (AFAs) are any pricing models that are not pure hourly billing. In practice, the most common AFAs include: 

• Fixed or flat fees – a set price for a defined scope, such as incorporation, simple contracts, or standard filings
• Capped fees – hourly billing with an agreed maximum total fee
• Blended rates – a single hourly rate for all team members, rather than different partner and associate rates.
• Contingency or success fees – payment that depends partly or entirely on achieving a specific outcome
• Subscription or retainer models – recurring monthly or annual payments in exchange for access to a defined bundle of services.
• Task based or phase based fees, fixed prices for each stage or task in a matter, such as discovery, drafting, or negotiation.

In short, AFAs shift the focus from hours spent to value delivered, although many still rely on careful internal time tracking to protect margins.

Pros And Cons Of Hourly Billing

Hourly billing is still the base model in many firms for good reasons.

Advantages of hourly billing

• Works well for complex or unpredictable matters where scope may expand or change over time
• Gives firms flexibility to bill for every hour of work, which can help maintain profitability on highly variable cases.
• Feels familiar and straightforward for many clients, especially when invoices clearly break down tasks and time spent.

Disadvantages of hourly billing

• Creates fee uncertainty for clients, who may struggle to budget or obtain internal approvals when total costs are unknown.
• Can be perceived as rewarding inefficiency, since more hours mean higher fees, even when the client would prefer a faster resolution.
• Encourages firms to focus on billable targets rather than client outcomes, which can hurt client satisfaction and lawyer wellbeing over time.

In short, hourly billing fits high-uncertainty work but can strain trust and budgeting.

Pros And Cons Of Fixed Fee Billing

Fixed or flat fees set a single price for a clearly defined scope of work. These are widely used for routine, repeatable matters, from standard contracts to simple corporate filings. 

Advantages of fixed fees

• Strong cost certainty for clients, making internal budgeting and approvals easier
• Aligns pricing with value rather than time; firms are rewarded for efficiency and smart process design.
• Improves cash flow: studies show firms using flat fees often issue invoices faster and get paid earlier than those relying only on hourly billing.
• Reduces billing disputes, because the client agrees to the price in advance instead of questioning individual time entries.

Disadvantages of fixed fees

• Accurate pricing depends on good scoping. If a matter proves more complex than expected, the firm absorbs extra time and cost
• Harder to apply to large, uncertain disputes or regulatory investigations where the path and workload are difficult to predict
• Can tempt teams to underinvest time in a matter if the fee is too low, which risks quality and client satisfaction if not managed carefully

Fixed fees work best when workflows are standardized, data on past matters is available, and the team can model average time and risk with reasonable accuracy.

Pros And Cons Of Other Alternative Fee Arrangements

Beyond pure fixed fees, firms are experimenting with hybrid and outcome based models.

• Capped fees combine hourly billing with a ceiling that protects the client. This offers more predictability, but firms must estimate carefully to avoid eroding margins.
• Blended rates give clients a single hourly rate across seniority levels, which simplifies pricing and can protect against overuse of senior staff. However, they may reduce incentives for efficiency because the total still rises with time.
• Success or performance fees link part of the compensation to outcomes. These can strongly align interests but can be complex to design, especially where results depend on external parties such as courts or regulators.
• Subscriptions and retainers provide recurring revenue for firms and ongoing access for clients. The challenge is defining scope clearly so the arrangement remains sustainable for both sides.

Most firms do not abandon hourly billing entirely. Instead, they build a portfolio of models and match each matter to the structure that fits its risk profile, complexity, and client expectations.

How To Choose The Right Model For Your Firm

Choosing between hourly billing, fixed fees, and other AFAs starts with a realistic view of your work:

• Map which matters are repeatable and which are genuinely unique
• Use time and billing data to understand the real cost of delivering each type of service
• Talk openly with key clients about what they value most: certainty, flexibility, shared risk, or speed

In many cases, a blended approach makes sense. For example, a firm might use fixed fees for standard documentation, capped hourly for negotiations, and success fees for high impact milestones.

Conclusion

The move from hourly billing to fixed fees and broader alternative fee arrangements is about more than pricing mechanics. At its core, it represents a shift from selling time to selling outcomes.

Hourly billing still has a role, especially for complex and unpredictable work. Fixed fees and other AFAs shine where scope can be defined, processes can be standardized, and both sides value predictability and alignment.

No one can promise a perfect model for every matter. However, firms that understand the pros and cons of each structure, invest in data, and design pricing around client value are better placed to compete as business models continue to evolve.

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