Category: Alternative Fee Arrangements

Legal Management Update – March 2026

I’m pleased to present my new Legal Management Update for your reading enjoyment. See here. The purpose of the newsletter is to alert you to current developments affecting how law firms are governed, priced, staffed, and run.

Let me know what you think. It’s still a work in progress, so I’d really appreciate any comments you may have for improvements, etc.

Partner Compensation: The Catalyst for Law Firm Innovation

Many firms get stuck at the same critical point with legal innovation. They’ve brought in AI and introduced value-based pricing. A firm strategic plan has been signed off on. Everything looks ready to go.

Then nothing clicks.

These firms struggle to identify the barriers preventing them from moving forward with their innovation efforts. They have AI that could make them efficient and effective. They have value-based pricing that could recognize their increased efficiency. They have strategies to implement everything and get it working in concert.

But there’s still a missing link: partner compensation.

The Four Drivers That Must Work Together

Real change requires four connected elements. Many firms focus on three and wonder why the fourth derails everything.

You need a strategic plan with clear firm goals that support legal innovation. Without direction, changes become random experiments rather than coordinated change.

You need a value-based pricing strategy that recovers efficiency gains. Fixed-fee billing and value-based arrangements reward results instead of time spent.

You need AI that improves effectiveness. The technology exists to streamline legal work dramatically.

And finally, you need a compensation system that incentivizes partners to achieve the tasks required to contribute to the firm’s innovation goals.

Why Compensation Is the Missing Link

You need to align your partner compensation system with your firm’s strategic innovation goals and modify compensation systems that primarily depend on billable hours.

Most firms are strongly opposed to changing their compensation system. However, it is often necessary to implement AI and value-based pricing. When compensation rewards billable hours above everything else, partners resist AI that reduces those hours. Their income depends on maximizing time billed, so they’ll protect that model regardless of firm strategy.

How Compensation Needs to Change for Innovation

Some ideas for linking compensation to innovation include focusing compensation more on revenues and nonbillable contributions instead of individual billable hours. Partners will be incentivized by proactive individual plans that help achieve strategic firm objectives, including AI implementation and value-based pricing. Management will oversee these plans and report on partner performance for comp purposes. Just a couple of the changes needed to foster innovation in law firms.

Most law firms focus on incentives for short-term profit, such as billable hours/production, and little on nonbillable innovations, like AI implementation and value-based pricing, which contribute to long-term profitability. This needs to change.

Clients are quickly catching on to the benefits of AI and will switch away from law firms that don’t adapt their processes, pricing and incentive systems to meet their needs. Therefore, partners currently married to time billing should be encouraged to transition to fixed or value-based pricing models where feasible.

The Urgency Is Real

You can’t escape changing your compensation system in this new environment. The legal market is shifting, whether you participate or not. AI will continue to advance, and client expectations will keep evolving toward value-based relationships.

The technology exists. The pricing models work. The only thing standing between most firms and successful innovation is their willingness to align compensation with their strategic goals.

Stop going in circles. Address compensation now, or risk losing clients and partners in an environment that demands innovation to survive.

Pricing the Client, Not the Work: A More Flexible, Value-Driven Approach to Legal Billing

I often see lawyers debating on LinkedIn about the merits and disadvantages of hourly billing versus value-based pricing. I don’t see it as a question of doing it one way vs. the other. Each client will have their own unique needs regarding how they prefer to be billed. And it doesn’t have to be just one way. The right way to price/bill is the one that best meets your client’s needs.

We need to start offering options: that could mean two or three different options, including hourly billing or value-based pricing, or a hybrid billing option, which includes a monthly retainer plus hourly billing, etc. This is my twist on “Price the client, not the work”, as Ron Baker recommends.

Clients Have Different Needs, So Give Them Different Options

Some clients still prefer hourly billing. Others want predictability through flat fees or monthly retainers. Some are open to value-based pricing or outcome-contingent models. A few are even willing to pay a premium for guarantees or guaranteed availability.

All of these models can coexist. Your job is not to convince every client to fit your preferred pricing/billing method. Your job is to understand what the client values, then design a fee structure that reflects that.

In Implementing Value Pricing, Ron Baker lays out a clear, eight-step process for moving firms toward value-based pricing models. But even Baker doesn’t argue that it’s all or nothing. Instead, it’s about moving along a continuum, away from pricing based on effort, toward pricing based on value.

Hourly Billing Isn’t Going Anywhere, But It Shouldn’t Be the Only Option

Let’s be realistic: hourly billing isn’t disappearing anytime soon. And that’s okay. What we can do is evolve from relying on it as our only pricing model.

Hybrid models are often more practical and better aligned with both firm and client interests. A client might be on a monthly flat fee for routine advisory work, with defined scope projects priced at a fixed fee, and a litigation file on a success-based arrangement.

The point is flexibility. And when you build tailored fee structures, you change the conversation from “what’s your hourly rate?” to “how can we work together in a way that makes sense for both of us?”

Unique Pricing Drives Unique Value and Breaks the Race to the Bottom

If your pricing model looks like everyone else’s, then you’re just another commodity. That’s when clients start comparison shopping based on price alone.

But if you’re structuring your pricing based on deep knowledge of the client’s goals and preferred ways of working, you’re no longer interchangeable. You’re delivering something tailored and valuable. You’re a legal professional, not a plumber.

And most importantly, you’re helping the client win, which means you’ll win too.

Track Your Time Even When You’re Not Billing It

One more essential point: I believe you should still record time, even when using non-hourly billing models.

Time tracking isn’t just for billing. It’s how you understand your internal costs, opportunity costs, and profitability. If you abandon time tracking altogether, you lose visibility into whether a fixed fee or value-based arrangement is actually working for your business.

Think of it as managing a portfolio. You need data to know what’s sustainable and where the value really lies.

Value Pricing Doesn’t Mean Taking All the Risk

A lot of firms resist alternative billing because they think it means giving up control or taking on all the risk. But that’s not the point.

A good pricing model finds a win-win. The client gets predictability or performance incentives, whatever they need most. The firm gets fair compensation aligned with results and client satisfaction.

Bartlit Beck LLP, the original poster child for alternative billing, still did 50% of its work on an hourly basis in the early years. Why? Because not every client was ready to make the shift. Some simply weren’t comfortable. And even the most visionary firms need to meet clients where they are.

Stop Arguing. Start Listening.

We don’t need to keep arguing about which model is superior. Hourly billing is not the villain. Value pricing isn’t a panacea. What matters is what your client wants and needs.

If you build pricing options around that, you’ll build trust and long-term success for both you and your clients.

References and Further Reading:

  • Ron Baker, Implementing Value Pricing: A Radical Business Model for Professional Firms
  • The American Lawyer (1995), Diamonds Are This Firm’s Best Friend – Profile of Bartlit Beck and its hybrid approach to alternative fees