The most recent – 2026 – Citi Hilderbrandt Client Advisory Survey Report published earlier this month contains some interesting commentary on how US law firms faired in 2025. None more so than the finding that:
a growing number of firms estimating that more than half their revenue will come from pre-negotiated discounts. (page 23)
Pre-negotiated discounts
The Report does not explicitly define “pre-negotiated discounts”; however it refers to alternative fee arrangements (AFAs) as including fixed, capped or blended rates. It is, therefore, reasonable to interpret “pre-negotiated discounts” as encompassing agreed reductions to standard charge-out rates, volume-based discounts and other upfront pricing concessions.
Viewed positively, this trend signals a shift away from reactive, end-of-matter discounting towards earlier and more deliberate pricing discussions. In principle, this should create a stronger foundation for meaningful conversations about value-based pricing, particularly where clients are seeking price certainty, predictability and risk sharing. From that perspective, pre-negotiated pricing is not inherently problematic — and may in fact represent a necessary transitional step.
The more concerning implication, however, is that for many firms these discussions appear to be anchored primarily in discounting, rather than in value definition. Where pricing conversations begin and end with rate reductions, firms risk reinforcing a price-taker mindset rather than asserting their role as price-setters. Left unchallenged, this dynamic contributes to margin erosion, commoditisation of legal services and an imbalance in client-firm relationships that becomes increasingly difficult to unwind.
AFAs as a pricing option
Despite persistent commentary throughout 2025 that artificial intelligence (ai) will fundamentally disrupt — or even eliminate — the billable hour, the data in this Report suggests otherwise. The proportion of revenue derived from AFAs has remained effectively flat, increasing only marginally from 23.5% in 2024 to a projected 23.6% in 2025.
Setting aside the fact that many commonly cited AFAs are, in reality, variations of the billable hour by another name, and acknowledging that it may still be too early to fully assess AI’s structural impact on pricing legal services, one conclusion is unavoidable: the billable hour remains very much alive.
The way forward
With 74% of firms expecting a growing proportion of revenue to come from AFAs by 2027, the issue is not whether pricing models will continue to evolve, but how deliberately firms choose to engage with that evolution; and whether AFAs are used as strategic tools or simply as discounted billing mechanisms.
In sum
Taken together, the findings in this Report further highlight a profession at an inflection point. While the billable hour continues to dominate, the steady rise of pre-negotiated discounts and the anticipated growth in AFAs suggest mounting client pressure for greater certainty, transparency and perceived value.
The critical question for law firms now is not whether they should offer alternative pricing arrangements, that horse has bolted, but whether they are prepared to move beyond discount-led negotiations and engage in genuine upfront value-based pricing conversations.
Firms that continue to compete primarily on price risk entrenching themselves as price-takers in an increasingly sophisticated procurement environment. Those that invest in articulating value, pricing outcomes and structuring risk intelligently will be far better positioned to protect margins and strengthen client relationships in the years ahead.
The decision on the way forward now rests with the firms themselves.
Tesla, Elon Musk’s EV carmaker, published its Q3 results earlier today (Australia time). Profits plunged 44 per cent. But, from my perspective this was the interesting part: “after it cuts prices to boost sales“.
Let’s unpack that for a second: Tesla “slashed prices by around 25 per cent in the United States during the last year” – “putting the priority on sales rather than profit“.
As it happens, this is also a common trait of professional services firms: prioritizing getting the deal done over making an actual profit – including agreeing to heavy “volume discounts”.
As the Tesla results show though, any price discount you give comes directly from profit – not sales revenue.
So the price discount you offer your clients is essentially compounded on your bottom line – 10% is not 10%, it’s more like 30%.
Or in the case of Tesla: a 25% price discount has resulted in a 44% plunge in profit.
Something to think about when you are next thinking about what pricing options you have available to you.
And please, don’t follow this advice:
“I view it as a way to defend market share at the expense of margin” .
Kevin Roberts, director of industry insights and analytics at CarGurus, an online auto sales site
In professional services firms, market share should never Trump (pun intended) profit.
As usual, if you need any help with any of this, feel free to reach out.
The Ninth Annual Law Department Operation Survey was published late last month (Nov 2016). A survey of – a record number of – 133 law department professional, one of the questions asked in this year’s survey was:
‘What percentage of legal spend is via alternative fee arrangement?’
Unlike other legal market surveys undertaken during the course of the year, the results here are telling in that they are from those running the legal department, as opposed to those practising, and therefore, arguably, are more reflective of the market’s aptitude to Alternative Fee Arrangements (AFAs).
Overwhelmingly – at 87 percent – US in-house law departments make some use of AFAs with their private practice suppliers. Tellingly though, only 14.1% of this is over 50% of spend and more than a third – 34.4% – is in the one to 10 percent space (making me wonder if this is just discounts disguised as AFAs).
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