Controlling Legal Spend With AFAs: A Beginner's Guide

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With all the information out there about wide-ranging and multifaceted approaches to using value-based or alternative billing methods, it can be overwhelming to figure out where to start. Jeff Novak, assistant general counsel at AOL, understands that. "Frankly, the biggest area people have struggled with is, where do I start?" Of course some AFAs can be incredibly complex and sophisticated. But according to Novak, if you break value-based billing down into manageable steps, it doesn't have to be so hard.

And if you keep working at it, a small start can grow into something meaningful, as it has for AOL--since 2006 the company has reduced legal spend by half.

"Look at spend management as an iterative process," Novak says. "You should get smarter and smarter at it over time and become a more sophisticated purchaser."

Here, Novak breaks it down for first-timers.

1. Look at the data. For Novak, data analysis is a logical and imperative first step--and one that should be continuous. "For a lot of people there's an information deficit," Novak says. "The first thing you should do is get your arms around what you're spending and then start to do some data capture." (E-invoicing can make collecting such data a snap.) Consider what the data means: What are we spending where? What type of work is this? Can recurring work--or even one-off work with recurring aspects--be handled more cheaply from matter to matter if one firm handles it all?

AOL now has about five years worth of spend data to work with.

"We're in the stage now where the next iterative thing we're doing is taking a look at particular matter types, groupings of matters and so forth, and trying to find where we can get a more predictable 'band' or range on the cost or the exposure in terms of what we're going to spend to handle the case," Novak says. "You can do a lot with that once you get pretty good at these bands--and it's not just our data. We're trying to occasion more conversation between and among various companies."

2. Incorporate the simplest fixes to get some basic control over spend. A lot of cost inefficiencies are fixable, Novak says, and they can be relatively simple solutions. After looking at AOL's legal spend data, one of the first things Novak did was bundle compliance work and use a cap-and-reward arrangement with one of his firms in which the firm agreed that if it beat a predetermined cost, AOL would share the savings. (A truly successful AFA must be mutually beneficial, Novak points out.)

"People both on the firm side and the client side of the equation knew this was an area we were paying attention to, so there was effort on both sides to make sure we were smart about the work that was being done, the level it was being done at, who was doing the work, repurposing things when appropriate," Novak says. "And it was a very good success story."

And any step that will control spend or ease data collection helps. AOL, for instance, began hiring to bring more work in-house, which has paid off over time. Its e-billing system also helped. Meanwhile, it sped up the payments cycle through a "Net 15" deal with firms, allowing AOL to better and more quickly analyze its legal spend. Now if AOL pays invoices within 15 days of receipt, it applies a 3 percent early pay discount. "That's been terrific and universally well received," Novak says. And the firms obviously like getting the money in the door.

3. Tailor your engagements."As you get better information and understanding, then you're in a position to say, 'How do I tinker with the incentive structure here so we have better alignment?'" Novak says. "I think firms are going to get there too. Eventually people will come to appreciate that kind of cost predictability--whether it's having the capacity to recycle work product or working out really effective service delivery mechanisms or figuring out the right balance of timekeepers and skill sets."

Companies with big offensive portfolios will have the easiest time getting started. More complex is the typical situation: a largely defensive portfolio. So where to begin?

"Say I want to do cap and reward," Novak says. "Where do I get my cap number? A lot of people say litigation is inherently unpredictable. 'How in the world are you going to do this?' I think that ship has sailed."

Now, Novak says, companies are starting to recognize that they hire firms for their litigation expertise, so experienced firms should be able to tell them how much that litigation costs. A specific, set-in-stone number may be impossible for firms to give, but clients should be able to get a range and use it to inform their purchases--and from there, anything is possible. What associates are assigned to which cases? Can the firm incorporate more technology for efficiency? Can the firm avoid reinvention from case to case and take advantage of incumbency? Can various law firms partner for better service delivery?

"In some ways, it's limited only by your own creativity," Novak says.

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