Technology: The keys to alternative fee arrangements

AFAs and shared transparency can help create stronger partnerships between inside and outside counsel.

Alternative fee arrangements (AFA) are now well-established in our profession. In-house counsel like the better cost certainty and outside counsel, well, we like to have the work. (For purposes of this discussion, an alternative fee is any deal struck for legal services other than on an hourly basis.) Let’s discuss some of the keys to a successful alternative fee arrangement.

It may seem obvious, but an important step to any successful AFA engagement is defining the scope of the project. In-house counsel set the initial scope and then outside counsel reaffirm or challenge the scope and fee around the project (especially if it is a fixed fee). From experience, especially for non-routine matters, taking a hypothetical matter with your execution team from beginning to end is a good way to anticipate scope issues. This exercise usually challenges assumptions made by all parties and can affect the final scope and expectations. It is equally important to determine what is out of scope. Be aware: in practice, the scope of an engagement can and often does change over time. Additionally, communication between the parties during a project about scope change is central to a successful AFA project.

Implementation of legal project management (LPM) also is vital to an arrangement. Many law firms now employ LPM managers who are often (but not always) non-lawyers specializing in scoping projects, helping with staffing plans and managing workers so that the “actual” work performed does not exceed the budget. Ironically, most law firms create budgets by estimating hours worked and then track “actual” to “budget” by checking assigned hours and rates against the budget total dollars for the AFA.

Incorporating the right technology is a must to keep a project on track. Tracking technology should give daily updates on how well the project is progressing and flag when the “actual” to “budget” is going off track for workers. Most importantly, this technology should give notices using “push” technology (i.e., updates that are automatically and regularly sent to the LPM manager, client attorneys and workers without them having to search for the information).

Note that I have used the term “worker” above because another key to successful AFAs is to remain flexible in staffing. The historical way of performing legal work is to include partners, associates and paralegals within the same firm; however, as work has become more competitive, firms are using non-traditional resources. These can include incorporating some element of contract attorneys, legal process outsourcing, non-lawyers, staff attorneys hired to perform certain work without being in the potential “partner pool” and others. All of these resources can be “billed” at non-traditional rates and included in AFA work (and non-AFA work, for that matter).

Finally, the most successful alternative fees are those that align the interests of both sides of the fence. Creating an appropriate fee structure that motivates both parties throughout the engagement is vitally important. Also, greater transparency between buyer and seller is required.

It is helpful to know, for example, in-house counsel’s budget and goals and attempt to match both. Outside counsel should consider giving better visibility into progress on client matters (often through collaborative technology extranets or tools) as well as the ability of a client to view its current legal spend. Fortunately, our profession is still relationship-based, which means that AFAs and shared transparency can help form even stronger partnerships.

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Jason Epstein

Jason I. Epstein is a shareholder and chair of the Business and Technology Group at Baker, Donelson, Bearman, Caldwell & Berkowitz, PC (Nashville, Tenn.). He...

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