In the mid-2000s, the legal industry was abuzz with discussion about an innovative cost-control mechanism: the alternative fee arrangement (AFA). The concept—in which legal departments form creative billing plans with their outside counsel in order to stray from expensive hourly rates—enticed some law departments willing to take a risk by rocking the price boat. Others have resisted embracing it. According to Fulbright & Jaworski’s 9th Annual Litigation Trends Report, which comprises data culled from 392 in-house lawyers in the U.S. and U.K., a little more than half of legal departments in those two countries use AFAs. Fifty-one percent of law departments in the U.S. reported using AFAs in 2012, a 10 percent drop from 2011 and 1 percent less than the number that reported doing so in 2010. Across the pond, 63 percent of law departments reported using AFAs in 2012, a 3 percent decrease from 2011 and a 13 percent increase from 2010.
Although Fulbright & Jaworski’s report found that the once-steady increase in law departments adopting AFAs has plateaued, experts say such arrangements aren’t a passing trend.
Brian Lee, managing director of CEB (formerly known as Corporate Executive Board), says fixed fees also are palatable to law firms because they frequently aren’t set in stone. “They often have a flexible collar—something that allows people to come back to the table and renegotiate if necessary,” he says.
As for U.K. respondents to Fulbright & Jaworski’s survey, 60 percent of them rated the performance-based fee to be the most effective AFA. In this arrangement, a company and a law firm agree that the firm will handle a particular matter, and if the result meets the predetermined benchmark of success, the firm will be rewarded, oftentimes with a bonus payment.