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Cheat Sheet: What inside counsel need to know about alternative fee arrangements

How to choose the right AFA from among numerous options

Alternative fee arrangements (AFAs) have long been trumpeted as a creative way for legal departments to cut costs. Well, the billable hour isn’t dead yet. In fact, the number of both U.S. and U.K. law firms using AFAs dropped in 2012—by 1 and 3 percent, respectively, according to Fulbright & Jaworski’s 9th Annual Litigation Trends Report. Still, 51 percent of U.S. firms used such alternative arrangements last year, as did 63 percent of their U.K. counterparts, an indication that AFAs are here to stay.

“Even though our survey respondents showed a slight decrease in 2012, about four out of every 10 companies [in the U.S.] said they were going to use more AFAs in the coming year,” says Otway Denny, chair of Fulbright & Jaworski’s global litigation department.


What are the most popular AFAs?

The most popular AFA among U.S. legal departments is the fixed fee arrangement, in which a company and a law firm agree in advance on the full payment for a matter or part of a matter. Fixed fees give companies a degree of certainty, but are often flexible enough to appeal to law firms. “They often have a flexible collar—something that allows people to come back to the table and renegotiate if necessary,” says Brian Lee, managing director of CEB.

Across the pond, performance-based fees are in vogue. These arrangements, in which law firms can earn bonuses for meeting pre-set benchmarks, allow legal departments to reward their outside counsel for qualities such as speed.


What other AFAs are available to legal departments?

Companies also have a host of other AFAs to choose from, among them, the capped fee, which sets a fee limit for all or part of a matter; the blended-rate fee, in which all law firm lawyers working on a matter bill at the same rate; and the contingent fee, in which firms are paid only if their client wins its case.


Are legal departments satisfied with their AFAs?

Seventy-six percent of respondents to Fulbright & Jaworski’s study are pleased with the work they receive through AFAs. And most companies that employ AFAs use them for at least 20 percent of their outside counsel billing.

But experts caution that AFAs shouldn’t be the only cost-cutting strategy that legal departments employ. Instead, companies should target areas of their company with high spend and tailor their AFA usage to the case at hand–for example, using fixed fee arrangements for matters that are more predictable, such as labor and employment or IP work.


Are law firms open to these arrangements?

Law firms—particularly large ones—may be more wary of agreeing to AFAs, says Brian Lee, managing director of CEB, considering that such arrangements can be risky for outside counsel. General counsel can assuage these concerns, he says, by emphasizing that the AFA is a partnership, not simply a way for the company to save money.

Communication is also key to winning law firm buy-in, says Otway Denny, chair of Fulbright & Jaworski’s global litigation department. “Make sure everybody is aware of what the situation is and that they’re going into it totally transparent about what the arrangement’s going to be,” he advises.

Alanna Byrne

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