Four certainties about alternative fee arrangements

As history proves time and again, great rewards can’t be reaped without a willingness to shoulder some risk.

Industry viewpoints on alternative fee arrangements (AFAs) tend to fall into two camps. There are those who say AFAs are redefining the industry and those who say they’ve heard that for the better part of decade.

According to the latter, it hasn’t happened. Not yet.

The truth, however, usually falls somewhere in the middle. Analytics can provide general counsel with more credibility, and can also be used to slice up “big data” to give them more detail on AFAs. The data consistently leads me to conclude that while the future of AFAs is uncertain, there are four certainties related to AFAs.

1. Economics drive AFAs. Businesses are focused on the bottom line and have two main requirements from all cost centers: a) reduce or at least hold the line on costs, and b) provide budgeting predictability. For a time, the general counsel could raise the “risk” flag and the corporation would provide a blank check. Those days are over. Corporate legal departments are increasingly required to rationalize their expenses and demonstrate value to their organizations. AFAs help general counsel prove that value in terms of cost management, expense predictability and, also, by building stronger partnerships and relationships with their outside counsel.

2. Blended rates are not AFAs. Blended rate arrangements occur when a senior partner and a first year associate bill at the same rate, regardless of their experience. This is not an AFA, but rather a discount of the billable hour and an ineffective way to help general counsel manage costs. Blended rate arrangements make no effort to control a critical variable — billable hours. An Alternative Fee Arrangement, by definition, is an alternative to billable hour-based fees where both parties share some risk in moving away from the billable hour paradigm. A standard definition is important if, as an industry, we desire to measure and evaluate our process improvement.

3. Data can inform legal pricing and packaging. The key to properly structuring legal fees includes taking an historical analysis of data about the type of work performed, the staffing requirements needed and the time it took to complete it. We see this happening regularly in repetitious work, such as in insurance, but it can also be applied for more complex work such as litigation by breaking those matters down into phases. There is a plethora of data that can be analyzed in the billing systems of law firms and the enterprise legal management systems of legal departments that will help develop a baseline for beginning to structure agreements.

4. AFAs as a law firm competitive advantage. Some industry watchers suggest AFAs are simply a vehicle for the general counsel to drive a hard bargain with law firms. The reality, however, is about driving efficiency — and efficiency presents the opportunity for firms to grow more business. In the eyes of the corporate law department, outside counsel raises the question of value rather than price. For law firms, it’s an opportunity to strengthen a relationship with a client and, perhaps. to win a greater share of work in the process.

So the question remains: Are AFAs redefining the industry? From my vantage point, which considers economics as the motivation, AFAs provide an opportunity for law firms and their corporate legal clients to collaborate and move the legal profession forward. Discussions should be centered on how to best structure and price legal work to the advantage of all parties instead of one side benefitting over the other. Data and analytics can be used to inform productive discussions around AFAs. Admittedly, AFAs may not come entirely free of risk, but as history proves time and again, great rewards can’t be reaped without a willingness to shoulder some risk.

Contributing Author

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Kris Satkunas

Kris Satkunas is director of Strategic Consulting at LexisNexis CounselLink.

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