Negotiating value-based pricing and AFAs

More information, better communication, and clearer insight can provide the foundation for successful, win-win AFAs

An Altman Weil study in 2009 found that 28 percent of respondents at law firms believed that increased use of alternative fee arrangements (AFAs) would prove to be a permanent change to the business of law. By 2013, that number had jumped to 90 percent. The acceptance of this industry shift is good news for legal departments with smaller budgets for outside counsel, but some legal professionals are concerned that pricing pressure might cause their law firm relationships to turn adversarial. With the right information and approach, it is possible to negotiate win-win fee structures that meet your budget needs and keep your partnerships with your firms healthy and collaborative. AFAs can be a useful tool for sharing some risk with law firms and grounding fees to results, but negotiating an AFA isn’t a simple matter. Information and structure can help.

Demystify the assumptions

Some corporate legal departments (CLD) fear that law firms merely use AFAs to repackage and rebrand their traditional fees; some law firms think “AFA” is a code word for deeply discounted hourly rates. There is also a concern that CLDs who request AFAs are sometimes unwilling to compare the firm’s response to the other alternatives in the market.

These suspicions and concerns arise partly out of a lack of information on both sides of a negotiation. While legal departments may come into the discussion knowing what their AFAs are with other firms and how much they normally spend on similar matters, they usually don’t know:

  • How much the firm charges their other clients
  • What, if any, AFAs the firm has in place with other clients
  • Their ranking with the firm in terms of amount of fees paid

A law firm approaches the negotiation with similar knowledge gaps about your existing AFAs with other firms, and as a result they may be reluctant to be flexible about their pricing, feeling safer with something closer to their usual fee structure.

Third party sources for industry data on legal spend can be very helpful to you, as well as your law firms, when it comes time to discuss fees. A clear understanding of industry benchmark pricing allows both parties to fill in some of the gaps and negotiate toward a fair agreement for both sides. Armed with recent, validated data about how much firms generally charge for the type of work being discussed, you can rest assured that you won’t overpay for services. And law firms will know what is required of them to remain competitive.

Negotiation best practices

Once you and the firm have good, current industry data from a trusted source, you’re ready to begin discussing fee arrangements. But how should you approach this conversation? The Four Pillars for Providing Value is a framework which can help to focus any negotiation of legal services and maximize the value that a firm will provide to you. This framework developed by TyMetrix, like successful AFAs, allows for both qualitative and quantitative considerations. Each of the pillars is described below, with a description of how to think about it during your negotiation, particularly where AFAs are concerned.

  • Pillar 1: Scope. Define the boundaries of the project, along with the desired and likely results. Consider whether these results should be included in the AFA structure. The firm should be sure to understand your business objectives and your best and worst case assumptions.
  • Pillar 2: Baseline. Determine the known state of past performance so it can be measured and compared. Both you and the law firm should evaluate your importance to one another’s missions to ensure that working together is the right strategy. You should flesh out the possible division of labor and establish what, if anything, should be done in-house or by other legal service providers.
  • Pillar 3: Benchmark. Gain a shared understanding of what other firms charge for similar services to help ensure that your AFA represents fair market pricing. Both sides should understand whether there are other firms who can provide the same type of work.
  • Pillar 4: Value. Ensure that the offering aligns your goals and the firm’s. The firm needs to understand what is significant to you and what is non-negotiable. Determine whether the firm is willing to accept some portion of the risk and build this into your AFA. Outside counsel guidelines can help to sync the understanding of both parties during this step.

Negotiations that bring to bear good data and helpful best practices lead to AFAs that allow you to save money while ensuring that firms are invested in your mutual success. As you negotiate, keep in mind options like enforcement of optimal matter staffing, favorable payment terms, cost sharing as incentive, education and training sessions in relevant competencies, and exclusion of some types of expenses.

Successful collaboration

More information, better communication, and clearer insight can provide the foundation for successful, win-win AFAs. Visibility into market pricing is essential to setting a starting point for negotiation and maximizing value for money. That key data, combined with an effective negotiation strategy, can provide the insight needed to achieve the right mutually beneficial strategy.

When you enjoy longstanding collaborations with knowledgeable firms who understand your objectives and are invested in continuing to win your business, you can reap the benefits for many years.

Contributing Author

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David Moran

David Moran, Director of Data Management for Legal Analytics at TyMetrix, is responsible for leveraging state-of-the-art technology to cut through the complexities of managing big...

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