While the billable hour isn’t going into retirement any time soon, recent data suggests alternative fee arrangements (AFAs) are steadily becoming a favored method for structuring legal bills by corporate counsel. Although use of AFAs remains relatively flat as a percentage of matters and billings with alternative structures, the most recent CounselLink ELM Trends report revealed the number of legal departments engaging – that is willing to experiment – in AFAs rose sharply.
According to the report, which represents $18 billion in processed corporate legal invoices, more corporate legal departments have structured work under AFAs than ever before. Analysis shows corporate counsel is experimenting at an increased rate with 76 percent engaging matters under a structure other than the billable hour. That’s up from 59 percent in 2011 and means more than three quarters of all legal departments today are actively engaging in AFAs.
Where AFAs are Most Prevalent
As corporate legal faces pressure to prove it isn’t just a cost center to the business, legal departments are maturing internal processes and looking for ways structure legal work not only to get more value from law firm partners, but also to gain important foresight and predictability related to the total cost of legal matters.
According to the report, AFAs are steadily increasing in the following five areas of law:
- Corporate, General & Tax: Under the category of corporate, general and tax law, in 2014 AFA usage increased by 6 percent from 2013, meaning corporate counsel that paid fees for some level of this type of work under AFAs went up from 39 percent in 2013 to 46 percent in 2014.
- Litigation: Litigation matters are among the more unpredictable types of legal work, yet this practice saw the biggest increase in matters structured under AFAs. Corporate legal departments structuring litigation matters experienced an 11 percent increase in 2014 bringing them up to 43 percent.
- Regulatory & Compliance: Two industries in particular, which frequently engage in regulatory and compliance work, experienced significant increases in AFA usage. Under the pharmaceutical category, the percentage of inside counsel using some AFAs increased from 3.3 percent in 2011 to nearly 20 percent in 2014 and, in the category of professional, scientific, and technical services, AFA usage increased from less than one percent in 2011, to more than 10 percent in 2014.
- Commercial & Contracts: Similar to litigation and regulatory matters, work that requires careful review and collaboration between multiple parties, such as commercial and contract work, also saw healthy increases in AFAs. Experimentation moved up from 10 percent in 2013 to 24 percent in 2014.
- Employment & Labor: Work in employment and labor also experienced modest increases in AFA usage moving up 4 percent to 42 percent of matters in the category structured under an AFA.
Percentage of Matters Steadily Increasing Year over Year
While larger firms are more likely to hold onto to hourly billing models, the CounselLink study indicates firms of all sizes are steadily increasing the use of alternative fee arrangements with corporate clients. Over a three year period from 2011 through 2014, firms with 200 or fewer attorneys were nearly twice as likely to engage in AFAs as firms with over 750 attorneys.
Here is a break out of the percentages of matters under Alternative Fee Arrangements over the three year period:
- 4.8. Percent for firms with 750 or more attorneys
- 5.1 Percent for firms with 501-750 attorneys
- 9.1 Percent for firms with 201-500 attorneys
- 9.8. Percent for firms with 51-200 attorneys
- 10.1 Percent for firms with 50 or fewer attorneys
Client Demand Driving Change
While this data is pulled from actual invoices, several industry studies also have similar findings in terms over overall AFA trends. For example, according to a recent report in American Lawyer, corporate legal departments, corporate clients believe law firm partners should be more receptive to structuring legal matters around non-traditional billing arrangements. While cost containment is key incentive for corporate legal to use AFAs, experts agree providing value and predictability around the cost of legal matters is an even bigger incentive.
"The issue of predictability of legal spend has never been higher," according to David Fries, senior adviser on pricing and practice management at Orrick, Herrington & Sutcliffe, as cited in the article. He added that nearly 30 percent of his firm’s work is now structured around AFAs.
While hourly billingstill commands a stronghold in the legal market, industry experts anticipate the tide is about to change, especially as firms of all sizes, continue to compete for the same shrinking pool of clients. According to a recent BTI Market Outlook Report, which is consistent with CounselLink data, corporate clients reduced their panel of firms from 47 in 2014, to just 36 firms, this year alone.
Another factor driving increased interest in AFAs also focuses on whether the value the legal department is receiving is aligned with the cost. In other words, clients today are unwilling to accept rate increases as simply the cost of doing business. They want to know if the increase will net them more value. This provides a dilemma for firms who have historically relied on periodic rate increases as a financial growth strategy.
Whether or not AFAs will ever surpass the hourly billing model remains to be seen. What is clear is that corporate counsel is increasingly interested in experimenting with new fee structures in an effort to provide greater predictably in legal spending.