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Law firms love AFAs. They love them because they make more money using them. Why else would a law firm actively bid on work using AFAs?

How are law firms profiting from AFAs? It’s simple. Strong AFA-oriented firms – regardless of size or specialty - have the data. They know how long projects take, how many personnel are required and the most efficient ways to execute. And they can mine that data across many matters and multiple industries. Additionally, because law firms are still capturing time entries from their staff, they can continually monitor the effectiveness of their AFAs and tweak their "input" costs accordingly if they are at risk of losing money.

Corporate legal departments are at a disadvantage because they likely don't have the data to inform structuring an AFA and they certainly don't get the "input" cost data from the law firms to monitor the effectiveness of the AFA from a cost perspective. From a purely cost-focused point of view, to enter into AFA negotiations without data and metrics around necessary resources and time is like going to a negotiation unprepared. The cards are stacked against the corporate legal department before the negotiations begin.

However, there is a way to help level the playing field and it’s pretty simple.

Request a shadow bill.

A shadow bill is exactly what it sounds like: A duplicate copy of the hours that the law firm staff spent on your project. I know that this is controversial, but making sure both parties have the data is the only fair way for AFAs to be entered into and maintained.

These bills are often circulated internally in a law firm so there may be an initial resistance to sharing them with a client. From a corporate perspective, requesting a shadow bill is the ONLY way you'll be able to analyze the true value you are getting from the AFA. Moreover, law firms have the technology and processes in place that make this a simple task on their side.

Clarity of Results

Now imagine the clarity that ensues when both parties come to the table with a shared understanding of AFA-related results and costs. It extends beyond cost-controlling measures to create stronger ties between in-house and outside counsel – ties that can be used to create mutually beneficial results. In fact, cost savings are only the beginning.

One of the key benefits from AFAs is being able to share in the financial risks. In some instances (depending on the type of AFA - see below), law firms reap the rewards when a certain goal is attained. When alternative fee arrangements focus on results with the emphasis away from the billable hour, lawyers are rewarded for efficiency.  AFAs also provide another important benefit to legal departments - clarity of future costs. Having the ability to mine data from other legal cases or matters is a huge incentive when trying to predict future legal spend. Shadow bills provide this transparency of legal spend.

Let's look at an example. A case settled in mediation might net a law firm a tidy profit under an AFA structure – one that would not be reflected in an hourly structure. But balance this against an AFA-billed case that might have unexpected turns and the arrangement may work in the corporate legal department’s favor.

Shadow bills are the only way to level the AFA-playing field for law firms and corporate legal departments. Get started today. Request a shadow bill from your law firm and start managing your legal department like a business.

Beyond the Billable Hour


Below are some of the common alternatives to hourly billing: 

• Fixed-fee or Flat Rate - An agreed-upon sum for handling a matter or a defined portion of a case.

• Capped Fee - An hourly rate, but the client is promised the total billing will not exceed a predetermined amount

• Discounted Hourly - A reduced hourly rate, often tied to a high volume or extended to major clients

• Blended Hourly - A uniform hourly rate averaged among the partner, associate and support staff rates

• Project Billing - A flat fee agreed upon in advance, for handing a specific project
  

• Incentive Billing - A fixed fee, established at the outset, with an incentive bonus if the law firm obtains specific results

• Modified Contingency - A reduce hourly rate with additional compensation depending on the outcome of a matter

• Defense Contingency or Negative Contingency - Defense attorney's compensation is totally or partially dependent upon the outcome of a matter

• Hybrid Arrangements - Any billing method that combines two or more alternatives

Want to Learn More?

Take a look at the articles and surveys below to see why alternative fee arrangements are becoming so popular.

Articles

• June 2, 2011 - Above the Law - Inside Straight: Alternative Fee Agreements For Beginners

• May 31, 2011 – The Globe and Mail - Lawyers Finding New Ways to Get Paid

• May 24, 2011 – Attorney at Work - Planning for Flat-Fee Billing

• March 22, 2011 – Adam Smith, Esq blog - A Modest Proposal for Alternative Fees

• March 21, 2011 –  3 Geeks & a Law Blog - The Value of Non-Lawyers in Client Fee Conversations

• Feb. 23, 2011 – FindLaw - Alternative Fee Agreements Gaining Popularity

• Feb. 14, 2011 – The National Law Journal -  Alternative Fees Are Not the Enemy

• January 19, 2011 – LegalBizDev – Why Alternative Fee Revenues Will Keep Going Up

ACC Value Challenge

• October 2010 - Elevator Pitch: How Can Value--‐Based Fee Structures Help Us

• February 2010 - ACC Value Challenge Brief

• July 2010 - ACC Value-Based Fee Primer

2010 Surveys

• BTI Premium Practices Forecast 2010: Survey of Corporate Legal Spending

• Fulbright’s 7^th Annual Litigation Trends Survey Report

• Inside Counsel Third Annual Law Department Operations Survey

• ALM Report : Law Firms and Alternative Fee Arrangements

Law firms are resilient – one of the most tenacious businesses that exist.

Never mind the (almost) static, partner-centric organizational structure. They’re slow to adopt new technology when compared to businesses in other industries. They often have the reputation of holding onto tradition and responding slowly to new experiences or trends.

What other profession is so well known for charging at an hourly rate – a set-up that essentially rewards lawyers for spending more time (as opposed to only necessary time) on cases?

However, as corporate legal departments strive to drive down costs and minimize risks, an opponent to the hourly bill is steadily growing in popularity and is now (ok, I’m just going to say it) a mainstream practice for many law firms. The common perception is that alternative fee arrangements (AFAs) (think flat-rates or project- or value-based fees) give corporate legal departments a distinct edge when it comes to saving money and puts law firms at a significant (monetary) disadvantage.

That might not be the case.

As billing models change, resilient law firms are adapting. They’re surviving and thriving when it comes to AFAs.

Why are law firms benefiting from AFAs? Because most of them have the experience and (most importantly) the data to reinforce their AFA negotiations. The result is that law firms make more money using AFAs; not less. Counterintuitive? Read our next post.

State of the Nation

That AFAs are gaining more ground in the bout of in-house vs. outside counsel is no surprise to anyone. And, as is usually the case, the battle to keep law department costs down is fueling the movement.

A survey from the BTI Consulting Group cites that corporate legal budgets were expected to decrease 4.3 percent in 2010. This means that corporate legal departments needed to get the same amount (or more) of work done with less money and resources.

According to Fulbright’s 7^th Annual Litigation Trends Survey Report, 52 percent of the U.S. corporate legal departments surveyed are using AFAs. One in six of the corporate counsel that responded estimate that AFAs account for 50 percent or more of their billings. Among all respondents using AFAs, fixed fees, conditional/contingent fees, blended rates and capped fees are the most widely used AFA variants.

And the practice is growing. The survey stated that four out of 10 U.S. respondents expect to increase their use of alternative fees and with large companies leading the way and that a majority of U.S. respondents see AFAs – and more stringent cost control measures - as becoming fixtures in the market.

To sum it all up, cost controls demand innovative thinking. As corporate legal embraces AFAs, law firms have to anticipate, adapt to and profit from these arrangements.

And they are.

Corporate legal departments are also embracing it. Read Mark Herrmann's article - Inside Straight: Alternative Fee Agreements for Beginners in Above the Law to see how your legal department can benefit from project or value-based billing arrangements. Mr. Herrmann is the Vice President and Chief Counsel - Litigation at Aon.