Onit

Jun 10, 2011

Alternative Fee Arrangements: The Fundamental Advantage is for Law Firms

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

ACC Value Challenge

2010 Surveys

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