The use of alternative fee arrangements (AFAs) has been on the rise in many claims and legal departments for several years and most agree that they are here to stay. But how do you determine which AFA structures are appropriate for a particular matter or outside counsel relationship? That depends on your specific goals. Beyond reigning in cost, what is it that you’d like to accomplish by establishing AFAs with your outside counsel? Below is a list of typical objectives and the types of AFAs that are best suited to addressing them.
Sharing Risk: Contingency/Success-Based Fees or Flat/Fixed Fees
When a law firm agrees to a contingency fee, they take on some of the risk of the matter by tying their compensation to the outcome. For example, a litigated matter may be based on a contingency fee in which the law firm receives a set percentage of any damages awarded to you and is reimbursed only for expenses if the case is lost. This type of collaboration demonstrates and supports a strong partnership between law firm and client.
In a flat or fixed fee arrangement, the law firm bills a pre-defined amount regardless of the number of hours worked on the matter. This approach is best for matters where similar work in the past provides a solid estimate of how much time the firm will likely spend on the matter.
Predictability: Capped Fees, Volume Discount Based Hourly Rate, or Flat/Fixed Fees
A capped fee AFA uses the hourly model, but imposes a maximum on the amount that can be billed. This is an excellent choice for occasions when you want to discourage the firm from spending too much time on a matter that isn’t necessarily of high value to you. In some cases, clients may even request separate billing caps for each phase of a matter.
By offering a discounted rate after a set billing threshold, volume discounts on hourly rates can ensure that if there are unavoidable budget overages, they are minimized. This model may be more appealing to the law firm than a capped fee if there is uncertainty about how much time they will need to invest.
Because a fixed fee agreement guarantees spend of no more or less that the agreed-upon amount, such an arrangement provides the ultimate predictability. As noted above, it is also an effective way of sharing a matter’s risk with the firm.
Optimized staffing: Blended Hourly Rates or Years of Experience Based Hourly Rates
When you want to avoid overuse of pricey partners, you might choose a blended hourly rate arrangement, which imposes a single rate for all attorneys who work on a matter regardless of their role or seniority. This type of AFA is normally used on fairly routine matters where it is clear that the added experience and expertise of partners is not necessary.
You may decide to assert even tighter controls by basing rates on the number of years each attorney has actually been practicing law. Again, on tricky or difficult matters where greater experience will help you to meet your goals, this model should be avoided.
Consolidating work with fewer firms: Volume Discount Based Hourly Rates
To maximize the value you get from channeling your business to just a few primary outside counsel, you could choose a volume discount on hourly rates. This model is often a good choice when getting started with AFAs because the change from regular hourly billing is not as drastic as with most other alternative fees. Take caution, however. With a volume discount, there is a danger of creating an incentive to steer business to particular firms, whether or not those firms are best equipped to manage a particular matter. For this reason, it is advisable to build some oversight into your process on matters where this approach is used.
Reflecting the true value of atypical work: Matter Based Hourly Rates
With matters that are unusual or involve a type of work that the law firm does not normally do for you, then matter-specific rates makes sense. This is type of exception rate reflects the fact that a law firm’s normal timekeeper role rates are not appropriate for some kinds of specialized work.
Agility and achieving a mix of goals: Hybrid models
For some matters or practice areas, there simply is no one-size-fits-all solution. When necessary, you can combine multiple types of AFAs on a single matter. For example, you may decide for a litigation case to implement a fixed fee arrangement for trial preparation activities. But if the matter goes to trial, a fixed fee is likely not appropriate and a matter based rate structure might then apply.
Choosing an AFA structure provides the foundation on which you can build great collaboration and optimize value, but it is not the end of the work that must be done. Once your AFAs are in place, you should work with your enterprise legal management provider to ensure that firms submit invoice data in a way that enables you to capture and report on the value of the arrangements. Measuring the effectiveness of your AFAs sets the stage for ensuring that they continue to bring benefits in the future.