If it hasn’t hit you yet, it’s coming. More and more business clients enter into Alternative Fee Arrangements (AFA) with their lawyers. Clients like the idea of the certainty and predictability an AFA provides, and quite frankly, they like the idea that they can pick up the phone to ask you a question without increasing their costs with every tenth of a minute they are on the phone.
According to the BTI Consulting Group, the outside counsel spending under AFAs was up to 35.6% in 2015, up from 21.7% just two years earlier. Almost 70% of companies polled were using AFAs for at least some portion of their legal work. Companies report on average that they are saving around 14% when using AFAs. In another survey conducted by LexisNexis, wherein 135 companies responded, the majority of respondents expressed a satisfaction with AFAs, many even suggesting that they hoped to increase their use of AFAs in the years to come.
Many lawyers’ initial reaction to this news is negative. Lawyers assume AFAs will cut into their fees. But that does not have to be the case. In fact, if employed smartly, AFAs will not only make your clients happier but can be used to increase your overall business and profitability.
What The Clients are Saying
An array of corporate counsel polled by LexisNexis responded that they believe pricing/fee structure to be top issue facing the legal industry and their legal departments. Interestingly, as hourly fee rates continue to rise, a majority of corporate counsel polled actually said that their legal budgets had been cut in the past few years. These competing trends obviously make extracting the most value in the most efficient means possible an important goal as businesses deal with their outside attorneys.
Businesses also enjoy the predictability that can be provided through various AFAs. It’s no secret that the ability to accurately forecast costs is one of the most important criteria to whether a business venture will be profitable. In my own conversations with business owners and corporate counsel, the prevailing view is that traditional hourly fee based litigation almost always ends up costing more than expected, as unforeseen issues invariably arise. And whether this a legitimate complaint or not, it is reality that clients often get frustrated with the idea that every time we, as lawyers, pick up our pens or have a thought process that involves their cases, it is costing them money.
In our experience, when we express enough of an understanding of a clients business to offer them AFA options that help make them more efficient, and their costs more predictive, they are incredibly appreciative. Many of the AFAs offered also shift some of the legal fee risk to the law firm, which again is appreciated by the clients, as they perceive our interests becoming more aligned. This often leads to more business not only from the client, but also from referrals the client then makes.
The Types of Alternative Fee Arrangements Commonly Being Introduced
Contingency Fee Wherein Client Pays Expenses
This is the most traditional AFA in which the law firm receives a fixed or scaled percentage of any recoveries in a lawsuit. The nice thing about this arrangement for the law firm is that the client pays all expenses. These arrangements are appreciated by smaller companies and start ups who do not have a large legal budget. This type of arrangement obviously works best on a plaintiff claim, but it can be structured as part of a defense claim also, wherein the payment is made contingent on a percentage of savings off of a set agreed to amount.
Partial Contingency Fee
This is an arrangement wherein the law firm bills at a reduced hourly rate, and also receives a percentage (smaller than normal) of the recovery. If a firm’s normal contingency fee rate is 33%, they may take only 15 to 20% here, while also billing at about 50% of their normal hourly rate. This type of agreement can work well in many instances, as the law firm is guaranteed some money on the reduced hourly rate, but there is also some risk sharing and aligning of financial interests provided to the client. This AFA is most common on a plaintiff claim but can also be structured as part of a defense file, with contingent money kicking in if agreed upon results are achieved.
Fixed Fee
Clients often find this type of AFA very attractive and they can be tailored to a number of different situations and circumstances. A flat fee can be a one time agreed upon payment up front, or made in increments. It can be a fixed number paid on a monthly basis, or in sort of a hybrid hourly fee setting, it can be a ceiling on the amount of hours billed per month, providing some certainty to the client as to what the maximum exposure will be. This type of agreement is versatile and can provide efficiency and certainty to both law firm and client.
Holdback/Success Fee
This is another versatile type of AFA that can be tailored to fit a number of matters. In this AFA, a portion of the attorney’s fee is paid up front, with another portion to be paid in the end, contingent upon certain agreed upon milestones or measures of success being reached. In this setting, the law firm is guaranteed some money without having to bill by the hour, which is nice, and has also aligned its interests with the client.
How Can this Be A Net Positive For Your Firm?
It seems that many lawyers assume AFAs will mean a net reduction in money to the firm without first putting the time in to evaluate the positives that could result. When a firm is not tied to just billing through as many hours as it possibly can, it is freed up to discover and entertain other opportunities.
The old model of “no stone unturned” on hourly files is a dying breed, except for at the largest of companies and on multimillion-dollar files. Clients, instead, are asking now for a more efficient, value-based approach. We see more reductions in time entries being asked for every day for tasks the client deems were unnecessary, or not technically a “legal” task, etc. More and more clients are also refusing to pay full price for associate work, making the partners spend more time on matters that are not their highest and best use for their law firms.
Under many of the AFAs discussed, many of these problems can be alleviated. Associates are freed up to work on the matters entrusted to them while partners are able to spend more time adding value to the firm in other ways. Efficiencies can be achieved in multi-tasking on several matters at once that were not possible under hourly fee arrangements. Also, the certainty in the fee provided by many of AFAs helps firms more accurately forecast the money that they will have to invest in other matters, which again can lead to pursuing opportunities that firms would have been more hesitant about in the past.
The bottom line is that if employed thoughtfully, smartly and appropriately, we believe AFAs to be win/win arrangements wherein the client appreciates that you’ve thought about and accommodated their situation and aligned your interests with theirs, while also providing your firm the opportunity to use resources more effectively, resulting in a net increase of business and productivity.
For more information, contact Matt Riley.