Alternative Fee Agreements, also known as AFAs, have become increasingly popular with both corporate legal departments and the outside counsel they employ, for good reasons.
These agreements allow corporate legal departments to increase the predictability in the amount they pay for outside legal services, and law firms are able to retain valuable clients in these trying economic times while also forecasting revenue projections. The best part is that when done correctly, these agreements really can represent the best opportunity for both businesses to experience winning with AFAs.
Corporate legal departments love the predictability of flat fee agreements, but these are not always appropriate or fair, especially in cases involving litigation. When negotiating an alternative agreement, it is therefore imperative to consider the type of work to be covered by the agreement. Just as important is the need to be creative. Hybrid versions of either flat fee or traditional billing arrangements can be both fair and effective ways to manage legal costs and revenue.
What are AFAs all about?
Flexible flat fees give legal departments the ability to pay a set monthly retainer to their outside counsel based on the amount of work typically performed. This may represent a discount from the firm’s normal fees. The software generates “shadow” billings, keeping track of the actual hours spent on each task, and it is this actual billing that determines the “flexible” part of the flat fee. If the actual billing is significantly less than the retainer paid, the corporation is entitled to a pre-negotiated rebate (typically anything exceeding a 10 percent variance).
When do you reconcile AFAs?
If the actual billing is significantly greater than the retainer (again, the variance generally needs to exceed 10 percent), then the firm will be compensated at the pre-negotiated rate. The flat fee provides often substantial savings to the corporation, while the flexibility provided by allowing both sides to look back at actual billings protects both the firm and the company in the event that the workload is dramatically different from the norm. A more detailed analysis of this kind of arrangement is available on the ACC Value Challenge site.
More than one law firm has noted the dangers of using some form of a flat fee for litigation, in which the unexpected twist can create a tremendous amount of work. While a flexible flat fee like the one described above may protect the firm, corporations could see their benefits disappear in clouds of last-minute billable hours. A possible solution here may be to use a hybrid version of a contingent fee. Firms would receive a discounted payment of their hourly fee, with either the balance or some pre-negotiated bonus due upon successful conclusion of the litigation. (This may also work well with more complex acquisitions or sales transactions). It will be important to determine what success means in any given litigation or transactions prior to beginning work on a new matter if this partial contingent fee arrangement is going to be used.
What’s the future for AFAs?
Alternative fee agreements are much more than simply a way for corporate legal departments to reduce expenses or a marketing tool for the savvy law firm hoping to retain or acquire new clients. They are becoming an integral part of the way law firms and their clients conduct business. If you have questions about the efficacy of alternative fee arrangements for your practice or department, doeLegal would be happy to use our experiences to show how ASCENT® clients are winning with AFAs so we can help you work out the details to navigate the best path forward.