Building Alternative Fee Arrangements? Here's Some Key Considerations

With an eye towards budget predictability and managing risk, many in-house legal departments are looking to implement alternative fee arrangements (AFAs) with outside counsel as an element of legal spend management.

There was a time when any arrangement outside straight billable hours was unheard-of, today a greater number of law firms are now open to AFAs – in fact, they have no choice. The issue, therefore, has become one of structuring the best fee arrangements – one that both parties agree to, aligns with the goals and financial requirements of each, and is based upon accurate historical data to give the legal department confidence that the arrangement is intelligent and appropriate.

There are numerous types of AFAs being utilised these days, but before deciding which might be most suitable given the individual circumstances of parties in question, it is wise for law firms and legal departments alike to consider the engagement in terms of true value to their respective organisations and the desired outcome. Is it a “win at all costs” matter or something much less critical in the big picture? Is compromise an option? Is any future relationship with the opposing party involved a non-issue, or does it involve an entity with whom either organisation to continue to conduct business with for many years to come?

These factors can immediately help the legal department decide which outside counsel would be the best firm to perform the work. It can also enable the legal department and law firm to analyse the situation upfront to seriously consider the best approach to achieve the desired goals in a cost-effective manner, beyond simply the appropriate level of staffing.

Establishing AFAs

Trying to get work done for less money isn’t necessarily the sole — or even primary — reason behind opting for AFAs. The legal department may be looking for predictability and to simply keep costs from being open-ended; there may be interest in allocating costs in a particular fashion; to give outside counsel reason to assume greater ownership regarding costs; or even to divide the risk so that the law firm at least assumes some of it. These are also considerations that can drive the decision regarding which type of arrangement is preferable.

Regardless of the driver for AFA, rather than adopting a “gut feel” approach, having a foundation of relevant data upon which pricing can be based is critical. This is where legal spend management technology delivers value – such systems provide budgeting, performance and billing information compiled from previous engagements with the same outside counsel and/or similar projects involving other firms.

With this level of insight, there’s much greater likelihood of arriving at a “win-win” fee structure — where both parties are not only agreeable, but excited about the arrangement and won’t be second guessing the project as work progresses.

The analytics that legal spend management systems provide are indispensable for AFA success.

Also, many types of AFAs can be creatively and successfully conceived and deployed – fixed fees; phased fees, with a fixed fee for each segment of a project; value-based fees, where an hourly fee is augmented by a sum based favourable/unfavourable outcome of matters; contingent fees, where outside counsel is only paid if its work leads to a financial; blended hourly rate; and so on.

Manually undertaking such AFA structuring and making it error-proof is near impossible. The analytics that legal spend management systems provare indispensable for AFA success.