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Best Practices in Developing Alternative Fee Arrangements

Feb. 27, 2018, 5:35 PM

Increasingly corporate in-house legal departments are asking their law firm providers to embrace alternative fee arrangements (AFAs) in lieu of the traditional hourly billing model. The rationale for such change can be attributed to a variety of factors, including economic considerations to seeking a deeper level of engagement between law firms and clients to achieving greater predictability of anticipated legal fees to obtaining increased value for legal services.

Here are some best practices to employ when developing AFAs. While there are different types of AFAs, for purposes of this article AFAs are defined as fixed or flat fees for the provision of legal services.

Transform as You Perform

Transitioning away from delivering legal services via an hourly rate to an AFA structure requires both law firms and in-house legal teams to be comfortable with change. For generations billable hours have been the primary—and highly lucrative—way that law firms have charged their clients for legal services. Lawyers at both law firms and in-house (many of whom previously worked in private practice) are highly familiar with the hourly fee practice and may be resistant to new approaches. Embracing AFAs require both providers and buyers of legal services to actively transform their ways of working.

Set the Tone at the Top

Senior leaders at law firms and in-house legal departments can help “jumpstart” AFAs by providing appropriate messaging to their respective teams about the strategic business rationales for doing so. This type of clear alignment is critical to implementing meaningful AFAs.

Identify AFA-Ready Work

Some types of legal work may be more suitable for AFAs than others. Try to identify the “low hanging fruit” of legal services that are appropriate for AFAs. Legal services that may be more predictable and routine in nature are often excellent AFA candidates.

Understand and Leverage Data

It has been said that “data is the new oil”—but data is often an untapped asset by law firms and in-house legal departments. Digging into the data associated with how your law firm previously delivered legal services that will be subject to an AFA and how your legal department consumed those services (e.g., hours worked, number of resources, frequency, trends, key issues) will be helpful in developing a meaningful AFA. Consider employing or retaining a data scientist to help you gain meaningful insights about your data.

Define Value

In-house legal teams need to thoughtfully consider how to specifically identify the “value” they are seeking from law firms as they perform under an AFA. What are the Key Performance Indicators (KPIs) that you require from your law firm providers? Examples of KPIs could be speed of service, quality, accuracy, clarity, conciseness, reusable content, etc.

Be Clear and Creative

As you develop your AFAs, law firm lawyers ought to think more like consultants and in-house counsel ought to think more like procurement executives. Make sure your AFAs are crystal clear and specific regarding the scope of responsibilities of the provider of legal services (the law firm) and the recipient of legal services (the in-house legal department). Also, be creative and consider building provisions into your AFA like fee holdbacks, fee bonuses based on success metrics, etc. that provide performance-related incentives for your law firm provider.

Get Help

In addition to enlisting the support of a data scientist, seek assistance from business professionals that are skilled in areas such as crafting detailed statements of works, developing the associated pricing for legal services, project management, quality assurance, information technology, etc. Be sure to engage such professionals early and often.

Provide Feedback

During an AFA, law firm and in-house legal team representatives should proactively provide feedback to help position each other for success. Establish the appropriate cadence for such feedback and do not wait to share feedback until the end of the AFA engagement.

Use Leading Technology

Leveraging technology that enables smarter collaboration between law firms and in-house legal teams can be a huge asset for AFAs. Identify and use those tools that can help break down silos between in-house legal departments and their law firm providers.

Learn From Others

It is important to embrace the growth mindset when establishing AFAs so actively seek out the advice of other legal professionals—both internally within your organization and externally—for guidance in structuring meaningful AFAs. Share such learning and best practices on social media and at legal industry conferences and events.

Best of luck on your journey in developing AFAs to help transform the provision of legal services.