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Alternative fee arrangements (AFA) sometimes invoked FUD – or fear, uncertainty and doubt. There’s always risk in trying something new or different, however, we have in among our corporate legal department clients a sizable volume that have found success.
Recently, our own Brandi Gunn presented a very compelling, clear and concise webinar that presented the fundamentals of AFAs. The slides from the webinar are embedded nearby and a link to the recording – just over 30 minutes in length – can be found on YouTube.
What are AFAs?
Simply stated, an AFA is a billing arrangement between clients and firms requiring billing by law firms in something other than hourly billing. Typically these include risk-based and value-based models:
- Risk-based fees: Fixed or flat, contingency, success initiatives, collared arrangements, capped fees, and hold-backs
- Value-based fees: Staged or task-based, hybrid models, market-priced fixed-fees, bundle pricing
Some our customers apply alternative arrangements which are not true alternative fees, but variations of the hourly-fee model include: discounted rates, volume discounts and blended rates.
Volume of AFA Usage
There are some $15 billion in invoices running through the LexisNexis® CounselLink® enterprise legal management system. Ms. Gunn began the webinar by presenting the volume of usage among our customer base:
- More than 50% of customers have implemented AFAs
- There are more than 44,000 matters structured under an AFA model
- More than $600 million in legal fees submitted on an AFA model
- The top matter categories for AFAs include:
- Commercial contracts – 19%
- Finance, loans and investments – 14%
- Intellectual property 23% (across patent, trademark and other)
Why use AFAs?
The most common reasons Ms. Gunn said CounselLink customers experiment with AFAs are as follows:
1. Predictability. AFAs provide predictable corporate legal spending and cash flows for law firms. In addition, AFAs can provide predictability around matters costs and overall department budgets.
2. Reserving. This predictability can potentially provide additional savings for a corporation in insurance premiums by providing data for forecasting costs.
3. Shared-risk. Especially under risk-based models both the corporate legal department and the law firm share the risk in the outcome.
4. Cost-reduction. Historically, AFAs were a catalyst for reducing corporate legal spend, however, this reason has slipped a little as organizations consider the legal department metrics around cost vs. value. As Kris Satkunas has previously written:
I’m not suggesting that organizations don’t manage the costs of their legal departments, but cost metrics have to be balanced against metrics that show the amount that the legal department prevents the organization from spending.
5. Efficiency. AFA invoices are easier to review and approve as opposed to going through legal invoices line by line.
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Ms. Gunn’s presentation offers a high-level methodology for implementing AFAs and examples for structuring AFAs for legal projects for litigation, trademark and recovery type matters.
How does the AFA definition listed here compare with your own definition? What reasons for using – or avoiding AFAs would you offer?
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