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The brave new world of AFAs: a quick guide

Information on legal spend is key for corporate legal departments to analyse how they are spending their money, says David Moran.

Information is key to analysing performance Mrnaxer

The drive for greater accountability, combined with more sophisticated tools for analysing greater volumes of  legal spend and business data, are all driving big shifts in how legal services are bought and sold. Flat or Fixed fees, one form of alternative fee arrangements, (AFA) quickly became a viable solution with this market shift. Today, with greater adoption of the AFA concept, a variety of types have emerged.

It is these varieties that are softening the original fear by corporate legal departments (CLD) that law firms were merely repackaging traditional fees into AFA structures. They also address law firms’ concern that CLDs were only interested in deep discounts.

There are many types of AFAs and some are more suitable than others depending on the specific situation.  However, given that the use of AFAs is still nascent for both CLDs and law firms, most organisations/firms tend to gravitate towards a single type instead of varying the type based on the particular situation. More information, better communication, and clearer insight can provide the foundation for successful, win-win AFAs. Understanding the various AFA structures available to both parties will also ensure success. Today, about seven different types of AFA structures are becoming common. These are:

• Contingency / Success Based Fees: With Contingency or Success Based Fee Arrangements, the law firm payment is based on achieving a favourable result for the matter.  For example, in litigation a law firm might utilize a contingency fee in which they receive a certain percentage of damages received or an agreed upon sum if the client considers the resolution to be successful.
• Flat/Fixed Fees: In a Flat or Fixed Fee arrangement, the law firm agrees to bill the client a pre-defined amount regardless of actual hours accrued on the matter. Considered by many to be the ultimate form of AFA given that both the law firm and client share equal risk, it is best used where you have a solid estimate of time required for the matter in question. 
• Capped Fees: Capped Fee arrangements will leverage hourly rate billing but will apply a maximum threshold on the total amount that can be billed.  In some cases, law departments may seek to apply distinct billing caps for specific phases of a matter.
• Blended Hourly Rates: Blended Hourly Rates arrangements are used when a law firm agrees to bill at a single blended rate for all attorneys who work on the matter regardless of seniority.  Blended rate arrangements are used to ensure that law departments receive quality and value by encouraging law firms to appropriately distribute work across all attorney levels as determined by the type of work being done.
• Volume Discount Based Hourly Rates:  In this model, the matter in question leverages an hourly rate structure but when an agreed upon total billings threshold is met, the client then receives additional discounts. 
• Matter Based Hourly Rates: For certain types of matters, you may need to establish an exception rate.  Matter-Based Rate arrangements replace regular timekeeper role rates with special rates for certain matters or groups of matters.
• Hybrid Models: This is where the real art and science of alternative fee arrangements comes into play.  Not every matter fits neatly into a single type of billing.  In a hybrid model, you can combine different AFA types and leverage them for a single matter based on your particular needs.  For example, a client may decide for a litigation case to leverage a Fixed Fee arrangement for pre-trial activities.  Should the matter go to trial, the initiative would then be managed under a Matter Based Hourly Rate structure.

In order to select the best structure for a particular situation, CLDs and law firms should seek third party sources for industry data on legal spend. A clear understanding of industry benchmark pricing allows both parties to negotiate toward a fair agreement for both sides. Armed with recent, validated data about how much firms generally charge for the type of work being discussed, you can rest assured that you won’t overpay for services. And law firms will know what is required of them to remain competitive.

David Moran is senior director of Data Management and Analytics, TyMetrix Legal Analytics at Wolters Kluwer. He is responsible for leveraging state-of-the-art technology to cut through the complexities of managing big data related to legal billing, claims, and payments.

Moran Moran

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13 May 2014

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