Historically, the fee structure between client and law firm had been the billable hour. The world changed with the massive sweep of the Great Recession when firms faced huge fee reductions. Today, in-house legal departments continue to apply pressure on law firms in the form of fee reductions or risk-sharing agreements with clients. More than ever, clients expect firms to provide legal services in the most efficient and cost effective manner. While the billable hour remains the predominant fee arrangement in the legal industry, Alternate Fee Arrangements (AFAs) are becoming more commonplace.
What’s the Attraction?
Many clients prefer AFAs to the billable hour because they allow legal fees to be managed to meet departmental budgets. Flexible arrangements may enable clients to recognize lower fees on certain agreed upon levels of legal services and also offer the law firm milestone payments as certain matters are completed. Under AFAs, the client perceives value for their legal fees.
Nevertheless, there is some risk. Both client and firm must recognize that not all AFAs will succeed. The AFA is just one part of their overall relationship and, as an experiment, it may be necessary to change course or make modifications if one or both parties become uncomfortable with the outcome.
Before You Consider an AFA
AFAs can be your pathway to build new business, establish a relationship with a particularly attractive client, and provide flexibility to a client. Nevertheless, when offering AFAs you need to develop a mutual level of trust with the client, understand and define the objectives of each phase of the engagement, and constantly stay on top of budget matters. AFAs can reduce billing and collection disputes with clients and, when combined with excellent legal services, build a foundation for a strong client relationship.
Your AFA Options
Contingent Fee. Occasionally referred to as a Contingency or Conditional Fee. With this approach, your firm collects a percentage of the money won at trial or on settlement. The downside: The client generally pays nothing should legal action prove unsuccessful.
Fixed Fee. Your firm takes on the matter for a pre-negotiated amount. This works well when the cases are routine. However, it could lead to difficulties should you incur unexpected costs requiring a separate negotiation.
Flat Fee. With this arrangement, the firm takes on a book of cases for an agreed upon amount. Provisions could be made for a specific number of cases or for certain types of cases that occur during a set time.
Bonus Arrangement. You firm receives an extra payment depending on how the case is resolved. Payment conditions could rest on:
Discounted Fee With Performance Bonus. You offer a discount on your normal hourly rates in exchange for a performance bonus or award for success. The performance bonus can be a percentage of the fees saved below budget, a multiple of the discounted fees, or a dollar amount.
Blended Rates. All time is billed equally without regard for attorney seniority. The tendency is to use less experienced attorneys which may impact the outcome of the case.
Volume Discounts. Your rates are based on the volume of the work you receive from the specific client.
Capped Fees. These are also referred to as Collared Fees. You set a maximum amount above which the client no longer pays fees. Depending on where the cap is set, this arrangement can encourage efficiency. You are at risk, however, if your estimates were not calculated efficiently. If possible, insert a safety provision which allows you to revisit the arrangement should the cap exceed a certain amount or percentage.
Holdback Fees. You and the client agree on a specific amount or percentage of the fee that will be withheld until you reach certain milestones or achieve defined results. Sometimes the holdback can be up to the end of the engagement. This will depend on your confidence in the client’s willingness and ability to pay. This type of “progress billing” is helpful for your firm in managing cash flow. For the client, it may be preferable to paying one large bill at the end of a matter.
In any of these arrangements, communication with the client throughout the matter is key. By regularly reporting on progress and milestones, any problems that arise can be discussed as they occur as opposed to when the engagement is complete. Also, it is not required that you stick to one particular AFA. It might be useful to try a combination depending upon client, case circumstances, and your desire to build a long relationship, among other factors.