February 23, 2023

 Erica White

law departments law firms best practices AFAs alternative fee arrangements

In Part I of this series, I provided a framework for law departments to operationalise a better and wiser approach to alternative fee arrangements (AFAs). In this post, I look at best practices for law departments and outside counsel to collaborate on developing and implementing AFAs.

As I noted previously, the possibility of tension between a law department and outside counsel always lurks when trying to institute AFAs. Law department leaders seek buy-in from colleagues and the department’s law firms alike, while law firms want to ensure an AFA doesn’t hurt them financially. Successfully addressing everyone’s concerns is best done through a three-step process:

Step One: The Menu

Begin by clarifying the reasons to use AFAs and determining the AFA structures suitable for your objectives. The most effective AFAs concern more than cost reduction (see Part I for more on this crucial point). If the goal is to simplify billing, a fixed fee AFA might be a great solution; if you seek to maximise budget predictability, a high/low risk collar AFA might also work well. If instead you want to align billable rates with industry benchmarks, a capped hourly rate may be ideal. Remember: at this stage, you do not necessarily need to select one AFA structure. The goal is to identify top choices from the available approaches.

Step Two: The Proposal

Next comes the RFP (request for proposal) process. The RFP will typically request case management recommendations and an estimated budget broken down by timekeeper classification (partner, associate, paralegal, etc.) and by phase (e.g., initial, pleadings, discovery, etc.). If you plan to consider AFAs, the RFP should request additional information specific to one or more of your top AFA choices. Even if the RFP does not require information specific to AFAs, you may decide to invite law firms to proactively propose an AFA to distinguish their proposals, create value-add, and demonstrate innovation.

Step Three: Evaluation and Selection

The final step is evaluating the proposals and selecting the preferred firm(s). You should assess proposals on value, which entails more than the lowest cost. Value includes a firm’s record of success with similar matters, its experience, the existing relationship between your organisation and the firm, and the trust you have established. You will need to weigh those considerations against the benefits of AFAs, such as simplified billing, transparency, predictability, and others.

To estimate the financial impact of various AFAs’ billing structures, run the data provided by firms during the RFP process through a model. (Of note, you can also use modeling to analyse historical data and narrow down your preferred AFA structures for a particular matter, practice area, or firm.) Both law departments and law firms should use modeling to compare AFAs to each other and traditional hourly billing models. Done right, a model will help identify the AFA with the most predictability, closest alignment of billing rates with industry standards, optimal rewards for success, and greatest transparency.

Conclusion

Maximising the potential benefits of AFAs requires a thoughtful, data-driven, collaborative process. Everyone should understand at the start that using AFAs to achieve a better pricing structure is not a zero-sum game and does not mean sacrificing valued priorities. Instead, a well-designed AFA can help simultaneously advance multiple values. My colleagues and I know that firsthand from our work with numerous law departments and their outside counsel.