So much of the conversation on alternative fee agreements (AFAs) only serves to stir confusion rather than clear it up. From a business perspective, AFAs are nothing more than a pricing strategy, something both companies that provide products and services experiment with all the time.
Think about it in the context of department stores: who is the target market and what does pricing say about the following stores:
Pricing is at the center of a business model – including the business of law – and touches nearly every aspect of a business from marketing, to customer service, to client satisfaction.
In light of the spate of recent surveys on AFAs, we dug into take a look at what the community at large is saying and offer seven posts for quality reading:
1. Are Blended Rates Alternative Fee Arrangements? by Jim Hassett
Blended rates work like a discount: one price, per hour, per attorney, regardless of experience. It’s a way to reduce cost, or perhaps improve relationships in order to retain business. But are they AFAs? Mr. Hassett breaks down the concept with examples, delves into the pros and cons of each and notes that the very question is a result of varying definitions.
The fact that two conflicting definitions of AFAs are in wide use adds considerable confusion to an area that was already confusing enough.
2. Alternative Fee Arrangements: The Facts Behind the Buzz by Debbie Stephenson
This post provides an infographic that sources statistics from a range of reports in the public domain. According to the data included, some 95% of law firms have some sort of AFA offering in place. To clear up confusion, the post offers a clear definition of AFAs presented up front.
In the practice of law, AFAs occur when payments to a law firm are based on a method other than billable hours.
3. ALM Releases 2013 AFA Report: Still Hazy After All These Years by Jean P. O’Grady
In one of the most enlightening posts I’ve read, Ms. O’Grady pointedly says procurement is the catalyst for AFAs. Further, she says, both inside and outside counsel are evaluating alternative agreements on a case-by-case basis. She calls for a new career path in the legal industry focused managing and improving process and efficiency.
The most significant take away is that right now many firms are treating AFAs as a loss leader with the expectation that it will bring in more work from the counsel. But if firms don’t have the discipline and the tools for managing their own efficiencies, it is likely doomed to failure. So the real question is whether firms will invest in the development of real LPM specialists who have sufficient authority to establish best practices which become the firm’s standard procedures.
4. Lawyer Productivity in Alternative Fee Arrangement (AFA) World by Ron Friedmann
There’s an old saying in military circles: amateurs talk tactics, experts talk logistics. Mr. Friedmann drives at this point from an attorney’s perspective: support staff help keep billing attorneys more productive. He says it’s especially important in the evolution of billing strategies.
One driver of lawyer output per hour is support staff. The more “non core legal work” lawyers delegate to staff, the higher their output. Many firms, however, have cut support, at least in the form of secretaries. Until about 20 years ago, the typical lawyer to secretary ratio was 2:1. Today, 3:1 is the new 2:1. Many firms now drive it as high 5:1 or 6:1. In AFA World, that trend may have to reverse.
5. The Pros and Cons of 5 Popular Alternative Fee Arrangements by InsideCounsel
Three authors put their minds together in this contributed article for InsideCounsel. The authors lay out what they say are five categories of AFAs and break down the advantages and disadvantages of each. They also point out, that views of AFAs are changing – are AFAs friend, foe or frenemy?
Are AFAs good or bad? More and more lawyers on both sides are recognizing that AFAs are not entirely boon or bane.
6. More on Alternative Fee Arrangements by Wynne James
“Almost any AFA is, of course, preferable to getting billed by the hour,” writes Mr. James, but his post is aimed at helping both clients and attorneys better understand AFAs. In other words, knowing how they are constructed is a path to understanding if they are reasonable.
How law firms typically estimate a fixed fee is probably a mystery, but include, most likely a) asking the question “how much did we charge for this type of work last time?” The problem here is that the last time might have been an engagement for which the firm got paid by the hour and managed it without much consideration of efficiency.
7. What About Alternative Attorney Fee Arrangements in Large Chapter 11? by John P Schafer
What about them? It’s a great question because if a company is going bankrupt, how can it afford to pay attorneys to settle the matter? Mr. Schafer cites two primary sources for pressure: a) incentive – since attorneys are often paid before creditors in bankruptcy cases, and b) regulatory scrutiny.
For me, the question thus becomes: what type of alternative fee model would best serve chapter 11 business bankruptcies? Alternative billing structure can take many forms, and include straight flat fees for the entire engagement, milestone fee arrangements, “value” billing, incentive billing or “success fee”, or a combination of these.
Your turn! Is there a post here you strongly agree with or disagree with? What are some great posts on AFAs you have read? Please feel free to share in the comments.
Photo credit: Firmex Infographic on AFAs
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