Subtle but steady – that’s what the data has to say about alternative fee arrangements (AFAs) – according to our own Kris Satkunas writing for InsideCounsel: AFAs rising: Data shows subtle but steady increase in non-traditional billing.
The study reveals the overall number of legal departments actively engaging in AFAs grew sharply, to the tune of 76 percent, up from 59 percent in the previous year. The data, which stems from the latest CounselLink® ELM Trends Report, indicates AFA usage grew in five core law practice areas:
- Corporate, General & Tax
- Regulatory & Compliance
- Commercial & Contracts
- Employment & Labor
As Ms. Satkunas wrote:
“While hourly billing still commands a stronghold in the legal market, industry experts anticipate the tide is about to change, especially as firms of all sizes, continue to compete for the same shrinking pool of clients. According to a recent BTI Market Outlook Report, which is consistent with CounselLink data, corporate clients reduced their panel of firms from 47 in 2014, to just 36 firms, this year alone.”
“Another factor driving increased interest in AFAs also focuses on whether the value the legal department is receiving is aligned with the cost. In other words, clients today are unwilling to accept rate increases as simply the cost of doing business. They want to know if the increase will net them more value. This provides a dilemma for firms who have historically relied on periodic rate increases as a financial growth strategy.”
Invoice Data and Surveys Jive on AFAs
The ELM Trends report is unique because it’s not opinion data, but rather based on $18 billion in legal invoices paid by corporate legal departments to law firms. That said, survey data from independents sources draws similar conclusions.
According to a report by The American Lawyer, bellwether companies like Microsoft and GlaxoSmithKline increasingly favor using AFAs as opposed to the billable hour. In the article, Justin Ergler, director of Alternative Fee Intelligence and Analytics for GlaxoSmithKline noted:
“If a firm won’t work under an AFA, it will have very limited opportunities to represent GSK—it’s that simple.”
Microsoft is taking a similar approach, The American Lawyer reported, with 90 percent of its work structured around AFAs. According to Microsoft Corporate Vice President and Deputy General Counsel David Howard, “Hourly fees reward inefficiency.”
“You can’t just look at the rates that firms propose to determine which is going to get the work done for less money. Quality and efficiency drive savings more than marginal differences in billing rates.”
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There is some debate in the legal community about whether or not AFAs earn far greater attention than usage. Usually when a trend takes hold, what feels like happened overnight actually took many years to achieve a critical mass.
The data is telling us more and more legal departments are experimenting with alternative fee structures. For law firms that lean forward and determine how to implement these profitably, it could well mean AFAs become a competitive advantage.
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