Striking the Balance: How to make alternative fee arrangements work for everyone

"Many corporate legal departments and law firms have gone "all in" on alternative fee arrangements, while others have chosen not to adopt them at all. After more than a decade in common use, only an average of 23% of legal work is performed under an AFA despite wide acknowledgement of their benefits. Why does this divide exist? It's not just about financial risk but also execution. The main benefit of implementing AFAs into legal operations is that it simplifies legal billing by shifting the focus from hours worked to value delivered. However, many organizations unintentionally introduce complexities that diminish their effectiveness."

"A common mistake is layering traditional billing oversight onto an AFA model. Legal departments often add requirements that make it harder for law firms to execute AFAs efficiently. For example, when legal departments expect compliance with hourly billing guidelines and extensive reporting, it contributes to the complexity of AFAs and creates additional administrative burdens for outside counsel. Requesting that a firm provide hourly breakdowns while adhering to a fixed-fee model undermines efficiency and can make AFAs unattractive."

"To achieve the best results from AFAs, law departments and firms should focus on four key pillars when negotiating terms. 1. Efficiency AFAs should reduce administrative work, not increase it. If a legal team requires the same level of oversight as traditional hourly billing, or possibly even more, it negates the efficiency gains that make AFAs attractive for both sides. Saving time on matter-by-matter invoice review and continuous budget and forecasting updates are also value-add reasons for leveraging AFAs. To streamline the approach, focus the success of AFAs on value not line items."

Only about 23% of legal work uses alternative fee arrangements despite acknowledged benefits. Overcomplication is the biggest barrier to AFA success. Layering traditional billing oversight, such as hourly guidelines and extensive reporting, undermines fixed-fee models and adds administrative burdens for outside counsel. Requiring hourly breakdowns while using a fixed-fee model reduces efficiency and makes AFAs unattractive. Successful AFAs rely on four negotiation pillars focused on simplifying processes and delivering value. The first pillar, efficiency, mandates that AFAs reduce administrative work, lower invoice review time, and emphasize outcomes over line-item detail.

Read at ABA Journal