By Vince Venturella, Associate Director, Technology Product Management, Insurance, Wolters Kluwer’s ELM Solutions
Corporate legal departments (CLDs) love alternative fee arrangements (AFAs) for their ability to deliver predictable costs and outcomes in line with pre-set goals. Indeed, a correctly configured AFA can help CLDs simplify budgeting, ensure alignment with firms on cost management metrics, and set expectations early in the engagement.
However, AFAs have always been challenging to implement effectively. They're complicated for law firms and CLDs to set up and require detailed configurations, auditing, and a lot of front- and back-end work. Most of the billing systems that law firms currently use support traditional hourly billing, and it's difficult for firms to customize these systems to handle nuanced AFAs.
Fortunately, with careful planning, clear communication, and a willingness to embrace innovative billing practices, AFAs can be a powerful tool that benefits CLDs and law firms. Here are three strategies CLDs can implement to encourage law firms to embrace AFAs and make the pricing structure work for them.
Use reverse auctions for cost savings
Reverse auctions are competitive bidding processes where multiple law firms bid to provide legal services to a CLD. Reverse auctions incentivize firms to create value-driven fee structures rather than just lowering their hourly rates. With a reverse auction, firms may propose or agree to different types of AFAs, including fixed or capped fees, success-based pricing, or flat-fee bundles – making the AFA more of a collaboration than a mandate.
Reverse auctions also provide the chance for firms and CLDs to gather detailed information about matters upfront. With this data, CLDs and firms can align on organizational policies and establish performance metrics. Outlining clear-cut expectations before any formal contracts are signed helps set expectations on price and other factors like strategy, staffing, and expertise.
Reverse auctions are particularly beneficial for large, expensive, high-risk matters or high-volume legal work where hourly billing can quickly get out of control. Examples include work related to compliance and regulation management, mergers and acquisitions, and employment law.
Keep requirements simple and streamlined
AFAs are challenging to implement and enforce because CLDs sometimes place unreasonable administrative burdens on outside counsel. For example, a CLD may stipulate that their law firm provide them with shadow billing, hourly breakdowns, and regular compliance audits to get the most significant possible cost savings. However, all these additional tasks undermine efficiency and make flat-fee pricing less appealing to law firms.
CLDs that streamline their requirements will find success. Firms appreciate it when CLDs are willing to openly collaborate and provide straightforward guidance. Simple instructions, mutual transparency around expectations, and collective agreement on goals help keep everything in line. These practices also lead to fewer questions, disputes, and administrative hassles, which helps firms deliver results under budget and remain profitable.
Clear AFA guidelines also help law firms propose profitable structures upfront, which benefits both firms and CLDs. Firms can design structures that are profitable for them and compliant with client expectations. This helps avoid billing disputes while ensuring that firms are working toward delivering desirable outcomes based on predetermined expectations. Everyone starts on the same page—an ideal place to be when entering the partnership.
Do not start from scratch
Setting up an AFA from scratch requires significant time and effort, even with straightforward requirements. Organizations must define pricing models, negotiation strategies, and tracking mechanisms and repeat the process every time. This cumbersome process can slow down contract execution and introduce inconsistencies in fee structures and other factors that could impact efficiency and the ability of CLDs and firms to manage the AFA successfully.
Instead, CLDs and firms should leverage automated technology to simplify and improve the process. For example, parties can use pre-configured templates to develop AFAs quickly without creating new configurations every time for each engagement.
The ongoing management and evaluation of the AFA's performance are just as critical as the initial setup. For this, CLDs and firms should consider technologies that streamline the enforcement of AFAs from pricing agreements to pricing enforcement. Organizations must be able to easily evaluate each AFA's effectiveness in reducing costs and increasing efficiency at any time.
Conclusion: It’s all in the execution
A well-executed AFA is beneficial to both CLDs and law firms. In-house attorneys and outside counsel can foster long-term and successful relationships when they collaborate to align financial incentives, improve cost predictability, and enhance efficiency.
CLDs and law firms should work together to remove the friction and complexity that have been part of the AFA process for too long. These strategies help make AFAs easier to implement and manage for everyone involved, so the focus of the engagement can be on the outcomes instead of the process.
