American Lawyer Media Legal Intelligence Released their report “2013 Alternative Fee Arrangements at Legal Departments and Law Firms”

There is nothing simple about AFAs. There isn’t even a simple definition of what it means and in reviewing the inconsistent responses of law firms and legal departments, I couldn’t help but wonder how many of the respondents were using the same definition. My favorite part of the report is the addendum that lists and explains the wide variety of AFA agreements as defined by the Association of Corporate Counsel,  The list  include: Blended rates, capped fees, contingency fees, defense contingency, flat fee, flat fee with shared savings, holdback, partial contingency or success fee and phased fee. The only thing each variant has in common is they are not “the standard hourly rates.”

A careful reading of the report shows that the real drivers of the AFA movement are not the GC’s but the corporate executives and often the procurement departments who have been charged with rationalizing  and reducing legal spending using the same tools they use for the procurement of office equipment.  And yet both in house and law firms responses indicate  that the effectiveness of AFAs need to be determined on a case by case basis.

Legal Project Management Is Critical To Success

The most significant take away is that right now many firms are treating AFAa 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.

Other key findings include:

  •  More than half of the Law Departments and Law Firms surveyed said their volume of AFA’s had increased from 2012
  •  Over 60% of Legal Departments said that Law Firms were cooperating more with AFA’s then when they took  the survey in 2011. 
  • AFAs are used predominantly by large companies with more than 10,000 employees (44% of respondents )
  • 59 % of law firm respondents said that AFA’s make up between 11 and 25% of all firm billings 
  • Several GCs articulated the goal of lowering lawyer rates by $100 an hour. 
  • Law Firms are not at all confident that AFAs are profitable. 
  • Most firms view AFA’s a the price of admission. A loss leader which they hope will result in growing the relationship. 
  • More firms are hiring pricing specialists. 
  • Half of the respondents have participated in” reverse auctions” in 2012 
  • Litigation is the activity which is most often targeted by legal departments for AFAs. 
  • Only 4% of law firms responded that AFAs were more profitable than the billable hour. 
  • 34% of respondents report that they lost money on AFAs. 

The Up Side of AFAs. Alternative career paths. Maybe law firms should start recruiting law grads with project management skills. Certainly there is a pool of second career candidates who in a prior life worked in as IT project managers. Take an unemployed law grad off the street and invest in a new kind of associate who can help build the workflow disciplines of the future. If that doesn’t work look around the law firm for other staff such as librarians and knowledge managers who have skill sets ideally suited to Legal Project Management.

The Dark Side of AFAs. Several weeks ago published a story Orrick’s Next Act which contained the following comment: “some partners worried that the firm’s embrace of alternative fee arrangements gave the impression that it was moving down market.” So herein lies the cognitive disconnect. Large Law firms see themselves as Neiman Marcus but now have to market themselves  as if they are Walmart. Bruce MacEwen, of  Adam Smith Esq.  has pointed to the risk of “suicide pricing” which leaves firms  blindly competing for business without the tools for analysing profitability. What law firm really wants to win this “race to the bottom?”