BrightFlag – Hourly billing has been the dominant financial model for the legal profession for generations. But more and more in-house legal teams are exploring the potential of alternative fee arrangements (AFAs) when engaging outside counsel.
Why? Well, for starters:
- Hourly billing models (implicitly and/or explicitly) incentivize law firms to increase the time, staff, and seniority assigned to a given task
- AFAs offer pricing certainty to clients and financial predictability to their companies
- AFAs expand the opportunities for cost-saving, risk mitigation, and operational efficiency
And it seems adoption is starting to catch up to interest. Two-thirds of law firms now say they are actively collaborating with clients to come up with creative fee arrangements.
With the onus of initiating such conversations still on the client in most cases, though, it’s important to understand the full range of options that you can put up for discussion.
1. Fee Caps:
Definition
Hourly billing arrangements that establish an agreed-upon maximum at the outset of a matter.
Example
Your attorney’s billable rate is $500/hr, but they agree to charge no more than $50,000 total for services related to the matter.
Considerations
This fee arrangement is still based on the hourly billing model, but it offers greater predictability in the sense that you know the absolute maximum you might have to pay before the work even begins.
2. Fixed-Fee Menus:
Definition
A defined list of services that your law firm will provide for a consistent, predetermined price. Varieties include set pricing on services provided by the law firm and additional flat-fee charges added to the initial base price.
Example
A standard investment transaction listed at $25,000, with an additional $8,000 fee for assuming a loan and a $10,530 financing fee.
Considerations
Fixed fees are typically seen in practice areas like banking and corporate law, offering a consistent price for commoditized and repetitive tasks. This makes it easier for your law firm to allocate a defined fee per activity and accelerate invoicing. Once again, these fee arrangements also afford you and your organization valuable predictability.
3. Volume Discounts:
Definition
A sliding-scale discount based on the volume of legal work assigned to your law firm. Higher discounts are reserved for higher work volumes.
Example
Once you incur $500,000 in legal expenses in a given business quarter, your firm agrees to supply any additional services at an 8% discounted rate for the remainder of that period.
Considerations
Volume discounts are particularly prevalent in insurance-related matters, but regardless of practice area, this fee arrangement can be a powerful way to promote efficient law firm operations.
4. Blended Hourly Rates:
Definition
A universal hourly rate applied to multiple law firm staff members who would have formerly billed at separate rates on their client’s matter — regardless of seniority.
Example
You might negotiate with your law firm a blended hourly rate of $400 and leave it up to the law firm to decide if they still want to assign the work to a $700/hr senior partner.
Considerations
Blended rates help to protect clients against law firms assigning low-value work to high-charging senior staff. Once the rates are applied you aren’t required to pay more than that. But one issue with blended rates is that there is less incentive for attorneys to work efficiently. The longer they take, the larger the bill. The main benefit would be the possibility of accessing high-quality services at a reduced price. But the downside to this is that law firms may not even offer the services of high-paying lawyers.
5. Contingencies:
Definition
Payment structures based, in whole or in part, on a predefined legal result.
Example
After winning a litigation matter, your law firm bills for a percentage of the awarded recoveries in addition to its baseline hourly rate.
Considerations
Contingency fees are commonly used in litigation cases where plaintiffs are seeking monetary relief. They can also be applied to matters involving defendants in which the level of damages avoided determines the amount of the contingency.
Full contingencies, on the other hand, bring the financial interests of both you and your firm into maximum alignment. But because full contingencies are high-risk, partial contingencies are more common as firms naturally prefer to have a high level of certainty that the outcome will be favorable.
6. Performance-Based Success Fee (Holdbacks):
Definition
A portion of fees are placed into a separate account and, upon reaching predetermined benchmark fees, are distributed to your law firm, refunded to you, or divided between sides. If the law firm achieves a successful result, they may also receive a multiple of the holdback.
Example
A performance-based success fee could be applied if your company is considering listing on a public market in an IPO. Your law firm would bill a typical rate for their work while also charging $10 million regardless of whether your company lists or not. If you are successful in listing, they would be entitled to an additional $10 million. This would be the holdback.
Considerations
This fee arrangement is most common within corporate practice areas. Holdbacks are more flexible than contingency fees and strengthen your law firm’s existing incentive to work efficiently for a successful outcome.
7. Portfolio Fixed Fees:
Definition
This fee arrangement is a set value-based fee assigned to a wide variety of matter types.
Example
For an insurance claim matter, your law firm would define a hierarchy of fees for that particular portfolio of work. Both you and your law firm could then manage the fee risk of individual outliers where the assumptions about the scope of work may be off.
Considerations
Portfolio fixed fees are becoming increasingly popular for higher volume, lower-value work that doesn’t make sense to charge on an hourly rate basis, such as IP defense, debt recovery, and claims management. They also allow for periodic adjustments or “look backs” of the fixed fee if additional unexpected developments arise. By handling a group of cases in a particular area, your law firm would have the ability to handle matters more efficiently and help you reduce any overarching legal risks.
8. Retainers:
Definition
A flat fee to be paid for a specific set of services provided during a set period of time.
Example
Your attorney is kept on retainer for $5,000 per month to advise on data privacy regulations. Any additional hours the attorney works on this particular matter would be billed to you. If the case is resolved ahead of time, your law firm would refund you the retainer surplus.
Considerations
These fees are largely used in employment and regulatory matters. They are considered to be the legal industry’s longest-standing AFA and are still growing in popularity. Retainers provide you with pricing certainty and allow you to gain knowledge on the unique nature of the organization’s requirements because the law firm is an integral part of that team.
9. Risk Collars:
Definition
An hourly billing arrangement that rewards efficiency in which your attorney would receive a bonus if their work is completed under budget or grant you a discount if their work goes over budget. The actual discounts and bonuses vary from firm to firm.
Example
You set a budget with your law firm of $10,000 at the start of the matter but your attorney exceeds that budget by the end. Because of this, you incur a previously agreed-upon 10% discount of the budget total.
Considerations
This type of fee arrangement is usually reserved for corporate purposes and aims to align both you and your law firm’s interests.
10. On-Site Legal Expertise (Secondments):
Definition
A flexible arrangement in which a law firm employee is placed at a client’s office for a set period of time to offer dedicated support. Clients cover a portion (or all) of the employee’s salary.
Example
Your law firm attorney joins you at your in-house legal department’s office one day per week for five months to help cover your colleague’s absence due to maternity leave.
Considerations
This fee arrangement allows you and your firm to form a true partnership, naturally collaborating and strategizing within the same environment. This provides a unique opportunity for the firm to intimately understand your business and better anticipate your needs.
