4 tips to get the most out of alternative fee arrangements
Alternative fee arrangements (AFAs), or billing models that don’t use traditional hourly rates, are becoming more common in the legal industry. Bloomberg Law’s 2021 Legal Operations Survey found that AFAs were applied to around 25% of outside legal services. More corporate legal departments are using them to bring predictability to legal invoices and avoid inflated hourly charges. Fun fact: Most of Microsoft’s outside legal spend is now billed under AFAs.
Most law firms are now willing to offer these value-based billing arrangements to stay competitive, and general counsels are fans of using them to support their renewed focus on legal cost control. So, the pressing question for in-house teams is not whether AFAs will be used but how to ensure the best ROI from AFAs.
1. Let go of billable hours as an indicator of effectiveness
Using AFAs is supposed to mean moving away from the billable hour. Still, many legal ops teams still get hung up on this familiar metric. In Bloomberg Law’s 2021 Legal Operations Survey, most respondents admitted they’ll ask vendors for records of the hours spent on a matter (AKA “shadow bills”) when using AFAs.
While having these figures might make you feel more comfortable, you shouldn’t need to rely on them. There’s no correlation between how long attorneys spend on a matter and its quality — while this is often an assumption, it’s almost never guaranteed. As the Association of Corporate Counsel notes, you’ll get the most out of AFAs when you shift your thinking from “how many hours will it take” to “what is the value to be delivered.”
Clinging to hourly metrics while using alternative fee arrangements also hurts your relationships with your firm partners. Even though you’re using a fixed rate instead of an hourly fee, vendors still get stuck recording the hours spent on countless line items. That’s a frustrating use of attorney or admin time and can appear like you’re micromanaging.
ElevateNext founding partner Nicole Auerbach summed it up for Bloomberg Law: “Clients should know what their attorneys are doing, they should trust them to get the outcomes that they’re wanting.”
2. Factor in AFA benefits outside of saving money
While cost savings tops the list of reasons corporate legal departments implement AFAs, there are more perks beyond that.
Don’t forget about these three when deciding whether to use an AFA:
- Time savings. AFAs reduce the time and energy spent on legal e-Billing review. With something like a flat-fee model (the most-used AFA), you don’t have to scroll through hundreds or thousands of invoice line items anymore. This means less manual admin work and more time for strategic spend analysis.
- More accurate budgets. With AFAs, you don’t need to worry about getting unexpectedly high invoices when outside counsel takes more time on a matter. You know the set price at the start of the legal work, so it’s much easier to keep your legal spend budget on track.
- Better working relationships with vendors. The hourly billing model often leads to a cat-and-mouse game between in-house legal and law firms. Vendors bill higher than anticipated, legal teams have questions and find line items they think should be adjusted, and both parties enter a tense back-and-forth. AFAs eliminate all that stress and manual work because, from the start, everyone is on the same page about what the final invoice will look like.
3. Emphasize how alternative fee arrangements also benefit vendors
The success of these fee agreements hinges on buy-in from both sides. If your law firms feel like they’re losing out in the AFA equation, you may hinder the relationship and limit the strategic value they provide. Show them how this type of billing structure is a win-win.
Highlight how the new billing arrangement will streamline the invoice review process. This means vendors will get fewer questions from legal or accounting about legal fees. A willingness to use AFAs also reduces the chances of losing business to another similar vendor or a cheaper alternative legal service provider. And it doesn’t hurt to mention that Am Law 200 firms have been drawing more revenue from AFAs steadily since 2018.
4. Use historical data to determine appropriate pricing
Bloomberg Law found that both legal ops teams and law firms listed “determining appropriate pricing” as the biggest barrier to using alternative fee arrangements more often. Remove the guesswork. Leverage historical invoice and matter data to come up with a realistic figure that works for both parties.
Reviewing these details gives you a concrete idea of how much you typically spend on certain types of legal work. If a vendor comes back and says your pricing seems too low, you have hard data to back up your reasoning instead of a rough guess of what’s fair. These legal analytics are also key for double-checking that using a fixed fee makes more sense than the traditional hourly billing model.
While you can collect and analyze this legal data in a spreadsheet, it’s a largely manual process that takes up a lot of your valuable time. Let’s say you were using Excel to try and figure out if you should base a flat fee at the task, phase, or matter level. You’d easily spend hours bouncing between spreadsheets and grouping together data into different categories. And the information would still be prone to human errors.
Another option is using advanced legal technology, which speeds things up with automation and reduces duplicate data entry errors by integrating with other sources. For example, legal spend management software can generate the following granular reports with a few clicks of a button:
- Practice area (matter group) activity by vendor report: Compare the work done by multiple law firms
- Task code cost comparison by vendor report: Measure legal spend by task codes and specific vendors
- Rate comparison report: Assess vendor costs and specific timekeeper rates
The quick, comprehensive insight from a legal spend management platform helps you figure out if an AFA is worth it faster than using a manual tool.
Proving the value of alternative fee arrangements helps prove the value of legal ops
Implementing and measuring the value of an AFA is a complex task. But it’s like building any new skill — it gets easier with practice (and with a helpful digital tool). As you continue learning the ins and outs of AFAs, you gain another strategic method to optimize legal spend — showing your C-suite how important your team is to a strong bottom line.
Once you set your AFAs in place, SimpleLegal’s AI-powered invoice review ensures you stay on top of them. Request a free demo to see how our legal spend management solution helps you handle existing AFAs and find opportunities to apply new ones.