Everyone is talking about Alternative Fee Arrangements (AFAs). Some clients are demanding it; some firms market themselves as special because they will consider it; some attorneys are frankly scared of it because they think all it means is that they will be required to discount their fees.
In reality, an AFA is nothing more than a bill based on something other than the amount of time spent on a matter multiplied by the hourly rates of the attorneys doing the work. Contingency fees are a prime example. Fixed fees are another. There are obviously countless other "alternative" ways to structure a legal bill. Each may or may not be less than the traditional hourly rate fee. The reason for an AFA may be to reduce fees, but there may also be other reasons:
(1) An AFA may provide certainty as in a fixed fee. The ability to budget legal costs with certainty may be more important to a client than getting the lowest price.
(2) An AFA may better align the interests of client and attorney. AFAs with success fees or premiums for desired results may actually increase legal fees. But the attorney is rewarded for obtaining the desired result in the most efficient manner.
(3) An AFA may allow for the client to provide a larger volume of work. The larger volume should drive efficiencies which create a more profitable engagement for the law firm while providing an overall smaller legal budget for the client.
(4) Where the assignments are repetitive or reusable, the law firm charging a fixed rate may lose on the first few engagements but then make it up in each subsequent assugnments. Or, in a slight variation, a law firm can quote certain matters at a loss and others at a premium without having to account for hours where the client can afford more in some cases and less on others (e.g., more on a lease for a large space and less on a smaller lease even though the same amount of time and effort is required.)
(5) The administrative costs involved with billing fixed fees, and with reviewing the bill from the client’s perspective, are less than that with hourly billing. And this is actually a key benefit. A lawyer and client will never need to argue about an invoice – it is settled in advance and the issue about who spent how much time on what is eliminated. The only issue is did the attorney do a good job.
I think in some ways the AFA movement may be akin to the shopping center landlords converting from charging tenants their pro rata share of CAM to now charging fixed CAM. When it first started, tenants were wary thinking it was a hidden profit center for the landlord and landlords were wary of taking the risk of loss. Eventually, landlords came to realize that it decreased conflict between landlord and tenant because they were no longer arguing what was CAM and how was it measured, and didn’t need to worry about audits. Similarly, tenants have come to see the benefit of budgeting exactly what their occupancy costs are without getting that extra reconciliation charge each year and not having to spend the time and aggravation negotiating CAM exclusions.
So the message is AFAs can be a great tool, and the effect on overall pricing is only one factor to consider. They work well in many situations, not in all. To be truly effective both the lawyer and the client need to feel fairly treated. Like strategic business partners !