Legal Spend Management Tools Provide the Base to Build Alternative Fee Arrangements

With an eye toward budget predictability and managing risk, more and more legal departments are looking for opportunities to implement alternative fee arrangements (AFAs) with outside counsel as an element of legal spend management.

While there was a time when any arrangement outside straight billable hours was uncommon, even unheard of, a greater number of outside counsel firms are now open to AFAs. The issue, therefore, has become one of structuring the best fee arrangement for the situation: one that both parties will agree to align to the goals and financial requirements of each and is based upon accurate historical data that gives the legal department confidence that the arrangement is intelligent and appropriate.

INITIAL CONSIDERATIONS

There are numerous types of alternative fee arrangements utilized these days. Still, before deciding which might be most suitable given the circumstances, it is wise to consider the engagement in terms of actual value to the organization and the desired outcome. Is it a “win at all costs” matter or something much less critical in the big picture? Is compromise an option? Is any future relationship with the opposing party involved a non-issue, or does it involve an entity with whom you will need to continue to conduct business for many years to come? Both internal and outside counsel need to understand the situation clearly.

These factors can immediately help decide which is the best outside counsel firm to perform the work if there has been any doubt. It can also lead to the legal department and outside attorneys then analyzing the situation upfront to seriously consider the best approach to achieve the desired goals cost-effectively, beyond simply the appropriate staffing level.

ESTABLISHING THE ALTERNATIVE FEE ARRANGEMENTS

Trying to get work done for less money is not necessarily the sole — or even primary — reason behind opting for AFAs. The legal department may be looking for predictability and to simply keep costs from being open-ended, or there may be interest in allocating costs in a particular fashion, or to giving outside counsel reason to assume greater ownership regarding costs, or to divide the risk so that outside counsel assumes at least some of it. These considerations can drive the decision regarding which type of arrangement is preferable.

In any case, having relevant data to base the pricing on is critical. In the best case, legal spend management technology can provide budgeting, performance, and billing information compiled from previous engagements involving the same outside counsel and/or similar projects involving other firms. There is no reason to go with a “gut feeling” when concrete data is available to guide you with specific measurements.

With that information providing insight, there is a much greater likelihood of arriving at a “win-win” fee structure — where both parties are agreeable and excited about the arrangement and will not second-guess the project as work progresses.

Many types of alternative fee arrangements can be successfully deployed between inside and outside counsel: fixed fees for the entire engagement; phased fees, with a fixed fee for each segment of a project; value-based fees, where an hourly fee gets augmented by a sum to base upon the favorable or unfavorable outcome of the matter; contingent fees, in which outside counsel gets paid only if its work leads to a financial recovery (in which case it would receive a percentage of that total amount); or a blended hourly rate (for all timekeepers or by category).

But the key is ensuring that you are entering the discussion from a well-informed position. Variables and unforeseen circumstances can arise during an engagement, but having historical data from spend management tools to point to when structuring a new alternative fee arrangement can make both parties feel better about it from the outset.

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