Alternative Fee Arrangements

Staying profitable with AFA. Guaranteeing client service with Legal Technology

Written by Knowledge Team, posted on October 27, 2018.

Best practices in adopting Alternative Fee Arrangements and still maintaining service levels and firm profitability. Ethics behind what is and not an Alternative Fee Arrangements

What is Alternative Fee Arrangement

Alternative Fee Arrangements are agreements between a law firm and a client, where clients are not billed on hourly basis. Time and Material way of compensating the firms is changed. Such structures can take the form of contingency fees, fixed fees, value or success-based fees or other alternatives to hourly fees appropriate under the circumstances of a specific matter.

Why not Hourly Billing

Most firms bill by the hour. The amount you pay depends on the amount of time it takes the lawyer to do the client’s work. Lawyers get paid more if they work more. The behaviour rewarded under the hourly approach is not aligned with your economic interest. It’s common that the legal team is larger than needed and more hours are generated than needed. There is no incentive to lower costs; to the contrary, under the traditional model, working efficiently reduces profit.
Digital Transformation is shaking up the way, both the law and the legal services are delivered. Clients are becoming accustomed to technology-enabled conveniences and a superior customer experience in their personal lives and expect the same in the professional environment too. So, for Legal Service Providers, automating and digitizing manual processes and empowering their clients to work in the way they want and from anywhere they want has become the core to digital transformation.

Implementing AFA Profitably and Measuring Success

How can firms know if they’re making or losing money if they’re not tracking billable hours. Firms that use financial intelligence and data to drill down into all tasks performed, and agree on precise methodologies to allocate resources, are much better placed to measure the success of AFAs.
Here are some points to consider if you’re planning to use and implement Alternative Fee Arrangements across the firm:
  • Budgeting works: Use budgets, profitability metrics, due diligence and firm data to set up and monitor your AFAs.
  • Set expectations up front: Make sure your clients are aware of the likely costs at the outset of each matter, which will help maintain good relationships and avoid hassles down the track.
  • Use practice management and time management tools: Data storage and workflow tools help streamline processes and eliminate repetitive tasks.
  • Monitor and track for accountability: By preparing an outline, monitoring the AFAs, identifying any delays and tracking your progress, you are more likely to stay on budget and meet client expectations.
  • Schedule regular meetings: Get together weekly to plan and discuss the ongoing arrangements.
  • Educate everyone around: Change is difficult. Make sure you educate your staff in the new way of thinking.

Achieving Profitability with Alternative Fee Arrangements

With the increasing prevalence of alternative fee arrangements (AFAs) – such as fixed, blended and capped fees and retainers – firms have the ability to increase the client’s perception of value, improve employee satisfaction and provide a competitive advantage all at once.
Firms that manage their internal systems well and get a handle on what it actually costs to generate legal work will have the competitive edge going forward – just ensure your AFAs are valuable to the client and profitable for your firm.
But not all AFAs produce profitable results. How can law firms be proactive when it comes to legal pricing and maintain good client relationships at the same time?
  • AFAs must be capable of generating profit: Applying a strategic pricing model will ensure a viable costing arrangement.
  • Value equals an assessment of the benefits and the price:AFAs assist in the process of determining ‘value’.
  • AFAs shift pricing control back to the firm:The demand for more value and lower prices from clients is often seen as a market problem. Firms that proactively approach this challenge as “the inability to justify our fee” instead of “a loss of pricing power” shift the focus to one of capability and differentiation.

Pros and Cons of AFA

Pros of Alterative Fee Arrangements
  • Makes costs more predictable
  • Simplifies budgeting or really eliminates it
  • Reduces potentially contentious billing issues between clients and firms
  • Controlled cost and clear expectations
Cons of Alternative Fee Arrangements
  • Loss of transparency, i.e., not being able to see the details behind the bill
  • Thwarts in-depth analysis across different groups, tasks, rates, etc
  • Case Complexity
  • Cost savings are seldom realized

Alternative fee arrangements – it’s time for a change

Clients are more demanding. They’re better informed. And they’re very price-sensitive. It’s best to adopt alternatives to lawyers charging by the hour. Surely there is a satisfactory middle ground where both the client and the solicitor can be happy and that’s feasible with Alternative Fee Arrangement.
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