Alternative Fee Arrangements That Work for Clients and Lawyers

Volume 40 Number 3

By

About the Authors

Paul Bonner is a marketing and business development consultant. He has more than 10 years of in-house experience atAm Law 100 firms, developing the strategic sales support function critical to assisting lawyers in knowing their clients better and in becoming more effective in their business development efforts. 

Deborah McMurray is the CEO and strategy architect of Content Pilot LLC, a strategy, design and technology company that serves the legal industry. She is a fellow in the College of Law Practice Management, in the Legal Marketing Association Hall of Fame and was recently named by the National Law Journal as one of its 50 inaugural Legal Business Trailblazers and Pioneers.

Law Practice Magazine | May/June 2014 | The Marketing IssueWe’ve heard the story countless times.
A billing dispute damages an otherwise productive attorney-client relationship and, because of the breached trust, opens the door for competition. Blame is often placed on the client not understanding the situation, law firm billing inaccuracies, a change in scope or poor communication. One often-overlooked factor is that the governing fee arrangement may not have fit the client’s needs.

Being open to alternative fee arrangements (AFAs) and initiating the conversation on that subject can reduce the risk of having a relationship-jeopardizing fee dispute. More importantly, it can elevate your client’s satisfaction, strengthen your relationship and distinguish you among your competitors.

To confirm what AFAs actually are working, we interviewed leaders in four law firms who spearhead their firms’ AFA strategies. What these leaders, representing firms that range in size from 25 to 320 lawyers, confirmed is that AFA success can be realized regardless of geography, scope of practice, size and reach.

WINSTEAD
Thomas R. Helfand, shareholder; chair of the business and transactions department
Locations: Austin, Fort Worth, Houston, San Antonio and The Woodlands, Texas; Charlotte, North Carolina; New Orleans, Louisiana; Washington, D.C.
Size: 320

Does your firm have an AFA strategy?
Winstead has a formal policy that details what lawyers should consider. “We encourage the dialogue,” Helfand says. “We encourage AFA agreements to be discussed and considered with all clients and prospects. If it matches up with the client’s goals and objectives, then we should do it.”

Helfand is an advocate for AFAs, having led the Winstead team that designed the program, and believes AFAs should be more common. He encourages fellow partners to be proactive.

How do AFAs support your business development strategy?
Winstead first determines the client objectives that make the most sense for the firm. Pricing is second.

How are you defining AFAs?
“Anything that is not based on a billable hour or a discounted hour—contingency, break-up fee, premium fee, flat fee, budgeted fee,” Helfand says.

Which matters make the most sense for AFAs? Which do not?
“I don’t think there are any matters that can’t work within an AFA,” Helfand says. “Litigators in particular say, ‘You have no idea what it will cost,’ but I disagree. For example, litigation can be divided into segments, and pricing can be determined for each one.

For some clients, it’s about budgeting; others want to share risks and rewards; and still others just want the lowest price. You can’t know the right direction until you understand the client circumstances and the matter specifics. Having this conversation is where the value is.”

Winstead lawyers determine the client’s goals—what’s important, what success looks like and what failure looks like. “The client may say, ‘I know the devil in the billable hour, so let’s do that,” Helfand says. “The conversation is imperative even if you end up with an hourly structure.” He is convinced that lawyers who do this provide better service.

How frequently are AFAs discussed? How often are AFAs selected?
Helfand wants AFAs to be more prevalent. He says the conversation happens less than 20 percent of the time, and actual agreements result in less than 10 percent. “The fact is,” Helfand continues, “many of our clients are happy with some form of hourly rates. Given several options, that’s what they choose.”

Who drives the AFA conversation?
“I often bring it up in the first conversation,” Helfand says. He notes that lawyers generally aren’t good at discussing fees on the front or the back end. Clients definitely discuss legal fees, but not necessarily AFAs.

Are AFAs financially successful for the law firm? For the client?
Helfand says that if you do your homework, they certainly can be.
“Here are two examples: We had a conversation with the chief financial officer of a long-standing client who wanted to get a handle on his legal budget. He used multiple law firms. I offered an AFA that I thought made sense for him and for Winstead. I analyzed the work over the last several years and determined an annual amount payable in quarters—a straight retainer deal. We are now in our fourth year. Because things have been ‘normal,’ the amount the client paid ended up being higher than our standard rates, so I offered to carry over the remaining retainer amount to the next year. We generated enormous goodwill by effectively giving them a refund.

“We have multiple arrangements with another client. For deals that don’t close, we charge only 50 percent of our standard rates but receive a comparable kicker if they do close. We now have all their deals—so that’s a win for Winstead.”

Are AFAs ever offered to secure the relationship or land higher-margin work?
“Litigation is the area that is the most ripe,” Helfand says. “You can’t market and sell pricing alone. Market expertise first, and then have the pricing discussion be ‘added value.’ Clients want more control over legal costs. If in litigation you can offer a better, more predictable pricing structure, your firm will have the advantage.”

What percentage of your total revenue comes from AFAs?
Helfand estimates less than 10 percent of revenue comes from true AFAs.

How do you track their success?
“Anecdotal evidence. Our policy called for a very specific tracking mechanism—but that part has been disappointing,” he acknowledges reluctantly.

Have you won work because you used AFAs? Have you kept legacy clients with AFAs?
“Yes, especially for legacy clients. Simply, they are happier,” Helfand says.

Looking out 24 months, do you see AFAs increasing?
“They have to increase. There are pressures on legal fees as much or more than ever before. Anything that can be done will be positive for the client relationship.” He adds, “Having said that, I don’t think they will ever dominate the fee landscape.”

CHAMBLISS
Dana B. Perry, former managing shareholder
Location: Chattanooga, Tennessee,
Size: 60

Does your firm have an AFA strategy?
“No, it’s been a tough nut to crack for us,” Perry says. “Why? A fair number of clients have indicated they are comfortable with hourly billing, and we’re responsive to what they want. We talk to them, work with them on budgets, etc., but our major clients are comfortable with hourly billing—with discounts.

“With every client and matter, there is a gut check that goes on—self-editing. We are very cognizant of having to show value on hourly billing. We are careful about what we bill,” Perry says.

How are you defining AFAs?
Perry defines it as anything that doesn’t fit into a bill-by-the-hour arrangement.

Which matters make the most sense for AFAs? Which do not?
Perry notes there are certain areas where fee planning is very common—for Chambliss those practice areas include transactional, patent, contingent, trusts and estate planning and startups. She continues: “Our transactional lawyers are experienced, and the work is sophisticated. Anything with a closing—they have to figure out a fixed fee.” Perry’s area is trusts and estate planning, which also relies on fixed fees.

Chambliss has a burgeoning group that serves the region’s startup companies. Chambliss offers fixed ranges to them, not necessarily fixed fees. “We have to have our ducks in a row so we aren’t reinventing the wheel each time,” Perry says. The startup team battles with non-law firm AFA providers, where Chambliss must come in and get clients out of trouble. Clients have to be careful when using online legal resources, which often aren’t complete and don’t offer sufficient protection.

How frequently are AFAs discussed? How often are AFAs selected?
Chambliss has a mechanism to track AFAs, although how often the conversation occurs is more anecdotal. Perry’s personal experience is that clients embrace the discussion. The vast majority of her clients are on board.

“The sea change is here,” she says. I believe it will occur more and more in areas where hourly billing is now the standard. Most cases follow some type of pattern that can be anticipated.”

Who drives the AFA conversation?
“We’ve done a pretty good job of being proactive,” Perry says. “We made a decision that we are going to lead this conversation—be in the client’s world, not react and wait on them.”

Are AFAs financially successful for the law firm? For the client?
“For the firm,” Perry says, “the tendency is to estimate low to win the business. Interestingly, we have to pump our lawyers up and tell them that they are worth more than they think they are. I encourage them not to undervalue their services.”

Chambliss quantitatively analyzes cases, doing postmortems to determine profitability, realization and more.

Are AFAs ever offered to secure the relationship or land higher-margin work?
“Yes, to secure the work—but not necessarily the higher-margin work, which is typically hourly,” Perry says.

What percentage of your total revenue comes from AFAs?
“Between 10 and 20 percent. It goes to the earlier point that clients are happy with hourly rates—that’s what they choose. Our relationship partners work closely with clients to develop workable litigation budgets, even if they are hourly. Our litigators are very oriented to the bottom line.”

How do you track their success?
Perry is enthusiastic when she says client feedback is positive. “We are penetrating new areas and developing new areas of work.”
Have you won work because you used AFAs? Have you kept legacy clients with AFAs?

Perry says that Chambliss had won work because of the attractive fee arrangements it proposes, but she doesn’t recall any legacy clients that wanted to switch to a new or different arrangement.

Looking out 24 months, do you see AFAs increasing?
Perry sees AFAs increasing to maybe 20 to 30 percent and emphasizes that it’s a gradual process. She concludes, “I think there are areas where hourly rates legitimately make the most sense.”

BRICKER & ECKLER
Quintin F. Lindsmith, co-chair, Insurance Industry Litigation Group; past chair, Litigation Group
Locations: Cincinnati/Dayton, Cleveland, Columbus and Marietta, Ohio
Size: 144

Does your firm have an AFA strategy?
“Our main strategy is to have AFAs on the menu of items available to certain clients,” Lindsmith explains. “I say ‘certain clients’ because I mean those who have a steady stream of litigation.” He notes that AFAs typically don’t work with smaller clients who have one-off, infrequent litigation.

The best candidates are companies that are in litigation often or for which litigation is a business strategy. Lindsmith says, “If the main goal is to reduce the cost to the client, AFAs in the beginning don’t necessarily do that.” He indicates that AFAs address predictability more than the cost. “Clients will pay a premium for predictability, so the initial costs may or may not be higher than billing hourly, but over time clients should realize savings.”

How are you defining AFAs?
“AFAs can take many forms,” Lindsmith states. “I include volume discounts—although some people don’t consider them AFAs. We will do flat fees on cases that have a similar subject matter. Another is what we call a ‘macro flat fee.’ It can be explained as follows: If an institutional client spends $3 million on litigation every year, we offer a flat fee for all of that type of litigation, broken out over the year, as long as the cases have the same profile.”

Bricker also uses hybrid arrangements, charging a flat fee until a certain event occurs, then switching to hourly

Which matters make the most sense for AFAs? Which do not?
Lindsmith explains that AFAs make sense “where you can identify a historic steady stream of litigation or a particular type of litigation, and where legal issues tend to be the same and factual scenarios range within a certain spectrum.” He believes that to secure an AFA arrangement, there needs to be complete candor between the client and law firm. “A client must disclose its historic spend for a category of litigation, and the law firm must disclose its total fees and expenses for that category of litigation. If neither is willing to be candid and to disclose, that’s where the AFA discussion should stop.

“You also have to evaluate the arrangement and adjust it over time—to make sure that the firm isn’t getting a windfall or losing its shirt,” Lindsmith adds. “The goal is to avoid extremes for both parties.”

How frequently are AFAs discussed? How often are AFAs selected?
Lindsmith says there is “surprisingly little discussion. Perhaps it is the largest institutional clients that are requesting AFAs. We just don’t see a lot of clients pursuing these conversations.”

Who drives the AFA conversation?
“Initially, the client,” Lindsmith says, “but as the conversation matures, it tends to be more balanced.”

Lindsmith works primarily with legal departments in his litigation practice. Despite what a lot of articles and conference speakers say on the subject of flat fees, most legal departments remain comfortable with traditional billing. The legal department might receive a top-down AFA request from senior executives, but in Lindsmith’s experience the in-house lawyers do not initiate the discussion.

Are AFAs financially successful for the law firm? For the client?
Lindsmith explains they can be successful if managed correctly. “This becomes a team management issue. It’s a challenge for lawyers to shift their mindset away from hours. They should worry more about realization than how many hours they’ve spent on a project.” Lindsmith believes that once clients get used to AFAs, they like them. They like their predictability. “Here is an example: An in-house lawyer client called about a litigation matter, and he wanted me to prepare a budget. Because we had a flat-fee arrangement in place, on the spot I could say, ‘It’s x dollars—a flat fee.’ He could immediately quantify the cost and determine whether his company wanted to pursue the litigation.”

Are AFAs ever offered to secure the relationship or land higher-margin work?
“We’ve had the benefit of doing some significant AFAs for several years,” Lindsmith explains. “We were reluctant to use them in marketing until we had a mature experience.” Bricker now knows the ins and outs of staffing, the various arrangement types, when they work, and how profitable or problematic they are to the firm and clients. He adds, “Now we can market it with all the right information.

“The biggest risk? Don’t go for the cheap arrangement because the main demand from the client is to reduce cost,” he cautions. “That will end up causing problems for the firm—and greater risks for the client.”

What percentage of your total revenue comes from AFAs?
Lindsmith estimates, “Of total firm revenue, maybe 1.5 percent; of litigation revenue, 5 to 7 percent.”

How do you track their success?
“Every month, our bookkeeping department generates a bill. If it’s a flat-fee case, it shows where we are—in the red or black. We send that ‘ghost bill’ every month so the client can see where we are in our budget. Both sides are always monitoring where we are.”

Lindsmith continues, “If we have to hire a high-priced expert, we have a safety valve in our agreement to cover such a cost. Because we are in a good position of trust and transparency with our clients, they will be very accommodating.

“There will be cases that resolve, and we are deeply in the red—or in the black. We anticipate that we will have winners and losers. It works as long as there is a reasonable balance over the history of the representation.” Lindsmith stresses that annual reviews with clients are important to determine who is making too much money or too little. “There should be adjustment and incentives for both sides.”

Have you won work because you used AFAs? Have you kept legacy clients with AFAs?
Lindsmith says that they have gotten cases that they wouldn’t otherwise have gotten.

Looking out 24 months, do you see AFAs increasing?
“Staying the same,” Lindsmith concludes. “I don’t see a growing appetite for it. I hear a lot of the talk, but don’t see a lot of the walk.”

GRUBER HURST JOHANSEN HAIL SHANK
G. Michael Gruber, partner, and Mark A. Shank, partner
Office: Dallas, Texas
Size: 25

Does your firm have an AFA strategy?
Yes, says founding partner Gruber. “Our tagline is ‘Interests Aligned.’ Our absolute strategy is to have the lawyers and clients walk in lockstep from Day 1. So there is never a tension between our interests and the clients’ interests.”

Shank adds, “We embrace risk, but we are very comprehensive in analyzing it.”

“Our AFA strategy is thoroughness,” Gruber says. “If we are going to share risk, we have to capture, understand and evaluate the twists and turns. It requires a lot of analysis.”

How are you defining AFAs?
“My definition is anything that isn’t traditional billing by the hour,” Shank says. “If hourly discounts don’t contain any other component, I don’t call them AFAs. However, if they are tied to higher volume, then I do.”

Which matters make the most sense for AFAs? Which do not?

“Most litigation matters make sense; the more cookie-cutter, of course, the easier it is,” Gruber states. “For more complex matters, it takes a fairly sophisticated buyer of services that can wrap its arms around how an AFA might work. We are focused more on the buyer than the matter, so we work hard to pattern a fee agreement that aligns interests.”

How frequently are AFAs discussed? How often are AFAs selected?
Gruber and Shank confirm that they are discussed at least 60 percent of the time. Actual adoption is a much lower percentage in practice, but they add, “Some of our most mutually satisfying client relationships have AFAs at their center.”

Who drives the AFA conversation?
Shank replies, “It depends on the buyer. Our partners are attuned to having these conversations. Clients may not know how to start the discussion and what the options are. We would love to have the conversation with everybody.”

Gruber Hurst works with more C-level, wealthy people doing business than legal department buyers. Its experience has shown that businesspeople are more open to a dynamic pricing structure.

Are AFAs financially successful for the law firm? For the client?
“The way for them to be successful is for lawyers and clients to find a way to negotiate a win-win situation,” Gruber explains. “They aren’t when a client is just trying to drive a hard bargain. The goal of any AFA should be a lasting relationship between lawyer and client. Clients should be able to say, ‘I know my lawyer is watching my back.’”

Are AFAs ever offered to secure the relationship or land higher-margin work?
“Absolutely. We lead with our strategy on the home page of our website,” Shank says.

What percentage of your total revenue comes from AFAs?
Both Gruber and Shank confirm that a “significant portion” of firm revenue comes from AFAs.

How do you track their success?
Shank replies that they have no systematic way of tracking. “But since our law firm is all about client satisfaction and loyalty, it’s not hard to know. A relationship that allows you to deliver high-quality work at a reasonable price—that’s a success.”

Looking out 24 months, do you see AFAs increasing?
“Staying the same or increasing,” Gruber concludes. “We have a cadre of clients that really like them.”

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