Law Practice Today | June 2013 | Finance Issue
June 2013 | Finance Issue
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Six Alternative Views on Alternative Fees

By Russ Haskin

Alternative fee arrangements (AFAs) are usually discussed in the context of cost-cutting.  It’s a negative connotation.

General counsel (GCs) are under pressure to reduce costs and bring a level of predictability to the legal expenditures, which trickles down to the law firms they engage for legal work.  In many cases, outside counsel may look to avoid AFA negotiations because conventional thinking is such arrangements are less profitable. Here’s a different way to think about AFAs – as a competitive advantage.

AFAs boil down to pricing – and pricing is part of the marketing mix that businesses experiment with all the time to answer one underlying question:  What is the fair value of a product or service?

Pricing and Value

Pricing sends a message too, and speaks to value, or the perception of value.  Discount and premium pricing are two very distinct strategies with conditions.  Retailers that discount too often condition customers to simply wait for a sale – which leads to wide and unpredictable variance in the cadence of revenue. 

Premium pricing has limits too, because first, it eliminates an entire segment of price-conscious customers, and second, because even those in the market for finer things have price thresholds.

Pricing strategy is at the very core of a business model – and in the legal industry those models are slow and resistant to change. Survey research consistently demonstrates AFAs account for roughly 20 percent of legal spend.  On the surface, 20 percent doesn’t seem like much, but given the overall size of the legal market, it’s indicative of billions of dollars in trade for legal services.

Progressive law firms are seizing the trend and using pricing as a driver to reconsider how they practice law and package their services.  This enables their law department counterparts to both provide the predictability in spending demanded by business economics, while ensuring they are getting value.

To that end, here are six ways to think differently about AFAs:

  1. AFAs are a Shared Risk. It’s worth pointing out that GCs assume risk with AFAs as well. It’s a different way of thinking about buying decisions – get an agreement wrong and they wind up spending more than anticipated.  Overwhelmingly, GCs have a strong desire to reserve AFA experiments for firms they trust. Every agreement counted as a win from both an inside and outside counsel perspective improves the chances of a greater share of the business.
  2. AFAs are the New Normal. Use of AFAs continues to grow. The underlying driver is economics, and while the AFA trend may well have been triggered by a recessionary climate and corporate cost-cutting to maintain profit margins, the market has had a taste.  Even as the economy slowly recovers, expect demand for AFAs to continue to grow.  It’s an opportunity for progressive law firms to capture a lead in the market.
  3. AFAs are Mechanisms for Relationships.  If cost was the catalyst for the AFA trend, in 2013, alternative fees are about relationship building. If both sides of the table use historical data, they will both come to similar conclusions about staffing, caseloads, time estimates, potential efficiency gains, and elements needed to remain out of scope.  That builds a much stronger starting base than the vague estimates we may have relied on before. Common conclusions build trust.
  4. AFAs Ought to be Based on Outcomes.  Understanding pricing and value means understanding the client’s desired outcomes – fee arrangements based on desired outcomes are more likely to be successful.  Improving outcomes is one of the three priorities for outside counsel established by the Association of Corporate Counsel.
  5. AFAs Breed Creative Service Offerings. Some of the larger firms I’ve spoken with are getting serious about delivering value.  For example, we are seeing many more secondments than in years past.  General and outside counsel tend to be receptive toward this idea as a way to deepen the understanding of the client’s business and invest in long-term relationships.  Other firms have created 24-hour help lines staffed by knowledgeable associates that corporate counsels can call anytime. 
  6. AFAs as a Competitive Advantage. At a recent conference with law firm partners on fixed-fee negotiations, attendees said that traditionalist firms are taking on more and more unprofitable business.  As a result, these firms are falling further and further behind and deepening the divide between progressives and traditionalists.

AFAs in a Different Context

For law firms, AFAs are an opportunity – an opportunity to improve efficiency and differentiate from the rest of the market.  The legal industry by nature is risk-adverse – nobody wants to be first – but those willing to embrace change sooner rather than later stand to gain a long lead that will be challenging for competitors to close.  It starts by changing how we think about AFAs.

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About the Author

Russ Haskin is director of Consulting and Services for Redwood Analytics at LexisNexis.

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