The Perennial Allure of Value-Based Fee Arrangements

By Kristin Casler, featuring Mari Henry Leigh of Legal Fee Solutions, LLC

Many attorneys talk about Alternative Fee Arrangements (AFAs) like they’re the odd cousins who periodically visit, unannounced and for an indefinite period of time. They might bring you a nice gift, but they just make you uncomfortable. Well, hold on. You might get the guestroom ready. AFAs seem to have changed for the better, because, more and more companies and law firms are inviting them to stay.

What’s causing the change of heart? Mari Henry Leigh, co-founder and vice chair of Legal Fee Solutions, LLC, chalks it up to “the value movement.”

“People still comment that AFAs will never replace the billable hour, but we are seeing more people embracing AFAs as a way to look for and purchase value in their legal services,” Leigh said.

The use of alterative fee arrangements by large law firms nearly doubled from 2008 through 2014, and a recent survey found that 92% of law firms are using some form of non-hourly billing, Leigh said.

In addition to value, diversity of arrangements is also driving growth in AFAs, she said. “Things that years ago I would have said could never be done in an AFA are now being done. There’s no limit to the type of AFA you can create.”

Defining Value

If you’re not going to pay for legal work in the traditional time-and-materials basis, you need to think about what you want to accomplish and how you will define success, Leigh said. Then, you put a value on that.

“AFAs scare people because they’re afraid of overpaying,” Leigh said. “If you defined value and you got what you wanted, then you didn’t overpay,” she said. “People often ask, ‘Well, how do we tell if we got a good deal?’ They often want to price it out after the fact using the old billable-hour method to find out if they did.” This perspective can make an AFA difficult to enter into.

A director of outside counsel management at a large pharma/biotech company said she has found value in AFAs in employment matters and in a small clinical trial contract. An AFA in a larger IP matter is still underway, so there are high hopes.

The Association of Corporate Counsel (ACC) has developed a Value Challenge program aimed at encouraging new fee arrangements based on value provided, rather than the billable hour. The ACC offers loads of reading material and ideas to get you thinking about how to integrate AFAs into your in-house–outside counsel relationship. It even details how real-world companies and law firms are piecing together their agreements.

Getting Started

Once you’ve decided to give AFAs a try, you have to settle on the how.

“People are really interested in the nitty gritty of how to do them,” Leigh said. That can be the hardest part. There are myriad options for AFAs, and to further complicate it, you can combine two or more types into a custom arrangement. Clearly, AFAs can require more work up front to price out, design and negotiate. Hourly billing is a known, age-old quantity.

An AFA should be fair to both parties and compensate both, Leigh said. It should obtain a good result for the corporate side, say a timely, efficient result, a certain dollar amount, or transaction completion within a specified budget, etc. The law firm wants to be recognized and compensated for the work it puts in, the creativity, responsiveness, willingness to align with corporate objectives, and, of course, to make a profit.

Typical AFAs involve fee caps, fixed fees, retainers, partial contingencies, success fees or risk collars. But there are many more, especially when you combine them.

Some AFAs are strictly monetary, such as one based on deliverables, say, 1/3 for each portion. Highly unpredictable activities might have to be staged—this price for this stage, and then so on, and you can negotiate the next stage as you go. This gives you a chance to correct for unanticipated events, Leigh said. Most AFAs have a look-back provision for an adjustment after a period, so no party gets a bad deal.

Leigh said she has some AFAs in mass torts that pay on a per-unit or per-plaintiff basis. This makes the accounting of the costs much easier.

The pharma/biotech counsel said outside counsel was very willing to participate in an AFA for the clinical trial contract. She acknowledges that AFAs are being discussed more and more by in-house legal departments, even in large litigation matters, but her company is still working on the small steps.

“I think it will take some time to find the right matters for AFAs and to gain acceptance from our in-house attorneys,” she said.

“Once you’ve done one, you’re more likely to do another one,” Leigh said. “It’s about being willing to put the work in to get started. The more work up-front, the better the engagement is going to be for both sides.”

Leigh suggested that if you don’t find value the first time around, don’t give up. The arrangement might just need tweaking. If you like the idea of the AFA, stick with it to find the right mix. The alternative is to return to the billable hour. And that needs to be monitored as the hours rack up. With AFAs, you just check that the billing and quality is what you negotiated.

Other Benefits

Companies report that AFAs encourage dialogue and strengthen their relationship with outside counsel. The ACC says value-based fee structures create incentives to reduce inefficiencies, increase productivity, improve the way legal services are purchased and delivered, and focus on results and outcomes that add value for the corporate client.

Any inside or outside legal counsel should consider finding a place for AFAs in their toolbox. They require a bit more work and creativity up front, but you can’t beat the predictability, Leigh said. “There’s very high satisfaction.”