AFAs and the New Billing Models--First Regular Session at ILTA

I attended Dan O'Day's session on alternative fee arrangements (AFAs) on Monday morning. Dan is a Thomson Reuters employee, but his session was devoid of product-pitching and served as a useful overview of AFAs, including a useful analysis of the key characteristics of all of the major varieties.

Almost half of the audience was in IT, the other half was in finance (I was in the small minority not in either camp).

Twenty Years of AFAs

Dan turned back to the DuPont Legal Model (c. 1992) for background on the development of modern AFAs. DuPont wanted to have fewer firms working for it, with closer partnerships with the fewer firms, all tracked by metrics around spend, diversity, and IT. The goal was to cut costs, increase the productivity of the outside legal work, and provide easier access (from DuPont's perspective) to legal work.

As has been noted elsewhere, different AFAs address different client concerns, and have different risks for firms in terms of cost overruns, shared outcome risk, predictability of fee amount, and so forth. Dan pointed to a 2002 presentation developed for the Legal Marketing Association (.pdf, see p. 7) and its chart ranking AFAs by frequency and noting the various key characteristics of the different types.

The rarest AFA, which I was less familiar with, is "Value-Based" or "Retrospective Based On Value" billing. In this model the firm is compensated based on the value of the services to the client. Dan's first example was a firm that raises funding in Europe based on a law firm's relationships with capital sources. A firm might negotiate that it should obtain 1% of the that funding so raised. Or, a firm might provide a 25% bonus to a litigation matter's billings if the law firm is able to prevent the firm CFO's deposition. It truly aligns the firm's needs with the client's needs, but it remains the rarest in part because they are hard to negotiate.

Moving to AFAs

Dan, a lawyer himself, noted that one challenge to moving to and budgeting for AFAs is lawyer's characteristics. A study (?) indicated that unhappy people make good lawyers, and he suggested that lawyers as a whole are more critical and negative than the population as a whole. They are paid to figure out (and try to prevent) what might go wrong in a given business situation or litigation.

Dan suggested that expanding the extent of AFAs at a firm requires a great deal of analysis and preparation.

As to existing AFAs,

• How many are there?
• What percent of business do they represent?
• How profitable are they?
• Are there any patterns as to the frequency by practice area, jurisdiction, billing partner of particular types of AFAs?

Preparing to work in a manner focused on efficiency is challenging, and is a task made more challenging by lawyer's critical managing style noted earlier.

The business process structures and strategy required to handle AFAs are quite different from those needed to support only billable hour work. To use a casino analogy, what are the table limits?

• Should the firm say that no fixed fee agreements will be allowed for 7-figure of 1,000 hour potential matters?
• Should the firm exercise tight process and setup control over even the smallest matters?
• How will matters be monitored?
• How will attorneys be held responsible for cost overruns?
• When in the course of a year is the profitability of unusual AFAs assessed?
• More generally, what is the governance of AFAs? Dan recommended that the model of "permission not forgiveness" be adopted.

Marketing and AFAs

One audience member was a marketing professional who is jointly responsible with finance for addressing AFAs at her firm. She suggested that that is because in her role, she is highly aware of client requirements and needs, and because pricing can be a key part of marketing strategy.

Dan's session was at a fairly introductory level, but it was still quite useful because he was able to raise, if not answer, so many key considerations for AFA implementation.