Focusing on Results, Not Hours
By Tanya Witt
The Witt Law Firm
While alternative fee arrangements(AFAs) are nothing new, especially to solo attorneys, interest in AFAs has dramatically increased. In the current economic climate, providing financial certainty and value to a client is more important than ever.
An April 2009 survey conducted by the Association of Corporate Counsel found that 77 percent of its members would like to consider alternative billing arrangements in work handled by outside counsel. When asked how outside counsel could improve their relationships with in-house lawyers, 60 percent said outside attorneys could offer alternative billing – the most popular answer among respondents. It is highly likely that other clients such as corporate clients without inside counsel and individual clients share the same desire for AFAs and the financial value they provide.
Solo attorneys have long used AFAs to provide clients with financial certainty and value. When I left a big Chicago law firm and started my solo practice 11 years ago, one of the first changes I implemented was fixed-fee arrangements. Most of my solo colleagues also offered AFAs. The latest trend is for big law firms to join solos in providing AFAs. AFAs, like technology, are an area in which solo attorneys often lead the trend. In 2010, Microsoft expects that 50 percent of its legal fees will be based on AFAs. And several commentators have reported that DLA Piper won a tender process to handle most of Kraft’s legal work in 2010 through the use of AFAs.
Chicago solo attorney Jonathan Aven notes that setting and collecting AFAs may be the most difficult aspect of an attorney’s practice, especially in the current economy. “We walk a tightrope between quoting a reasonable fee to get a prospective client and not have them walk away but, at the same time, trying to make sure the fee is commensurate with the amount of work that will be involved,” Aven said.
For the most part, AFAs shift financial risk from clients to attorneys. The most popular AFAs are risk collars, fixed fees for a single engagement, full contingencies, success fees, fee caps and holdbacks, but there are virtually no limits on ways to structure fees. With a risk collar, an attorney and client agree on a fixed fee for a matter and, over the course of the representation, compare the actual hourly time expended to the fixed fee. If the hourly time is less than the fixed fee, the client is provided a discount, but the firm is still compensated more than the actual hourly expenditure. If the billable work exceeds the fixed fee, the attorney may absorb the first 20 percent in excess and then the client and attorney split the remaining hours. A fixed fee for a single engagement is a specified fee with little to no room for adjustment. An attorney may build in some disclaimers, but if the parameters are too broad clients may feel the fee arrangement is too open-ended. Full contingencies are arrangements in which an attorney is compensated only if the client obtains a monetary award. A fee cap usually involves hourly billing up to a specified maximum cap.
Some AFAs are performance-based. In some holdback or bonus arrangements, the client is allowed to decide if the attorney has earned the bonus or holdback. Lawyers and their clients can determine performance standards that will be used to measure the success of the representation and tie financial rewards or penalties to the results achieved or the client’s satisfaction with the representation. With matters in which tying fees to results violates ethics rules an AFA that is not dependent upon results can be used. To be adept at using AFAs, an attorney must have a thorough understanding of the time required to complete matters and of her practice’s cost structure. If time has been tracked on past matters, an attorney may mine that data and use it to calculate AFAs. On an ongoing basis, attorneys should compare estimates to actual time expenditures, creating a feedback loop to be used for future matters. Many online practice management software programs may be run on mobile devices so attorneys can track time anywhere at any time. Clio and Time 59 have iPhone-optimized sites. Chrometa tracks time automatically while attorneys work.
Attorneys should be able to explain to a potential client how they came up with a quoted fee and why the fee is reasonable and fair to both the client and the attorney. Patrick Lamb of The Valorem Law Group says the key to creating an AFA that is a “win/win” for both the client and the attorney is to spend time in the beginning of an engagement finding out what the client needs and why. The fee agreement can then provide that if the client’s stated objective is achieved the attorney’s compensation is greater than if the objective is not achieved. This type of AFA aligns the financial interests of both the attorney and the client.
As mentioned before, be sure your AFAs do not violate ethics rules.