Measuring AFA effectiveness part I: how to account for the “intangibles”
It’s been roughly ten years since best-selling author, Scott Turow, penned the cover story for the American Bar Association journal titled, ‘The Billable Hour Must Die.’ During this time Turow’s story became a reality with law firms of all sizes adopting alternative fee arrangements (AFAs).
These fixed or flat fee arrangements serve as a means to find a happy medium between the risk of padding bills with additional hours and straight contingency-based arrangements where the attorney is at risk of being under compensated. The goal of AFAs is to create an incentive driven arrangement that focuses on results and outcomes, but still considers the inherent risks encountered by both parties.
The challenge is not whether AFAs will be used in some capacity, but rather how to measure the effectiveness of these billing arrangements versus the traditional dollars x hours method. Before we dive in, it’s important to note that there are many variances and hybrid instances of AFAs. While they all apply when trying to measure effectiveness, we’ll assume the common ‘fixed or flat fee’ arrangement in this post.
Prioritizing Value Over Hours
With regards to AFAs and outcome based pricing, the Association of Corporate Counsel encourages legal departments to move away from “how many hours will it take” to “what is the value to be delivered” in their Value Based Fee Primer Report.
Why this shift in thinking? Hourly billing has inherent constraints. Time is limited. There’s also no given correlation between your legal costs and quality. It’s often assumed, but almost never guaranteed. There is also little to no incentive for efficiency in this model. All of this leads to uncertainty, leaving legal departments unsure of how to measure the value of their legal spend and thus, how to budget for it. AFAs provide peace of mind by way of more accurate and reliable budgeting – an expected goal for any in-house legal team.
AFA Benefits Go Beyond Dollars and Cents
Hourly billing has introduced an increase in time and effort when it comes to bill review. Adjustments are made, firms appeal, it goes back and forth. I’ve seen this firsthand and I’ve helped produce countless lists of line items for bill reviewers to scroll through in an effort to spot a potential adjustment opportunity. It can turn into a game of cat and mouse between the firm and the client, at the expense of both parties.
In this case, AFAs can be effective in allowing you to reallocate resources, cut down on administrative involvement, and spend less time perusing individual line items (as much fun as that is). These intangible benefits show that the value of AFAs doesn’t have to be limited to savings in terms dollars and cents.
Finding the Incentive-Based Solution that Benefits the Attorney & Client
If you’re truly invested in AFAs being an incentive-based solution that is beneficial for both your legal department and your law firm, the flat rate fee you decide on may closely resemble the estimated cost of using the traditional hourly model because of the intangible benefits (increased efficiency and time and resource savings) that AFAs inherently provide.
I’ll understand if you can’t advocate telling that to your GC, and cost savings will always be seen as a win in my book, but the success of AFAs hinges on buy-in from both sides. Again, this opinion may run contrary to some, but if your law firms feel like they’re losing out in the AFA equation, you may hinder the relationship and limit the strategic value they provide.
Leveraging Data to Determine the Appropriate Flat Fee Amount
Now that we’ve discussed the intangible benefits of AFAs, our next post will dive into how your legal department can leverage historical data to determine the appropriate flat fee amount.
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