The billable hour has been the inspiration supporting regulation agency enterprise fashions and the yardstick by which attorneys have been evaluated and compensated for greater than six a long time.
In the meantime, because the demand for authorized companies has elevated, so has hourly charges. And since purchasers proceed to pay them, there was no actual incentive on the regulation agency facet to vary the observe or discover alternative fee agreements (AFAs).
That’s been altering, although, for the reason that financial recession of 2008 made AFAs much less of a novelty and extra of a necessity as common counsel more and more search aggressive charges and value certainty.
Even so, AFAs haven’t seen the type of fast development that some anticipated. Even all through the COVID pandemic and financial downturn in 2021, CounselLink knowledge reveals that lower than 15% of authorized issues included some type of AFA, up from 12% in 2013, and solely 9.6% of all charges had been non-hourly.
CounselLink defines an AFA as a billing association that’s non-hourly in nature, so AFAs don’t embody issues with quantity or different reductions or preparations similar to blended hourly charges the place a single price has been negotiated that’s billed by all timekeepers on a matter.
The obstacles to beat
So why aren’t purchasers demanding extra AFAs?
The first impediment is consolation with the established order. Regardless that many in-house counsel ask for alternative pricing as a part of their RFP course of, they sometimes fall again on the billable hour because the mechanism to which they’re most accustomed.
A associated impediment is the notion that neither in-house nor exterior counsel have the info and metrics to guage whether or not a worth is cheap. In reality, most regulation corporations and authorized departments have a goldmine of information they might use to guage pricing.
Legislation agency billing system knowledge from enterprise authorized administration platforms may be mined to check and break down matter prices in a myriad of how.
Courtesy of LexisNexis CounselLink
In the meantime, authorized departments which have enterprise authorized administration options in place have entry to comparable knowledge offered to them by a mess of regulation corporations.
An absence of information just isn’t a sound excuse. A extra viable one is that some organizations might not have the analytic expertise on employees to carry out the mandatory knowledge mining and interpretation.
Clearly there may be room for enchancment, however what can regulation corporations and their purchasers do to search out widespread floor and implement extra AFAs?
Though company authorized departments ought to at all times drive the AFA dialog, regulation corporations ought to proactively method purchasers with choices for modern fee buildings.
Investing the time and focus required to construct a mutually useful AFA ensures that company purchasers and outdoors counsel obtain their targets with out introducing pointless problems.
Company regulation departments can use knowledge from an enterprise authorized administration (ELM) to investigate complete exterior counsel spend, negotiate charges, set up spending thresholds and establish areas the place AFAs (or implementation of different authorized effectivity instruments, similar to contract lifecycle administration) may ship worth.
Evaluating inner efficiency knowledge and exterior benchmarks towards regulation agency efficiency knowledge ensures that each one events stay on the identical web page and fosters larger transparency, communication and collaboration.
To stay aggressive over time, authorized service suppliers may have no alternative however to supply a spread of consumer pleasant AFAs as a result of that’s what purchasers are unambiguously demanding. People who fail to put money into the expertise required to carry out the evaluation wanted to guage eventualities will wrestle in the long run.
The over-arching consideration for any AFA includes figuring out what final result the consumer needs and fashioning a fee construction that maps to that final result whereas preserving profitability and mitigating undue enterprise threat.
Kinds of preparations
If an organization hires a agency to handle patents — which is often a routine, high-volume matter — they could contemplate a flat-fee association to curtail prices.
On this case, the consumer advantages from predictability as a result of there aren’t any expense overruns. The regulation agency advantages from predictability of income, and unbeholden to the billable hour, is incentivized to work as effectively as doable to maximise profitability.
Capped fee preparations contain an hourly billing association with a restrict on the full quantity that shall be paid. Whereas a capped fee construction may be utilized to a complete matter, it may also be utilized to a subset the place there’s a restrict as to what shall be paid for particular actions.
Authorized service suppliers typically use a capped fee construction when there isn’t sufficient knowledge or certainty to have faith in utilizing a set fee.
Collared fee buildings replicate a variation of capped fee preparations the place purchasers obtain a deep low cost for work carried out past a predetermined restrict.
A collared fee association might result in some value financial savings for the company buyer and supply some restricted incentive for a agency to be environment friendly. Such fee buildings typically require larger administration and oversight, which might offset a few of the advantages.
In some litigation instances, an organization may tie compensation to the end result of the case. Such contingency charges are paid provided that the lawsuit is profitable, with a set proportion of the restoration negotiated beforehand.
If the lawsuit is unsuccessful, the consumer just isn’t obligated to pay something. Such contingency preparations are examples of AFAs that don’t equitably share the danger however may be equally useful when profitable.
A variation of the contingency construction, the holdback fee association is most frequently used for complicated litigation.
On this case, firms pay regulation corporations a proportion of their invoices upon completion of a matter or stage, after which sometimes award an extra payout if the litigation is profitable. In both case, the authorized service supplier assumes the danger.
Constructing the infrastructure
As a result of constructing and managing AFAs introduces a brand new set of variables and parameters, cautious planning is important, notably with respect to course of, expertise, and analytics.
For instance, while you’re constructing an settlement, be conscious of the impression on time-consuming handbook processes and make it possible for administrative employees perceive their position in servicing a novel fee association.
Additional, your expertise must assist simple invoicing for AFAs, and the consumer group should be capable to course of them utilizing their programs. Your fee buildings ought to be designed with knowledge assortment in thoughts — with out this measurement, you received’t be capable to assess the viability and profitability of issues working beneath AFAs.
The slowly growing use of AFAs through the years reveals a rising urge for food by company counsel for such preparations, and a willingness by regulation corporations to offer them.
Since regulation agency billing price will increase present no indicators of slowing, we are able to anticipate to see an uptick in AFAs in 2023 and past.
The important thing to growing AFA use is for each in-house counsel and outdoors counsel to know the wants of the opposite get together and to construction billing preparations which are simple to manage and supported by data-driven insights.
Doing so will allow either side to see AFAs as a win-win situation and will result in extra mutually useful and longer-lasting relationships.