There’s been a lot of discussion in the legal industry lately about Alternative Fee Arrangements (AFAs), both pro and con. Not surprisingly, in a profession where we have been trained to argue either side of just about any proposition, proponents and detractors include both in-house and outside counsel, as well as any number of consultants. I recently read a set of comments, however, that caused me to scratch my head: law firms were being criticized for proposing fixed fee arrangements that were based on the law firm’s estimate of the effort the work would require.
It is certainly the case that some clients have made it a priority to spend less money on outside firms. Certainly law firm revenue and profit trends have shown amazing gravity-defying capabilities until the most recent economic downturn, and many clients have finally reached the point where they are unwilling to continue to pay those fees. But “fixed” fee arrangements are not vehicles for achieving overall reductions, nor should anyone expect them to be. Fixed fee arrangements, long a common way to structure engagements in other kinds of professional services, are a way of providing the client certainty about the fee, and of shifting the risk of inefficiency to the provider of those services. Indeed, sometimes it is more than just the risk of inefficiency that shifts to the provider, when the provider does a poor job of managing the engagement, managing the client relationship, or keeping the client involved in making choices about how to deal with the many “surprises” along the way that tend to affect the scope of the work. But it is not at all unusual that a provider of services, in exchange for bearing project management risk (something law firms are not especially good at), will add a small risk premium to their best estimate of the expected effort. In the case of legal services, given some of the inherent unpredictability in the actions of counterparts/adversaries, regulators, and adjudicators, the certainty offered by a fixed fee should be of real value to a client who is expected to manage to a budget.
Clients who are primarily interested in spending less on outside legal services should consider other mechanisms available to them, including more effective sourcing techniques such as segmenting and consolidating their providers, unbundling some of the services they buy and sourcing lower value activities from lower-cost providers, and working with their preferred law firms to introduce better and more efficient ways to manage matters. Fee arrangements conducive to encouraging efficiency, such as fee collars with some sharing of the risk of falling outside those collars could well be part of an overall program to work more closely to align client and firm incentives. Haggling over discounts, however, just turns client and counsel into adversaries, intent on out-bluffing, out-threatening, and essentially deceiving one another.
Clients who are primarily interested in sharing some of the risks (and rewards) of some of their matters with outside counsel might do well to consider which kinds of matters in their portfolios are well suited to some of the many variations possible on results- or value-based fee arrangements. Certainly plaintiffs’ side litigation firms, investment bankers, and turn-around specialists in consulting have laid some useful groundwork that buyers of legal services could consider, adjust, and apply. Results-based arrangements raise concerns of their own, however, including whether the law firm’s incentives can be so skewed as to threaten the objectivity of their advice.
Negotiations about fee arrangements have to be part and parcel of how clients and law firms work together. But such discussions need not be difficult and they need not create barriers between client and trusted advisor. Professional service fee negotiations can and should bring to bear the best of what both in-house counsel and their outside providers do so well when they are working on the same side, to negotiate a transaction or resolve a dispute: their understanding of the client’s main objectives, their creativity in problem-solving, and their joint undertaking to manage the inevitable challenges or downsides that any billing formula will entail.