In case you missed it, our recent Inside Voices session featured Daniel Michalek, legal ops manager at Branch, and he had some pretty choice words about outside counsel’s willingness to work under alternative fee arrangements (AFAs). Check it out.
Tell us how you really feel, Daniel!
He’s not wrong about law firms being resistant to AFAs, or about in-house teams’ love of them. According to Bloomberg Law’s 2021 Legal Operations Survey, law firms have some big concerns blocking them from using AFAs, including how to accurately estimate time and pricing without compromising revenue.
Nonetheless, AFAs continue to grow in popularity: Some form of AFAs were used in 15% of matters in 2021, and account for about 20% of law firm revenues. And Bloomberg’s survey found that client demand was the main driver of AFA use for 85% of law firm respondents. So let’s discuss these issues and see if there’s a way to reconcile law firm resistance with in-house demand.
Estimating Time and Pricing
As any attorney can tell you, you never really know how long a matter is going to take until you’re working it, so estimating the time you’ll spend on a particular matter can be challenging.
On top of this, as we know, firms often rely on billable hours as a metric for how individual attorneys — and the firm as a whole — are performing. AFAs don’t allow for this, and require firms to estimate how much time they’re going to spend on something to give clients the most accurate price possible. Underestimate and you can lose revenue. Overestimate and clients may think you’re charging too much and go to a competitor. What’s a firm to do?
Letting billable hours go in favor of an AFA can be a bit disorienting, but firms who want to be more accommodating in their use of AFAs can make it work. Reviewing invoices from previous, similar matters can help firms provide accurate estimates of time and pricing for clients. This may sound labor intensive, and it can be, but there is legal spend management software that can help.
On the other hand, some firms report struggling to get clients to agree to AFAs, and have found that clients are more likely to accept traditional billing arrangements. Firms also have to balance the wellbeing of their employees, and it doesn’t seem that AFAs and their emphasis on efficiency provide much relief for associates, though there are ways to mitigate the potentially stressful effects.
In the end, it’s up to the firm to do what they feel is right for their employees, clients, and business. Firms may decide to deprioritize AFAs, or find it worth the effort to give meet client demand and match competitors.
Firm Revenue Concerns vs. In-House Cost Concerns
Another concern for law firms when considering using an AFA vs. billable hours is decreased revenue. Of course, in-house teams are also concerned about money. The Bloomberg survey found that cost certainty and savings were the two primary factors for in-house teams favoring AFAs with outside counsel. Prioritizing savings and cost predictability becomes even more important for companies in times of economic instability. Say, for instance, when there’s a looming recession.
AFAs can help provide in-house teams with a level of certainty and predictability that billable hours don’t. And who doesn’t love certainty and predictability (besides literally every eDiscovery vendor)? It’s why I keep watching The Office over and over instead of all the new things I’ve told myself I’m going to watch.
As long as firms are diligent in creating accurate time and cost estimates for their AFA clients, they should be able to maintain their revenue streams while using AFAs. And given the high demand for AFAs among in-house counsel, using them may be good for business, both as a competitive differentiator and a way to maintain long-term relationships with clients.