Fear of Alternative Fees

Sue Reisinger

Corporate Counsel

09-01-2012

Note: This article has been updated.

Lawyers appear to be using alternative fee arrangements more and enjoying them less.

At least that's the impression captured by a new survey. The study shows that the use of AFAs has been slowly rising while the billable hour has been slowly shrinking since the economic collapse of 2008. But only 26 percent of legal department respondents and 11 percent of law firms said they were "very satisfied" with the alternatives.

The survey, conducted from March 6 to April 6 by ALM Legal Intelligence (ALM also owns Corporate Counsel ), included participants from 194 large law firms and 141 law departments—all based in the United States.

Kris Satkunas, director of analytic consulting at LexisNexis CounselLink, which sponsored the study, says that outside and in-house lawyers both tell her that they're just not comfortable with AFAs yet. Often they say they don't have enough data. "But that's just a crutch," Satkunas says. "There is no shortage of data. What they're really saying is that they don't know how to distill the data into something meaningful."

The survey clearly shows that there's an information gap. Satkunas says she's met with many GCs who have bridged that gap by hiring consultants or asking their outside counsel to bridge it for them. She believes that the low percentage of lawyers saying that they're very satisfied correlates with the percentage who are actually measuring what AFAs do for them. "There are many more people who use them, but haven't gone back and measured," she adds.

And yes, Satkunas's company offers software and services to bridge gaps and measure benefits. But whether through her company or other means, lawyers need "to get to that comfort level" with AFAs, she says, because their use is growing.

For some, it took years. Thomas Anderson, senior counsel at CSX Corporation in Jacksonville, says that his rail company started small and slowly grew its AFA system over the past seven years: "It's a process, not an event."

For CSX the ultimate goal isn't cheap legal services, Anderson stresses. He says it's more a question of finding the right price that makes everyone feel comfortable. "You focus on the relationship with outside counsel instead of on fractions of hours," Anderson says. "It definitely saves us time. And time is money."

Purvi Sanghvi agrees that AFAs aren't just about saving money. Sanghvi, manager of financial business analysis at Patterson Belknap Webb & Tyler in New York, says that AFAs work because they force both client and firm to think about the most efficient way to handle a matter and to communicate regularly. "I can't make a blanket statement for all cases," she adds, "but AFAs make us look for a win/win—more so than with an hourly arrangement."

Sanghvi explains that the arrangements bring clarity and transparency to how the client relationship is structured. It also requires a budget, and it yields more control over the process to the client, she adds. If the cost of an item like discovery suddenly shoots up, the AFA process "forces you to have a conversation about it with the client. Five years ago, that conversation probably wasn't happening," she notes.

But some in-house types are dubious. An article in Canadian Lawyer about the ALM study quoted two who had mixed feelings. Sanjeev Dhawan, senior legal counsel at Toronto-based Hydro One Inc. (and president of the Association of Corporate Counsel Ontario Chapter), told the magazine that it will take time before AFAs are widely accepted. "For corporate counsel," he added, "the easiest route is to have an hourly rate, and to get into an AFA takes effort at the beginning." The second lawyer wasn't convinced that they actually save money.

Whether an AFA cuts costs may depend, more than anything, on the lawyer and the matter. "Everyone who has used AFAs has had instances where it hasn't saved," Satkunas says, "but they have learned from it and evolved."

Rees Morrison, a consultant and founder of General Counsel Metrics, tends to agree. His group did a study this year, written about in The National Law Journal (a sibling of Corporate Counsel ), which found that law departments using management software showed at the medians worse staffing and spending benchmarks than those that don't.

Morrison speculated in a recent blog on why that may be true. "Larger departments, particularly, invest in software not just to save money," he wrote. "Their general counsel also choose it to be able to tell what is going on, to be able to manage work flow, and to boost the quality of work." Perhaps better-managed departments make more use of software, he continued, and as a result are involved in more of the company's issues and spend more of its money.

One thing on which nearly everyone agrees: The use of AFAs will continue to grow. Law departments in 2012 have no choice but to demonstrate value.