Legal Departments Are Expanding Use of Alternative Fee Arrangements
"Legal departments are more creative in breaking a matter down to its component parts in order to find ways to get at least a little predictability on what they are going to spend," Kristina Satkunas, director of strategic consulting at LexisNexis CounselLink in Richmond, Virginia, said.
July 14, 2020 at 09:51 AM
3 minute read
The original version of this story was published on Corporate Counsel
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In-house counsel are increasingly using alternative fee arrangements for high-volume and predictable matters such as labor and employment and finance, loans and investments, according to LexisNexis CounselLink's 2020 Enterprise Legal Management Trends Report.
According to the report published Tuesday, approximately 32% of finance, loan and investment matters in 2019 included some kind of alternative fee arrangement and approximately 25% of labor and employment matters involved an alternative fee arrangement. In 2018, approximately 28% of finance, loan and investment matters included an alternative fee arrangement and just under 25% of labor and employment matters included an alternative fee arrangement.
"Matters that are relatively similar and high-volume are easier to reach an agreement as to what a fair price might be for that type of work," Kristina Satkunas, director of strategic consulting at LexisNexis CounselLink in Richmond, Virginia, and author of the report, said in an interview.
Labor and employment immigration issues are often subject to an alternative fee arrangement. In the finance, loan and investment space, in-house counsel and law firms often agree to an alternative fee arrangement.
There has also been an increase in alternative fee arrangements for high-cost and less frequent work such as mergers and acquisitions. In 2019, 19% of M&A work included some kind of alternative fee arrangement. In previous trend reports, the number was just over 10% for M&A work. Satkunas said she has heard about creating pricing around early due diligence and drafting particular agreements.
"I think that is a positive thing to see. Legal departments are more creative in breaking a matter down to its component parts in order to find ways to get at least a little predictability on what they are going to spend," Satkunas said.
She said she would expect to see alternative fee arrangements used in more complex matters in the future.
Just over 12.1% of all matters in 2019 included an alternative fee arrangement. In 2018, 12.2% of all matters included an alternative fee arrangement. Satkunas said that number has risen from 2017, where only 9.2% of all matters included an alternative fee arrangement. The report does not have data on what kinds of alternative fee arrangements were utilized most often. Satkunas said the flat fee is most commonly used. However, for more complex matters legal departments are getting creative.
"There may be a flat fee up to a certain point. Anything that gets billed after that threshold is billed at an hourly rate, but there is a discount at that hourly rate and increases as the total spend on that matter goes up," Satkunas said.
Those kinds of arrangements are made to incentivize the matter as quickly as possible because the law firm is getting paid at a greater discount as legal spend for a matter increases. It is likely that legal departments will continue to utilize alternative fee arrangements in the future given the current COVID-19 crisis and the looming threat of another recession.
"I think that pressure to manage costs and know what they [in-house counsel] can anticipate is something that will get pushed back to the law firms," Satkunas said.
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