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Alternative fee arrangements (AFAs) should be matched to the type of work the outside law firm is handling, according to experts. They also point out that simply implementing an AFA does not guarantee costs will go down.
John Weber, general manager of CT TyMetrix, a Web-based application service provider, says his company has conducted more than 100 client interviews to identify the most commonly used alternate fee arrangements. He cites research on effectiveness from the General Counsel Roundtable: “The most widely-used AFA, the volume discount, is not particularly effective in reducing cost,” Weber says. In fact, Rees Morrison, president of Rees Morrison Associates, argues that the volume discount is not really an AFA at all.
Experts say general counsel should consider flat fees, and add an incentive for efficiency.
“AFAs that use flat fees and performance-based bonuses are most effective at reducing cost and improving satisfaction but are currently underused,” Weber says.
On the other hand, Weber cautions against blended rates, in which the law firm charges the same hourly rate for every hour billed, regardless of whether the work was done by a high hourly rate partner or a low hourly rate associate.
Weber calls the blended rate arrangement “arguably the least effective AFA in history … because the law firm’s incentive is to push the work down to the lowest-rate biller, who inevitably will be a junior associate with incentives to run up the number of hours on a given matter.”
Mark Poag, senior vice president and general counsel of DataCert, a legal operations management company, also favors AFAs based on incentives for many kinds of legal work.
“We always suggest to our clients that they utilize incentive-based alternate fee arrangements, which benefit both the law firms and the corporate clients so that everybody is pulling in the same direction and has the same incentive [to achieve] a positive outcome in the most efficient manner,” he says.
For more commodity type legal work, Poag has a different advice.
“If clients ask us, we always advise that for patent prosecutions, trademark filings, employment litigation, matters that tend to be repetitive, go with a flat fee.”