After conducting a new survey on alternative fees, Pepper Hamilton has found that while general counsels expect to see the use of alternative fees rise in the future, their real concerns when it comes to billing are efficiency, predictability, and allocation of risk. The survey included general counsels from 54 companies across multiple industries; two-thirds of respondents spend at least $1 million on outside legal fees each year. Although Pepper conducted the survey to improve its use of alternative fees, respondents included companies that were not firm clients.
According to a report this week in the Philadelphia Business Journal, seventy percent of survey respondents expect the use of alternative fees to increase in the future. Ninety percent of those surveyed already use some form of non-standard billing arrangement. Of those, alternative fees make up between 6 and 20 percent of their outside legal spend.
But according to Robert L. Hickok, co-chairman of Pepper’s litigation department, simply offering these arrangements is not enough:
Clients are telling law firms that they want alternative fee arrangements, but that the AFAs need to truly control costs, provide greater accuracy in estimating fees, promote greater efficiency in lawyer time utilization and better allocate risk.
The survey revealed that the majority of companies using AFAs report only moderate satisfaction with their experience. Law firms may share the sentiment – as we discussed last month, some firms struggle with AFAs because they don’t yet have the infrastructure to implement them efficiently. Another common complaint is that for firms accustomed to hourly billing, it can be challenging to determine whether an alternative arrangement actually made money for the firm.
The good news is that the underlying concerns are shared by both firms and general counsels. Transitioning to alternative fees will necessarily involve some amount of friction, but ultimately, firms and their clients stand to benefit from this process of evaluation. Even for engagements that retain standard hourly billing, this debate over value for fees may help firms improve by increasing the focus on efficiency, predictability and risk.
Posted by Emily Fisher
Having worked on successful fixed fee engagements for twelve years at Accenture, I think that Emily has touches on two of the key points about AFAs that seem to be lost on many law firms:
1. AFAs are more about risk than than they are about cost. In fact, clients will pay a premium to know that their costs are capped. Given that law firms have experience with thousands of matters, and have control over how they manage a matter, they should be the ones to take on the risk. However, delivering AFAs successfully requires that firms make the changes necessary to maximize profit despite the additional risk. Which leads to point two:
2. Successful delivery of AFAs requires more than just picking a price that the client will agree to. It requires end-to-end changes in how matters are estimated, staffed, managed, and measured. Until firms are willing to seriously revise their operating model for matters, AFAs will continue to be crap shoots.
The good news is that other professional services companies have been doing AFAs for more than a decade. If law firms were willing to reach out for help, they would stop looking at AFAs as just necessary evils.
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