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Legal Practice Management

Alternative fee arrangements in the legal industry: Recognizing firms that excel

William Josten  Senior Manager, Enterprise Content - Legal, Thomson Reuters Institute

· 6 minute read

William Josten  Senior Manager, Enterprise Content - Legal, Thomson Reuters Institute

· 6 minute read

The True Value Partnering Institute & BTI Consulting recently announced the law firm winners of their inaugural Law Firm Alternative Fee Arrangement (AFA) Awards

While the popularity of alternative fee arrangements (AFAs) seemed to have plateaued in recent years — at least in terms of AFAs as a percentage of law firm revenue — that does not mean that all, or even most law firms have stood still when it comes to innovating around how their work is priced.

The True Value Partnering Institute, in collaboration with BTI Consulting, recently announced the winners of their inaugural Law Firm Alternative Fee Arrangement Awards, recognizing 22 law firms that have been cited by their clients for excellence in integrating AFAs into their legal service delivery models.

While AFAs may have lost some of the momentum they enjoyed early in the 2010s, that does not mean they have slipped in terms of importance. “Every sign we get in our research shows that alternative fees and pricing are going to be more important than ever as clients try to prepare for what they anticipate will be a record caseload,” said Michael Rynowecer, President and Founder of BTI Consulting.

The winners of these inaugural awards were divided into two categories: Six firms were identified as “AFA Powerhouse Law Firms” — DLA Piper, Jones Day, McGuire Woods, Ogletree Deakins, Reed Smith, and Seyfarth Shaw — and an additional 16 firms were recognized as “AFA Standout Law Firms.”

To be recognized as one of the top AFA law firms, a firm must have been nominated by their clients. In seeking out nominations, BTI Consulting focused on industries and companies that spend the most on legal services. No list of law firms was provided to the in-house lawyers being interviewed; and all nominations were the result of open-ended questions.

The findings of the nominations show that clients tend to gravitate towards those firms that are providing better pricing and value. Indeed, clients’ nominations tended to focus on a relatively consistent set of factors, including:

1. Partners have the ability to enter into an agreement — Clients can become intensely frustrated when they spend weeks negotiating a matter engagement only to be told that deal then needs to be approved by a law firm committee. In such a situation, the client may be upset they spent time negotiating something that to which the firm might not actually agree. Firms identified as excelling at AFAs empower their partners to either make the decision themselves within established guardrails, or at the very least have made the committee review process more proactive and responsive to the client.

2. Firms are confident and comfortable discussing AFAsMany law firms are still finding their way through the labyrinth of AFA options and don’t yet have a clear path or policy for their use. Clients like firms that have comfort and experience in creating pricing alternatives.

3. Firms have a streamlined approach with minimal back and forthClients gravitate toward firms with which communication around pricing and service delivery is clear and meaningful.

4. Firms make proactive offeringsClients appreciate it when a law firm offers up pricing alternatives, even before the client asks. The offer should be accompanied with an honest assessment of the potential benefits of the offered options, and an explanation of how the arrangement will work. While the offered alternatives may not always fit the client’s desires, the proactive approach still helps the law firm score points.

5. The AFA is tied to the strategy and approach the firm plans to take to handle the matter — Clients understand that any discussion that occurs at the outset of a matter regarding how that matter will be handled may be preliminary. However, clients expect experienced lawyers to be able to assess risk and strategy for most matters. Firms and partners need to be able to communicate their approach and strategy and this should also be reflected in how the matter is priced.

6. Firms provide effective project management and accountability to budget — Clients want to know that a firm has the skillset to effectively manage their matters. This serves as a safeguard for adherence to established matter budgets. Absent these considerations, clients may be apprehensive that a law firm might either start to cut corners or come back asking for more money, blindsiding the client. Clients equate risk management with project management — if project management is lacking, clients might assume the firm has poor risk management as well.

7. Firms establish trust — While this factor is listed last, it is perhaps the most important. In a client’s eyes, trust is vital. After all, agreements can be put down in writing after lengthy negotiations, but ultimately the client has to trust that the law firm to deliver. This factor is subjective, but critical. “Clients ultimately ask themselves, ‘Is my law firm going to do the right thing if something goes wrong?’” Rynowecer explains.

While not a factor directly considered in determining Powerhouse and Standout law firms, the research into this project also determined that clients that are happy with AFAs also tend to work with partners who excel at client service generally. Client-facing skills are a cultural value, and attorneys who are good at this will brand a firm. Unfortunately, the opposite is true as well.

It’s worth noting that the Powerhouse and Standout law firms tended to have more AFA engagements or larger AFA engagements as well as a larger AFA market share. They also tended to be larger firms; however, midsize law firms were cited by clients as excelling at AFAs, too.

In fact, a large number of the law firms listed in another category, “AFA Distinguished Law Firms”, would fall into the midsize law firm segment. Larger firms tend to be a more aggressive with regard to AFAs, but savvy observers of innovation in the legal industry should not ignore midsize firms.

“The goal of creating these awards is to determine [which firms are] best at AFAs, and what they do differently,” the True Value Partnering Institute said in a statement. “We can use that to help other law firms and move the whole industry forward.”