Alternative fee arrangements (AFAs) can be of benefit to legal departments and law firms. According to the American Bar Association, “AFAs are not about charging more than what an hourly rate might be — they are about charging an appropriate fee, based on what value the client receives and how that client perceives value. Keeping track of time should be the lawyer’s measure of cost, not necessarily a measure of the value he or she is providing the clients in their legal needs.”
Pricing approaches vary by practice area, complexity of the project, and the familiarity the company and law firm have with the particular kind of matter(s). Often, fixed fees are applied for higher volume type matters such as immigration, some types of employment law, contracts and trademarks.
For complex matters such as M&A and litigation, AFAs are more difficult to agree upon. They can usually be settled by using a mix of AFAs, such as hourly fees plus fixed fees for certain elements of the work, because parts of the engagement cannot easily be defined. They can also be tied into success fees. The key is to ensure that open dialogue takes place in order to agree upon the approach that best aligns the fee to the value the client puts upon the work. The author provides an overview of several types of value-based AFAs: fixed fees, budgeted fees with a collar, reverse contingencies, success fees and holdbacks. Building a bonus into the holdbacks if certain criteria are met can further encourage the law firm to commit to the process of defining and evaluating performance and value.