18 Different Types of Alternative Fee Arrangements


 

Numerous Different Models

Proponents of value-based billing recommend that law departments that have not yet begun to use AFAs meet with some of their primary outside counsel to discuss those matters in their portfolio that might make sense with which to start. There are many different models from which to choose. The table below represents several different ways that law department and law firms are using alternative fee arrangements today.

AFA Type Examples of When to Use It
1.     Fixed or Flat Fees Best-suited where time and effort are highly predictable – can be used in either litigation or transactional matters. This is the most widely used AFA type today.
2.     Phased Fee Works well where defined segments can be estimated and scope is well delineated.
3.     Success Fees Payment is contingent on a successful pre-defined goal being achieved – e.g., early motion to dismiss.
4.     Multiple Matters Can apply to either plaintiff or defense-based matters. Can be either contingent or fixed fee. Law department gives the firm a group of similar matters. All matters are handled at the same cost.
5.     Fixed Fee for Accounting Period An annual agreed upon fee is paid in twelve monthly installments.
6.     Appeals The firm’s compensation rests on the success of the appeal.
7.     Budget-based Fees Both parties agree to establish a budget for the work to be performed. This model works best when both sides have an understanding of fees and costs involved.
8.     Retainer Fees The firm agrees to provide general advice within specific subject areas regardless of actual time spent.
9.     Pure Contingency Fees (typically plaintiff-side) Compensation to the firm is based solely on the results achieved, often expressed as a percent of recovery, settlement or amount saved.
10.  Partial Contingency The client pays a portion of the hourly rate plus a smaller percentage of any recoveries – used more in plaintiff matters.
11.  Holdback/Success Fee Similar to partial contingency fee, except used more in defense cases.
12.  Blended Hourly Rates All time is billed at the same rate regardless of who works on the matter. Used where it is easy to predict required tasks.
13.  Collar Arrangements Work is billed hourly, with a percent +/- “collar”. Fees above or below the collar are shared on an agreed upon basis in savings or additional expense. Risk collars are a good way to get started with AFAs.
14.  Menu Pricing Most suitable for high volume routine projects or “per task” basis.
15.  Tiered Volume Discounts Reduced hourly rates as volume of legal work increases.
16.  Broken Deal Discounts Discount of fees if project did not proceed beyond a certain stage of the transaction.
17.  Hybrid Fee Arrangements Combination of fixed fee for some matter phase(s), holdback on hourly rates for other phases, and success fees for other phases
18.  “Credit” Discount Reduction in fees in one matter for client commitment to work in a new area of the law not previously serviced by the firm.

 

Summary

Alternative fee arrangements and value-based billing are trends that will continue to be used more, rather than less. AFAs enable law firms to grow their business, increase profitability and increase the probability of establishing long-term client relationships. Law departments are able to avoid surprises, increase predictability and reduce unnecessary costs. The key for both sides is to communicate in a spirit of mutual self-interest and exert the effort up-front – some short-term pain will help achieve long-term gain.

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