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The Impact of Alternate Fee Arrangements on Law Firm Information Professionals

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In the simplest terms Alternative or Special Fee Arrangements are agreements between a law firm and a client to bill clients based on a structure other than hourly billing. 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. Alternative billing should be based on what is fair and reasonable both to the client and the lawyer. 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.”

AFAs come in many flavours with the main types being:

  1. Fixed or Flat Fee
  2. Contingent or Success Fee
  3. Task or Unit-Based Billing
  4. Percentage Fee
  5. Retrospective Fee Based on Value
  6. Statutory or Other Scheduled Fee Systems

There are also various hybrid fee arrangements:

  1. Blended Hourly Rate
  2. Fee Collars
  3. Fixed Fee Plus Hourly
  4. Fixed Fee Plus Success Fee

The pros and cons of AFAs are discussed in detail in other articles, such as here, but it comes down to increasing cost predictability and risk reduction on the part of the client, and improving client retention and possibly increasing profitability on the part of the law firm. As AFAs appear to be here to stay and increasing in number, I’m interested in how this affects the information services community and how we as a software vendor can help. Some of the impacts on the law firm information services department include:

  1. Less direct cost chargeback/recovery.
  2. More data recording and analysis of work on particular types of matters or clients.
  3. A move to improve efficiency, both lawyers work efficiency and efficiency of the information services or library operations.
  4. A cap on effort for fixed fee matters.

If performed correctly AFAs should not signal profit reduction and corresponding budget reductions, as long as the firm identifies the types of transactions to which AFAs apply and price those services accordingly. Appropriate pricing requires detailed analysis of work patterns leading to a deep understanding of the effort and cost involved in completing various types of work. As a result, any tools that assist in the analysis (and control) of effort and cost on a client by client and matter by matter basis are of value. You may be asked to assist firm management determine pricing policies for certain matter types, to do so you’ll need access to metrics about how lawyers typically research and how much work could be expected of the research team. In both cases you need access to metrics, which is an area close to my heart.

As the use of AFAs increase, the firm needs to be even more aware of how they utilize online resources which are now more of an overhead expense. Firms are moving away from billing clients for legal research and into the area of trying to understand what they just spent on a fixed fee arrangement with their client. Although ResearchMonitor’s Client Validation module was originally designed as a charge back tool, it’s now additionally an enabler of fixed fee matter analysis by generating reports showing work practices by matter.

Analysis of the library’s research request work is also an important part of understanding the effort spent on different matters, and through the use of tools such as Quest you’re able to accurately track your team’s efforts, using this data as a means to assist pricing decisions and to back up the work performed in the case of any billing queries.

As AFAs increase in popularity for specific types of legal work, it will be necessary to constantly reassess price points, feeding back data to the pricing team to help refine the numbers so the firm can continue to provide value without sacrificing profits. ResearchMonitor and Quest are already useful tools in these efforts, and we look forward to further developments to make them even more valuable.

Peter


Peter Borchers, Managing Director
References:

https://legaltrek.com/blog/2015/09/alternative-fee-arrangements-a-comprehensive-law-firm-guide/

http://www.lexisnexis.com/legalnewsroom/legal-business/b/finance/archive/2011/09/28/the-nine-most-common-types-of-alternative-fees.aspx

 

 
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