Implementing AFAs without FUD(Fear, Uncertainty, Doubt)

Brandi Gunn

• Billing arrangement between clients and firms requiring billing by law firms in something other than standard detailed hourly model

• In other words, Not Hourly!

AFAs Defined

• More than 50% of CounselLink customers and their law firms

• 2012 to present– Over 44,000 AFA matters

16% of total matters– Over $600m in fees submitted on an AFA

9% of total fees submitted

Who uses AFAs?

Other8%

Commercial and Contracts19%

Corporate, General, Tax

4%

Employment and Labor8%

Environmental1%Finance, Loans and Investments

14%

IP - Other10%

IP - Patent7%

IP - Trademark6%

Insurance9%

Litigation - General

6%

Mergers and Acquisitions4%

Real Estate1%

Regulatory & Compliance3%

% of Total Matters Using AFAs

AFA Matters by Industry

Other4%

Commercial and Contracts

12%

Corporate, General, Tax14%

Employment and Labor3%

Environmental0%

Finance, Loans and Investments

7%

IP - Other2%

IP - Patent10%

IP - Trademark0%

Insurance14%

Litigation - General21%

Mergers and Acquisitions

1%

Real Estate0%

Regulatory & Compliance12%

% of $ Using AFAs

AFA Spending by Industry

• Predictability– Cash flow– Matter cost– Department budget

• Reserving– self insured retention, reinsurance, or premium impact

• Share risk with the firm• Cost reduction• Efficiency

– Faster and easier to review/approve invoices in CounselLink

• Use for vendors such as copying, court reporting etc.

Why would you want to use AFAs?

• Discounted hourly rates

• Volume discounts

• Blended rates• Retainers

Hourly-based

• Fixed / Flat Fees

• Contingency• Success

incentives• Collared

arrangements• Capped fees• Hold backs

Risk-based

• Stage / Task based

• Hybrid • Market priced

fixed fees• Bundled pricing

Value-based

Non Hourly – “True Alternative Arrangements”Hourly – Alternative or Not?

Types of AFAs

• Law firms provide a specific service for a set price• Used when the total scope of work is routine, repetitive and scope is easily defined• Examples: Workers Compensation, Investigation and Advice

Fixed or Flat Fees

• Discrete related tasks with a clear deliverable at the end of each stage• Works best with Transactional matter types such as Immigration & IP

Staged / Phased Based

• Mix of different models such as fixed fees for initial / discovery stage and then hourly for trial preparation followed by fixed for actual trial.

• Common areas of use: Litigation & Employment

Hybrid

• Client makes a deposit against charges for future services or • The law firm guarantees availability for a specific period of time• Supports a more consistent / predictable cash flow

Retainers

• Client pays the law firm based on the results achieved• Payment can be expressed as a percentage of the recovery, settlement or amount saved• Most common in debt recovery / collections

Contingency Fees

Most Common AFAs

• Request for proposal (RFP) model• Parameters of matter are laid out up front and then provided out to law firms for submission of best price• Commodity type matters such as low dollar insurance defense or advice

Market Price

• Reduced hourly fees by biller / level for specific matter types• Typically coupled with some sort of bonus for meeting desired outcome

Discounted Hourly Fees

• Pay the law firm up to a specified maximum amount• Can encourage efficiency, but considerably more risky for the law firm• More common in transactional matters

Capped Fees

• Agreed upon total fees (see Capped Fees above)• Often a 10% collar (overage/underage) credited or paid• Credited or paid amount is typically 50% of normal fee• Limits risk to both client & law firm

Collared

• A portion of the total fee is held until an agreed upon milestone or result is delivered or until the completion of the case

• Used in debt recovery• Can be objective or subjective, client discretion based on satisfaction

Holdback

Other AFAs

Mechanics of AFAs

• Hourly Fees• One time fixed amount• Fixed amount, billed multiple times:

– Daily rates– Filings etc.

• Expenses are separate

Never locked into one arrangement permanently

Examples of AFAs

Litigation

1. Investigation

2. Discovery

3. Trial Preparation

4. Trial

5. Appeals

Trademarks

1. Initial Investigation / Admin

2. Trademark Investigation

3. Application Preparation

4. Renewal

or

5. Prosecution

Examples of AFAs

Recovery

1. Demand Letter

2. Default Judgment

3. After answer up to trial

4. Trial

5. Post trial

6. Filing of Abstract Judgment

7. Execution of Judgment

8. Debtors Exam

9. Subsequent Execution of Judgment

• Mining data:– Which practice area is best served with AFA?– What is the right AFA?

• By practice area, matter type or line of business– Where will I get “the biggest bang for my buck”?– Which of my firms will work with AFAs?– How do I know what to pay on an AFA?– Is an AFA project worth the effort?

• How do I manage AFAs?• How do I measure success?

Customer Challenges

• Firms can be risk averse– Will they lose money on the project?

• Traditional law firm internal compensation models are based on the billable hour

• They don’t know what to charge

• May be hard to report / track results

Law Firm Challenges

Plan

Design

Test

Deploy

Validate/Repeat as necessary

Methodology to Implement

• Plan– Drive this through your LDO, Not OC– Determine your primary and secondary goals – Make sure they are quantifiable & reportable

• Determine your long term reporting needs by matter type– Mine your data

• What matter types do you have?• What are the rates, hours & totals you are paying (include

disposition)• What is common for similar customers?• Do you have preferred firms? Can you group them in some

logical manner?– Are your ideas consistent with your overall LDO strategy?

Methodology to Implement

• Design– Don’t re-invent the wheel, use your resources

• LexisNexis Strategic Consulting Group• ACC Value Challenge materials• Volumes of articles and material on the internet

– Model them off of actual billings & goals– Total costs should include disposition averages– Plan for the “opt out” use cases– Collaborate with 1-2 key partner vendors

Methodology to Implement

• Test– Work with your key vendors to test the agreement

first. • Is it easy to understand? • Is it easy to set up fees initially? • Are the stage / type transitions, if any, clear?

– Pilot the agreement. Assign appropriate sample set of matters to your pilot firm(s).

– Make sure the way you want the AFA to work also works for them

Methodology to Implement

• Deploy– Develop Training / Law Firm Job Aids based on

learnings for full deployment– Remember you can change model “mid-stream”

• Repeat as necessary

Methodology to Implement

• Did you get the value you anticipated?

• What was the total cost of the case (time + expenses + resolution costs)

• How was Firm participation?

How to Measure Success

Sample Reports

Sample Report – By Law Firm

Sample Reports

Sample Reports

1. Define your objective & scope

2. Research models that resonate with your company / firms / operational model

3. Plan / design with LexisNexis Strategic Consulting

4. Monitor your results / success

Key Takeaways

Additional Resources

• AFA related posts on the Business of Law Blog:

– 10 Authentic Tips for implementing AFAs in Legal Billing– Infographic Friday: The Case Against Billable Hours– How Inside Counsel can Use Data and Analytics– Four Reasons Why Alternative Fees are here to Stay– Seven Essential AFA Articles Every Lawyer Should Read

• Connect and engage:

– LexisNexis CounselLink case studies, whitepapers, and webinars– Blog: www.businessoflawblog.com/corporate-counsel– Twitter: @business_of_law or @LNCounseLink – Facebook | Google+ | YouTube– www.counsellink.com