- Effective Alternative Fee Arrangements require three main elements.
- The lawyer must know their costs and the link between the steps and risks in a matter and those costs. Use technology to assist in determining costs and what causes costs. Communicate with clients to understand their objectives and openly discuss the steps and risks in the particular matter that need to be priced.
- Actively monitor and manage costs as the matter progresses. The aim is to achieve the client objective as efficiently as possible.
- Look for opportunities for improvement, including reducing costs through redesigning internal processes.
Previous articles in this series have discussed the challenges that Alternative Fee Arrangements (‘AFAs’) pose to more traditional time-based billing (LSJ, November 2020) and the advantages and disadvantages of a range of fee arrangements, both time-based and alternative (LSJ, February 2021). This article concludes the series with a focus on AFAs and recommendations as to how to implement them.
AFAs have achieved renewed prominence due to client demand for cost certainty and efficiency. However, for AFAs to be attractive to clients and lawyers there needs to be a win/win arrangement where risks, efficiencies and rewards are fairly allocated between lawyer and client so as to encourage a long-term relationship.
To achieve efficiencies and determine how risks should be compensated the following actions are suggested:
- Open communication. The lawyer is an expert in their subject area and the client expects that expertise to be deployed for their benefit. However, the lawyer cannot identify and solve the problem alone in an efficient manner; they need client input. Expectations, constraints and risks need to be openly discussed in developing a solution and associated fee agreement.
- Understand what the client values and what they wish to achieve. Use this to define the work to be undertaken and what a good or bad result is. This means going beyond simply winning is good and losing is bad. Most transactions/disputes are multi-faceted and involve a number of interests or objectives. This has the added advantage that it can identify novel or multiple ways in which a transaction or agreement may be structured, or dispute may be resolved.
- Understand the value of the risk being assumed. Put a price on that risk. Consider how the risk can be mitigated if possible and whether mitigation is solely within the lawyer’s control or involves actions by the client. Engage with the client on those potential actions, recognising that it may create a cost or risk for the client. For example, AFAs can cover several cases or a portfolio of client matters. By applying an AFA such as a fixed fee or success fee across a range of matters, the law firm and client can diversify the associated risk.