You Should Push for Alternative Fee Arrangements OUTSIDE COUNSEL SHOULD GIVE THEM TO YOU By Michael S. Zullo
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orrying about your legal budget is killing you, whether it is concerns about controlling costs or dealing with the inherent unpredictability of the legal spend, or both. If your company is similar to most, “legal” can be a fourletter word that business counterparts associate with pessimism, obstruction, and worst of all, cost centers. Most sophisticated executives know they need their legal departments, but few are excited dealing with legal budgets and litigation costs. So what is an in-house attorney to do? The better question is, “What can your outside counsel do to help?” The answer, from at Michael S. Zullo least some outside is a partner in the trial group of Duane counsel, is plenty. Morris LLP. He represents banks, broker dealers, financial advisors and other financial services firms in a wide array of matters. He has worked extensively with clients on alternative fee arrangements and large litigation portfolio management. He is a member of the International Association of Defense Counsel. MSZullo@duane morris.com.
ALTERNATIVE FEES
The death of the billable hour has been foretold for years, but it’s still prevalent. There are many reasons for this. Lawyers do not make a product that is susceptible to more efficient manufacturing processes
or supply chain pricing discounts. Instead, as Abraham Lincoln succinctly stated many years ago: “[a] lawyer’s time and advice are his stock in trade.” Billable hours have been around a long time, yet inertia presents a huge hurdle to innovation. However, it does not have to be so. Creative attorneys are adapting to the changing business climate and learning to package their services more like tangible products by seeking efficiencies and exploring volume discounts. The most prominent example of this approach is the alternative fee arrangement, or AFA. AFAs come in many forms. These are examples: • Reduced hourly rates: The most common example. A firm agrees that all engagements for a client will receive a discount on regular hourly rates. This usually comes with a certain volume threshold. • Blended banded rates: A variation on reduced hourly rates. It means a firm creates brackets of attorneys, based on years of experience, and then assigns fixed hourly rates to each bracket. • Fixed fees: A firm sets a price for an engagement regardless of hours spent. • Capped fees: A firm agrees that fees for an engagement will not exceed a certain price. • Annual Fees: Firm agrees to a set fee for a fiscal year that covers all legal services provided during that year,
billed in equal monthly increments. • Mixed contingent fees: Firm agrees to a lower up-front fee for an engagement and builds in a “kicker” that can be a percentage or flat number earned at the end of an engagement based on its success. • Phased billing: Firm breaks an engagement into phases and sets a fixed or capped fee for each phase, billed as each phase passes. • Hourly Volume Discounts: Firm discounts hourly rates after an agreed threshold number of hours has been crossed. • Failed Deal Rebates: Firm discounts its rates if the transaction it has worked on fails to close. Attorneys on the cutting edge are using some or all of these tools, separately and together, to create a clear value proposition for their clients and realize revenue for their firms. If outside counsel are reluctant to engage in discussions about AFAs with their in-house counterparts, they are not fulfilling their role as business partners. The best AFAs create value for the in-house lawyer by delivering certainty. This, in turn, helps control and manage the legal budget. In-house counsel surely would love to shed the angst that comes at the beginning of each month from worrying that the incoming bills will contain unforeseen, budget-busting costs. In-house attorneys surely have better things to do with their time than continued on page 47
