I had a different topic in mind for this post and then someone sent me a screenshot from a fee request filing on Pacer (the federal courts’ e-filing system).  Here’s just a snippet:

This is not a joke.  You are reading this correctly – $775.00 per hour for first-year litigation associate lawyers.  $1,205.00 per hour for a third-year!  In a world that often feels insane, we’ve reached a new level of rate insanity when it comes to legal fees, especially those demanded by the mega firms.  If you are like me, you looked at this chart and then fell out of your chair, unconscious and involuntarily flopping on the floor like a dying fish.  Or maybe that’s just me?  Unconscious or not, there is a lot wrong with these numbers, but I do not want to spend 3,000 words bashing the business model of the mega law firms.  I know you all get it.  Hell, even the folks at Big Law get it – they just can’t change the trajectory.  But, the bigger questions to me are: (1) is this rate insanity sustainable, and (2) what can in-house legal departments do about it?  Personally, I believe that the number of clients who can afford these rates (or have matters justifying these rates) is shrinking, like George Costanza at the beach house coming out of a cold swimming pool.[1]  In other words, is a reckoning coming?

I have no idea.  These rates may, in fact, be sustainable.  The legal services marketplace seems to be immune to pressures other businesses face.  So, let’s just set that question to the side.  Instead, today I want to talk about – once you stop flopping around and get back into your chair – what in-house legal teams can do in response to rates like this.  In particular, I want to discuss alternative fee arrangements as I have been asked about these numerous times over the past month or so and they are likely to be (if done correctly) one of the most promising ways legal departments can get some control over the cost of legal services, especially when economic times appear to be as uncertain as they do here in the first half of 2023.  This edition of “Ten Things” will tell you what in-house lawyers need to know about alternative fee arrangements:

1.  Why is there a problem?  If the billable hour were Mark Twain, you might hear it saying, “Reports of my death have been greatly exaggerated.”  Because, to the surprise of many, the billable hour has turned out to be incredibly durable and remains the primary way clients pay for legal fees in the US (and around the globe).  This was not always the case.  In the 1800s legal fees were capped by state law and the loser paid litigation fees.  In the mid-1900s, many law firms billed via retainers or charged minimum rates required by state bar associations (yes, even the Supreme Court eventually found that to be a violation of antitrust law).  As late as the 1990s, some large firms still submitted one-page legal bills with an amount for “services rendered.”  The billable hour, it seems, has really only been around since the 1970s (see The History of the Billable Hour and the Consequences of Its Tyranny).  But once it took hold, man did it stick. As I see it, the problems with the billable hour are the following:

• Many law firms, especially Big Law, cannot change the model because their infrastructure and compensation programs are tied to an ever-increasing billable hour rate.  This is, in my opinion, the root of the problem.  Many law firms that are so invested in high-priced real estate in high-price locations and rely on a dog-eat-dog equity partner model are virtually locked into raising rates every year. This is why someone, based on the rate sheet above, is paying $775 an hour for a first-year lawyer.[2]
• The huge increase in rates is driven by the transaction work which – since the cost is part of the deal ROI – is not price sensitive.  The mistake firms are making is assuming that holds true for all other legal work.  It doesn’t.
• The billable hour often drives the wrong incentives, bill more hours = make more money.  This does not encourage efficiency or even value.
• There is a “black box” problem.  No one can really tell why it took five hours or seven hours to do the first draft of the contract.  This can drive friction between in-house counsel and outside counsel.
• Billable hour cost is tied to inflation and other economic factors, not the value of the services delivered.

2.  What are AFAs and how do they solve the problem?  Simply put, most people define an alternative fee arrangement as any method of pricing legal services other than the traditional billable hour.  I think this is generally correct, though, as you will see below, there are several alternatives that hang off the billable hour, so I am not sure the traditional definition is 100% accurate.  But I’m probably just being pedantic.[3]  Regardless, let’s just say it’s when you pay something less than – or different than – the rack rate hourly amount.  Good?  Good.  How AFAs solve the problem of rate insanity is threefold: a) AFAs can give you cost certainty, e.g., fixed fees; b) AFAs can lower your overall cost of legal services, e.g., blended rates or litigation funding; and c) AFAs can give everyone skin in the game and sharing of upside and downside that doesn’t happen with the traditional billable hour, e.g., contingency fees or holdbacks.  Next time you stay in a hotel look at the notice on the back of the door that sets out the “rack rate” for the room you are in.  It’s usually some ungodly high amount and you will wonder who is dumb enough to pay that.  That would be you if you are paying Big Law rack rates by the hour.  So, don’t be a sucker.  You are the client, and you have way more power when it comes to rates than you can possibly imagine.

3.  What are the different categories of AFAs?  When you start to analyze AFAs and think about which ones may work for you, it’s easier to break them down into categories.  To me, there are five different types of AFAs:

• Fixed – fees that are fixed in some manner.
• Hourly-based – fees that propose some type of alternative or discount, but do so on a billable hourly basis.
• Value-based – fees based on the value of the services performed.
• Share the risk – fees where each party (client and law firm) shares the risk on both the downside or the upside.
• Hybrid – fees based on a combination of the above

4.  Different types of AFAs  People talk about AFAs a lot, yet we rarely see them.  Like Bigfoot.  But, that is changing.  Well, not about Bigfoot, but definitely about AFAs.  I believe we are on the verge of an explosion of AFAs as more clients demand them and more law firms look to offer them.  And there is a lot of green space here and the number and types of AFAs are limited only by the imaginations (and economic realities) of the parties.  Here is a partial list of the most common AFAs I have seen:

• Fixed or flat fees – the service or services are provided at a flat fee.  For example, drafting a certain type of contract.
• Capped fees – the fees for the project or case are capped at a certain maximum amount.
• Phased fees – the fees are priced by phase with either a flat fee for each phase or a cap on fees for each phase.
• Contingency fee – the fee you pay is based on a percentage of the recovery.  You see this most frequently in litigation where the firm will take 25% to 33% of the amount recovered as its fee.  The client typically pays nothing unless the case is won (though sometimes the client pays the out-of-pocket costs, like filing fees and deposition costs).
• Success fee – the law firm offers a discounted rate in exchange for an agreed-upon success fee should they close the deal or win the case. Sometimes called a “holdback” fee.
• Blended rate – the law firm offers its attorneys (partners to associates) at one blended rate.
• Volume discount – the rate or AFA gets better for the client as they send a larger volume of work to the firm.
• Retainer – the law firm handles all of the legal work, a certain type of legal work, or a certain amount of legal work for a flat monthly fee.
• Training fee – the law firm knows that it needs to train its lawyers and offers a heavily discounted rate to the client to allow them to let the younger lawyer “lead” the litigation or deal (with proper supervision by a partner).
• Sliding scale – the law firm charges different rates for certain types of work, e.g., more routine work is at a lower price, and work that requires more expertise is billed at a higher rate.
• Dead deal fee – used in transaction work whereby if the deal is terminated (not closed) then the client only pays a percentage of the legal fees incurred.  Incentivizes the law firm to watch for deals that are not going to happen.
• Risk collar – the law firm gets a bonus if the work is completed under budget (a portion of the savings).  If the work goes over budget, the client gets a discount on the overage.
• Unbundled – the law firm and the in-house legal department split up the work and the company pays the firm to do some – but not all – of the work.
• Secondments – the law firm places one of its lawyers in the client’s legal department for a period of time at a super-discounted rate.

You can also mix and match a combination of any of the above. This is where creativity and imagination (and economic reality) collide – in a good way.

5.  What are the downsides of AFAs?  There are many flavors of AFAs, and, for the most part, they work great if you have done your homework.  There are downsides, however, and you need to be watchful for several things.  First, make sure you and your firm agree on the assumptions that have gone into creating the AFA pricing.  And get that agreement in writing.  The worst thing that can happen with an AFA is the law firm coming back to you saying that there needs to be an adjustment in AFA pricing because the project is different, bigger, etc. than they assumed.  That is not a fun call to be on.  Second, it takes a lot of work to get AFAs right (this is the homework part).  It is tempting and easy to take whatever “AFA” is dangled in front of you without thinking it through because it looks like a good deal.  Here is where you need to be on guard for AFA sleight-of-hand.  For example, if you have a blended rate, did you agree on the ratio of partner to associate time?  If the work is done mostly by low-level associates, you are paying more (on average) and getting less efficiency for your dollar.  Third, AFAs can create windfalls for one side or the other.  If you’re the client and you agree to a flat fee of $500,000 for litigation and the matter settles two days after the complaint is filed, that’s a great payday for the law firm and not such a great day for the in-house legal team.  You need to think about the different phases of the project and how the AFA will work at each critical point.  Lastly, AFAs can create a lot of administrative work.  Say what you want about the billable hour, but it is simple to administer.  If you have 40 different AFAs going on at one time, that can be a burden on your (or someone’s) time.

6.  The most effective AFA? Move the work (or at least part of it).  One time as general counsel I was really pressed to figure out an alternative fee arrangement for a large piece of litigation.  I was getting a ton of pressure to cut costs (surprise, right?), and needed to find a big chunk of money from my outside counsel budget.  I spent the better part of a day thinking about all the different ways I could recut the deal with my outside mega firm counsel (whom I really liked) on this particular case.  Then it dawned on me:  just move the case to a less expensive firm.  I am not saying it was an easy decision, but overnight I cut millions out of my litigation costs and, because I found the right firm to move the case to, with no loss in the quality of representation.  This brings me to the point – the single most effective AFA in my mind is moving legal work to the right law firm, regardless of whether they charge by the hour or under some type of AFA.  When placing or moving legal work, here are your options:

• A firm with a lower hourly rate but the same quality of lawyers.
• A firm that offers a true AFA that saves you money.
• A firm that can partner with your lead firm to take a lot of the day-to-day “grunt” work at a significantly lower rate (but leaving the high-profile, high-value work for the more expensive firm).[4]

7.  Value of RFPs.  One of the most straightforward and practical ways to get law firms to engage on AFAs is through a request for proposal (“RFP”) process.  The RFP can be for a specific matter (lawsuit, contract negotiation, etc.), a specific type of matter (e.g., all litigation, all contracts), or as part of putting together a panel of law firms that will be the legal department’s primary law firm (i.e., in exchange for being on our team, what AFAs can you offer me?).  The beauty of the RFP process is that it allows you to ask for and then compare across all participants: (a) hourly rates, as well as (b) the types of AFAs offered and the value proposition of the same.  You may even find one firm offering a unique or different type of AFA and you can ask other participating firms if they can match it – giving you the benefits of that AFA where it may not otherwise have been offered.  An RFP process also requires law firms to think hard about the AFAs they are offering, likely leading to more thoughtful and creative proposals than if you just emailed a firm and asked, “Hey, what AFAs do you have available?” If you’re serious about AFAs, get serious about your RFP process.  For more, see my “Ten Things” post on running an effective RFP process.

8.  Alternative payment arrangements.  Most of the time, when it comes to AFAs the focus is on the calculation of the fee.  That’s understandable, but it’s not the full picture.  Savvy in-house lawyers are also leveraging what I call “alternative payment arrangements” to capture additional savings, even when dealing with traditional billable hour billing.    Here are a few examples:

• Prompt pay discount – here the company gets a discount for promptly paying the law firm’s invoice (potentially in addition to any other discounts or arrangements made).  For example, 5% off of the invoice total (excluding costs) if you pay in full by the 10^th of the month.  This can be very attractive to law firms looking for certainty around getting cash in the door.
• Break invoices in two (or longer) – you have probably noticed that when looking to make a large purchase or even after you make one, you get an offer to break the payment up into smaller payments.  You can do the same thing with law firm invoices.  For example, negotiate that if an invoice exceeds a certain amount, say $50,000, then it automatically gets broken into two invoices with the second one due 30 days (or more) after the first one.  It’s an easy way for you to manage cash flow and smooth out expenses.
• Credit cards – another way to get smaller payments and better manage cash flow is to pay with a credit card.  Most law firms offer this option, but you typically need to ask about it.  Another reason to use a credit card is to take advantage of cash-back options which can mean a further discount of 3% to 6% just for using the card.  Many companies have a company card tied to discounts or other perks, so those points accumulate as well.  Work with the CFO to see if it makes sense to move legal invoices to the card.
• ACH discount – a lot of businesses still pay legal invoices by check.  Checks can take forever to arrive and, if you are using the USPS, may never get there.  Meaning you then must place a hold on the check and issue a new one and start all over.  Some law firms will offer a discount if you pay by direct deposit, i.e., ACH.  If you are currently paying by check, it’s worth looking into.
• Net 45, 60, 90, 120 – lastly, while not technically a discount, you can help the company by arranging for the longest possible payment cycle.  Traditionally, most companies pay on a 30-day cycle.  But, if you can stretch that to 45, 60, or even longer, the company can take advantage of the finance folks call “the float” (i.e., the benefit of having the cash in your bank account longer).  It may not make the bill less expensive, but you will be a hero to the CFO if you can manage longer payment terms.

9.  Litigation funding.  I know not everyone likes it, but I think litigation funding is a highly effective AFA.  With true litigation funding, a funder agrees to finance the entire cost of the litigation (or package of cases), including all costs and attorneys’ fees.  You, the client, get your pick of counsel.  There is zero risk to you if the funder takes your case, i.e., if you lose the company is out nothing.  If you win, then the funder shares in the winnings as a return on its investment.  But, all along, the company pays zero in legal fees and costs, so nothing hits your legal department budget and nothing hits the company P&L.  Everyone is happy – except maybe the party on the other side which is usually the defendant as litigation funding is not as strong an option for defending litigation as it is for bringing litigation.  Still, if your company has legal rights that it might not otherwise enforce because of the cost of litigation, litigation funding can be a godsend.  Moreover, with the right counsel, you can bundle your case or cases in with other client’s cases and create a bundle of different types of matters which is incredibly appealing to a funder as 1) there is diversification of risk across different types of matters and 2) a case that by itself might not warrant the attention of a funder becomes much more interesting when it is one of several cases.  For more, see my “Ten Things” post on litigation funding basics.

10.  Legal procurement.  Do you know who generally stinks at negotiating AFAs? Yes, that’s right, you do.  Same for most in-house lawyers (myself included).  Of the many things in-house lawyers train for or learn over time, negotiating legal fees with law firms is generally not high on the list.  And that’s just for hourly rates.  When you throw in AFAs, many in-house lawyers are showing up to a gunfight with a comfy pillow and a pack of gum.  And it’s not pretty.  So, you have a few choices.  First, you can educate yourself on AFAs and become a crack negotiator.  Second, you can turn the job over to your legal operations team (if you have one and if they are any better at it than you are). Third, you can partner with the procurement team at the company and create a legal procurement function to negotiate and manage AFAs (and legal fees generally).  It sounds odd, I know, but not when you really think about it.  Most procurement teams (but not all) are professional negotiators, i.e., this is their job.  Wouldn’t it be nice to let someone else do the hard work of grinding down on fees while the in-house lawyers just worry about the legal work?  This can be the case if you can loop in procurement professionals.  The good news is that the legal team still gets to select which lawyers the company will use.  All the procurement team is doing is negotiating with whomever you ask them to negotiate with and focusing on the value delivered, not just the lowest cost point.  They are different and, by partnering with procurement, you can work together to ensure that your side is well-armed and knowledgeable.  Trust me, law firms are using professionals to help them determine fee offerings.  Isn’t it time legal departments caught up?  For more, see my “Ten Things” on legal procurement.

 *****

Well, there you have it.  The scoop on alternative fee arrangements.  I think all in-house counsel should have a solid understanding of the options out there (including the downsides) and looks for ways to move away from the insane hourly rates that have become more common over the past few years.  Besides negotiating AFAs, there is always the option to simply move the work (even in mid-stream like I did) to a firm that offers the same quality but at a sane price point.[5]  Legal procurement is something to think about as well.  Lastly, consider litigation funding as a way to drive down costs.  The good news is, there are many tools in the box. As you look to fold more AFAs into your arrangements with law firms, be sure to tout what you are doing to the finance team and in any regular updates to the C-Suite.  Like any part of the business, the legal department should get credit for spotting trends and moving to lower-cost vendors or fee arrangements.  No matter what, look around you – indifference is not an option.  Now is the time to act.

Sterling Miller

March 31, 2023

Psst.  Yeah, you.  Come here.  If you see the ABA goon squad lurking around my home with ropes and billy clubs, that’s because they are asking about book number six (on productivity) and when I am turning in the first draft.  If they ask you about me, be a pal and tell them you haven’t seen me and last you heard, I moved to Peru – somewhere near Machu Picchu. Or tell them rabid raccoons ate the only copy.  Or whatever.  You’re smart, just make something up and cover for me. They are starting to get a wee bit impatient with me (as I know you are too).  I promise you, I am working on it.  And it will be glorious!  Well, glorious-ish. But, if you cannot wait, my fifth book, Showing the Value of the Legal Department: More Than Just a Cost Center is available right now, including as an eBook!  The first printing sold out, but the second printing is now back in stock and the ABA book crew is hawking it like mad.  So, go buy this book and help keep the ABA thugs off my back for a bit longer because they are easily distracted by all the dollars and spare coins you are sending their way!  You can buy it HERE.

Two of my books, Ten Things You Need to Know as In-House Counsel – Practical Advice and Successful Strategies and Ten (More) Things You Need to Know as In-House Counsel – Practical Advice and Successful Strategies Volume 2, are also on sale on the ABA website (including as e-books).

I have published two other books: The Evolution of Professional Football, and The Slow-Cooker Savant.  I am also available for speaking engagements, webinars/CLEs, coaching, training, and consulting.

Connect with me on Twitter @10ThingsLegal and on LinkedIn where I post articles and stories of interest to in-house counsel frequently.  

“Ten Things” is not legal advice nor legal opinion and represents my views only.  It is intended to provide practical tips and references to the busy in-house practitioner and other readers.

If you have questions or comments, or ideas for a post, please contact me at sterling.miller@sbcglobal.net, or if you would like a CLE for your in-house legal team on this or any topic in the blog, contact me at smiller@hilgersgraben.com.

[1] If you have never seen the television show “Seinfeld,” there are too many episodes to choose from for the title of “The Best” but George at the beach house and the shrinkage dilemma has to be in the top five.  Check out this YouTube clip:  https://www.youtube.com/watch?v=85MZ4c1EWkM.

[2] For comparison.  I have been practicing law over 30 years and my rate is in the $400.00s.  I wonder who can help the client the most?

[3] Yep.  Another bucket list word used in a sentence.  I have always wanted to toss out “pedantic.”  Now I have.  That leaves “scrumpdillyicious.”

[4] Or if I need to satisfy the C-Suite or Board that I have a “name brand” law firm working on the matter.

[5] Seriously, email me if you’re interested in learning more about me and my firm.