To bill or not to bill? That is the question. But perhaps the better question is what happens before the bill is even negotiated. As corporate general counsel search for sustainable solutions to manage legal risk while maximizing value for their companies this new year, alternative fee arrangements can address many of the legal budget pressures emanating from the offices of the CFO, and even the CEO. The topic of alternative fee arrangements (AFA) was again top of mind for corporate executives during a January 9th event hosted by the Houston Bar Association. The event featured a panel of AFA experts, including Jim Neath, President of CLUTCH Information Management & Discovery at Morae Global Corporation.
In Neath’s panel remarks, he referenced his experiences both as a buyer of corporate legal services and as a consultant to General Counsel. As British Petroleum’s Associate General Counsel in charge of global litigation, Neath and his team moved away from hourly fee billing arrangements for litigation, regulatory, commercial counseling and corporate transactional services, putting more than $100 million annually under law firm AFA contracts. Today, as President of Morae Global Corporation’s Information Management Business, Neath and his consulting team advise general counsel on how to structure and operate their legal departments as an efficient business, helping them build law firm sourcing strategies that optimize AFA arrangements to improve decision making, save money, and strengthen law firm relationships.
Neath shared with attendees insights from his deep experience on how general counsel can deploy AFAs as an element of a wider legal function strategy to meet the needs of multiple corporate stakeholders. He explained how the movement away from standard hourly time & materials fee agreements gathered steam since the introduction of “task based billing” in the 1990s. In his experience, AFAs can serve three important risk-sharing purposes. First, they can improve alignment between corporation and law firm around what constitutes a successful matter outcome; what is the business really trying to achieve in the matter and how can the law firm best contribute to this risk outcome. Second, AFAs can drive improved efficiency and innovation in legal expense management, resulting in greater predictability at less total cost. Third, an often-overlooked advantage of AFAs, these alternative fee arrangements help foster longer term relationships of loyalty and trust with external law firms. These objectives are achieved when the corporation and its key law firm partners share the cost and outcome risk of a legal project, incentivizing deeper and ongoing communication between them.
According to Neath, the key to making an AFA work for the corporation and law firm is mutual trust. These arrangements work best when both sides seek a long-term business relationship. AFAs fail when one or both sides take an overly “transactional” or “commercial” view, and they become preoccupied with who “wins” or “loses” the fee bargain on any particular project. When they work well, AFAs encourage more meaningful dialog about the handling of a legal project and foster greater innovation and creativity in managing legal costs efficiently. For example, the advent of AFAs has helped accelerate strategic unbundling of law firm services and the use of Legal Process Outsourcing (LPO) firms to deliver routine or technology-driven services in partnership with external counsel, thus freeing up law firms to focus on their core legal advice-giving value. When AFAs underpin long term relationships of mutual advantage between law firms and their corporate clients, there is less concern for ethical pitfalls that are often debated in this context. Yes, according to the Model Ethics Rules, all fee arrangements must bear a reasonable relationship to the services provided, and a well-documented arrangement with full disclosure of risks is recommended. And, mutual trust and openness in the relationship will minimize risk of conflicts of interest in the administration of these agreements. As Neath states, “Today, AFAs have become an important part of every well-considered law department business plan.”