The recent economic climate has created a buyer’s market for legal services and has accentuated the pressure on corporate law departments to reduce legal spend. As law departments have increased their scrutiny on legal budgets, other issues such as spend predictability and risk sharing have also surfaced as targets in their effort to streamline and decrease legal spend while improving their options. This has resulted in a renewed focus on alternative fee arrangements (AFA’s).
According to the 2009 LexisNexis State of the Legal Industry survey, 69% of corporate law departments have begun shifting more work in-house and 40% have implemented the use of AFA’s. In addition, the same survey found that 71% of corporate counsel and 60% of law firms believed fee arrangements to be the number one issue facing the legal industry.
These same corporate law departments have invested heavily in new software tools to assist in matter management, e-billing, budgeting, matter staffing control, accruals and reporting. These programs are being used to carry out the effort to reduce spend while improving risk sharing and spend predictability. The result is that more work goes to firms that are willing to adapt to the use of electronic tools and alternative fee arrangements.
So what are some AFA strategies for firms to employ in order to create more opportunity in the current conditions? When considering the use of AFA’s it is important that the AFA be right for the type of matter, for the client and for your firm. Additionally there are several factors that are always present when AFA’s work.
- Client trust is key and always present in successful relationships—the demand for legal services will increase.
- Understand your client’s motivation—cost certainty or price? These are not the same thing.
- Recognize that sometimes, the billable hour is the best arrangement.
- With proper understanding of margins and reasonable assurance of scope, you can be indifferent to the pricing arrangement.
- Start somewhere. Only experience will increase a firm’s competence.
Finally, it is important to stay current with AFA trends and educate your firm and partners in the basics of AFA’s so that when opportunities present themselves you are positioned to take advantage and prosper in this changing industry.