Are Alternative Fee Arrangements (AFAs) a Flash in the Pan?

 

It is de rigeur to assert that AFAs are creating a revolution in the legal services profession, but is it actually a case of the grass being greener on the other side of the fence?

I have participated in AFAs and will no doubt do so in the future, but I have argued that the billable hour will never be replaced as the primary method of lawyer payment. If corporate counsel are merely willing to put into hourly billing matters the same degree of active involvement as is necessary to implement proper AFAs, the billable hour will almost always come out on top because the client retains control.

Interesting bits of information on the AFA vs. Billable Hour debate now come out on an almost daily basis. The following seemed worthwhile of mention in this respect. A recent article (“Survey: In-house counsel cutting legal spending” by Allison Petty in the Chicago Daily Law Bulletin, March 10, 2010, Vol.156, Issue 47) reviewed the results of this month’s Association of Corporate Counsel’s Chief Legal Officer survey. She noted the following about the survey responses:

“Additionally, a large disconnect seems to remain between how much corporate attorneys want to use alternative-billing practices and how much they are actually using them.

Asked, “Would you like to increase the percentage of work handled by outside counsel on alternative-fee arrangements?” 79 percent said yes.

But only 4 percent said they used alternative fees for more than half of their work with outside counsel. The bulk of respondents — 68 percent — said they use alternative fees for 10 percent of work or less.

Still, alternative-fee use has increased from 2008 survey results, when 78 percent of respondents said 10 percent or less of their outside counsel spending was structured around alternative-billing arrangements.”

Ms. Petty then quoted two corporate legal officers regarding their experiences with AFAs, as follows:

“Ronald E. Potempa, associate general counsel at Infor Global Solutions (Michigan), Inc., said his company had tried blended rates and found that they sometimes did not work out well because outside counsel spend less time on the matter.

‘Quite frankly, at the end of the day, we were just glad to get back to normal billing,’ Potempa said.

Alternative billing rarely works for PepsiAmericas Inc., said the company’s senior vice president of legal and government affairs, W. Scott Nehs.

Because the company operates across state and country lines, alternative billing can make matters too complicated, Nehs said. In other words, he said, ‘the juice isn’t worth the squeeze.’”

I really like the way Mr. Nehs put it: “The juice isn’t worth the squeeze.”

I’m sure we will see more AFAs, but hourly billing is here to stay.

Hourly Billing vs AFAs — Redux

An extraordinary piece is in the current month’s issue of Corporate Counsel magazine. It is an interview with Richard Baer, the General Counsel of Qwest Communications. Qwest was on the leading edge of companies looking at the possibility of implementing alternative fee arrangements with its lawyers but Mr. Baer has concluded that billable hours are generally better for Qwest than AFAs.

Mr. Baer notes that AFA attorneys have greater incentives to act in ways which are in the law firms best interests but not necessarily those of Qwest, by the manner in which its cases are staffed, the amount of time put into cases and the decisions on when to settle. In his words, “fixed fees just create a different misalignment.”

Although he acknowledges there is still a place for AFAs on certain kinds of matters, he prefers hourly billing because he rejects to old notion that hourly billing attorneys will just churn files for as many hours as is possible. He acknowledges that any lawyer who wants continued business will not act in such a way.

I agree completely with Mr. Baer’s thoughtful analysis, as I’ve previously stated here and elsewhere. His reference to creating a “different misalignment” is critical. Proponents of AFAs tout them as making sure that the client and lawyer’s interests are aligned. However, under the hourly billing model, the client’s interests must always predominate; not so with AFAs. In an AFA, the lawyer and client may be in direct conflict of interests on certain issues in a case, such as how aggressively to act in litigation or other transactions. A lawyer in an AFA might well choose to act to reduce conflict and time spent on a matter. Although that might be consistent with the client’s interests, there are a significant number of situations in which a client wants to push aggressively. For example, many product liability clients assert they do not have the luxury of settling every claim which comes through the door or they risk many, many more such claims in the future.

I continue to believe that if a client is merely willing to work closely with its lawyers, the results will be very good and cost-effective. Mr. Baer notes that by continuing with the hourly billing model, he was able to reduce his legal department’s costs by 10%.

The Q and A at the end of the article says it all:

Q. So, what’s the future of the billable hour?

A. I think it’s going to be around a heck of a lot longer than people think.

Follow-up to AFAs versus Hourly Billing: Kraft Foods

Today, AmLaw (affiliated with Corporate Counsel) posted an item which is significant for supporting my point in the last post: “Value” can be achieved by clients in both AFA and hourly billing models, but both models require the client to work for it.

The AmLaw posting (http://preview.tinyurl.com/yl4xsc3) reported on how Kraft Foods, Inc. publicly recognized one of its hourly billing law firms for working closely with Kraft to reduce legal costs. Just as “value” is achieved by a corporate client who puts in the effort to develop AFAs, smart corporate clients like Kraft recognize that the same can be done with hourly billing law firms.

The key in all of this is communication between client and lawyer about their expectations to ensure that the law firm is willing to work for the client’s best interests in all respects, not just for the particular matter for which the law firm was retained.

Congratulations to Kraft Foods’ Legal Department.

Hourly Billing vs. Alternative Fee Arrangements

Pat Lamb at the Valorem Law Group is a huge proponent of alternative fee arrangements and has made that fee structure a core part of the firm’s marketing effort. On his blog, Pat recently posted on the subject again proclaiming the virtues of AFAs. I was a little cautious about posting a comment because I had done so once previously but for some reason a decision was made to not post my comment. Nevertheless, I decided to try again and I replied to his most recent post. My comment and Pat’s response to the comment can be found here: http://tinyurl.com/y8cnegr

I didn’t want to have an endless reply/response game on Pat’s blog, so I thought I’d post my thoughts on the matter here.

 

Pat is a good litigation lawyer, and litigation lawyers often spend a great deal of time rewriting the opponent’s arguments and shooting down these “strawman” arguments. It’s good litigation strategy but it does not serve the pursuit of truth. I know that AFAs are all the rage now, but we should at least have a genuine discussion about them.

Pat starts out his reply by saying:

“Let’s begin with a fundamental truth: in any fee structure, a client gets what it pays for. If you buy hours, you will get hours. If you buy efficiency, that is what you will get.”

 

Of course, that is not at all the issue to be dealt with and although it is glib, the statement is hogwash. One can just as easily say “If you buy good, high quality, valuable work to be done by your attorney but only that work, then you’ll get exactly that. If you want to buy an attorney who will decide what to do, when to do and how much to do on your files, then that is what you will get.”

The very end of Pat’s reply is the real key to understanding his enthusiastic marketing of AFAs. He says this:

“While there are, as I have said many times, examples of firms who bill by the hour who are not caught up in maximizing hours, there are too many stories and too much data to dispute the conclusion that a shift from hourly billing to well-thought out AFAs produces materially greater value in the eyes of the client.”

 

I’ve highlighted the significant language: “well-thought out AFAs” because proponents of AFAs usually attempt to make an extremely poor comparison between AFAs and hourly billing. The contrast is usually set out as:

(1) unethical law firms who abuse hourly billing with clients by overbilling for activities which do not advance the client’s interests and in matters in which the clients do not supervise the lawyers,

               versus

(2) “well-thought out” AFAs in which the client and law firm go into great detail about the work to be done, the work which should not be done, the expected outcome of the matter, and the costs to be accrued.

The problem with this type of biased comparison is it assumes the worst possible scenario with hourly billing and the best possible scenario with AFAs. Shouldn’t the proper comparison be between the more likely instances of the two billing systems, and assuming the same degree of client involvement in the matter management and billing process? Of course, that was the point I made in initially posting a comment on Pat’s blog: If clients would put the same interest and work into matters handled under the hourly billing system as they would under an AFA, there is absolutely no reason why the results for the client under an hourly billing structure cannot be far better than the AFA system.

Most client disputes with law firms regarding billing relate to misunderstandings between the two regarding expectations; very few relate to malicious, intentional churning of files. Of course, Pat feeds into the worst case scenario by stating the following:

“That they spend their time avoiding being taken advantage of by their own counsel, however, is something I see as an indictment of the hourly billing model. Protecting your client from being ripped off by your outside lawyer is a waste of resources, certainly not the highest and best use of the inside lawyer’s time and talent. This “policing” approach also assumes that in-house counsel has the time needed to carefully review and monitor all bills.”

Using terms such as “being taken advantage of” and “being ripped off” by outside counsel improperly attempts to lump all hourly billing attorneys into a coven of horrible, unethical ambulance chasers while at the same time elevating all AFA lawyers as cherubic, beneficent halo-wearing professionals who don’t concern themselves with pedantic interests such as money.

The reality is that any corporate client which decides to pursue AFAs has a great deal of work ahead of it, not the least of which is continuing to monitor matters handled by outside AFA counsel to ensure that the proper work is being done. On this point, Pat acknowledges the argument that AFA counsel might put in less needed work in order to enhance the firm’s bottom line, but he again glibly dismisses it by suggesting anything could happen and that “I know of no examples where a firm devoted inadequate resources in the presence of a success incentive.”

Respectfully to Pat, the hourly billing model has existed since lawyers began doing work (including the many years he practiced under such a system and under which he managed to practice ethically and have clients value his assistance). AFAs, for the large part, are a relatively recent creation. To properly address it, we at least have to consider the possibility something will occur. Further, although Pat wants to dismiss it, I guarantee that clients in AFAs are thinking about it, as they should.

Pat and I agree that clients want value, which does not mean the lowest possible cost; it means a mixture of things, including costs, results, expectations, and everything else which clients care about.

To be clear, I have absolutely nothing against AFAs and would happily work with my clients to find mutually beneficial arrangements; I’ve done them in the past. Pat and I disagree, however, on whether a client can obtain “value” in an hourly billing model.

I suspect it is because Pat’s law firm has gone full bore with AFAs as a marketing method, rejecting hourly billing systems. Unfortunately, he absolutely refuses to acknowledge that hourly billing lawyers can provide value. I have a very long list of clients who would disagree with him as they are people and companies with whom I have been deeply involved and who know and trust I will ethically carry out their wishes for their benefit. Certainly there have been disagreements between some lawyers and their clients over billing (although I have not had any), but I pointed out in my comment to Pat the recent lawsuits between AFA lawyers and their clients, so AFAs should not be expected to eliminate controversies.

Client direction, understanding and supervision are critical to ANY successful relationship with lawyers, whether it is in a traditional hourly billing model or a new AFA model.

I believe that the recent surge toward “value” is actually a movement of clients saying they want to work with their lawyers and be certain lawyers and clients are on the same page for the best interests of the client. For that, I say “great!”

As for AFAs versus hourly billing, I say: “Can’t we all just get along?”