In-house counsel hire outside counsel for specific purposes, for example: to document and implement a transaction; to obtain a favorable outcome in a dispute; to provide specialized expertise or counsel; or to provide guidance for complying with a regulation. These services derive their value from the outside lawyer’s ability to deliver a favorable result at the most efficient cost – addressing exposure to risks without an undue level of effort and cost.
For decades, law firms have used the legal industry’s preferred economic model – the billable hour – to track time as the primary method of determining value. However, the time it takes a lawyer to perform a particular task doesn’t always relate to the value of the legal service to the client. In these instances, clients are demanding that lawyers explore ways to better translate the value of the services rendered.
Due to new market realities, business leaders and in-house counsel must account for and justify legal expenses and reduce costs. What we hear clients saying is that they want outside counsel’s billing models to align with their financial interests and strategic goals so that money spent is an investment, not an expense.
Alternative Fee Arrangements Provide Value to Clients While Still Measuring Cost for Lawyers
How then do you tailor legal fees in a way that adds value to the underlying business activities of the client? Law firms have responded to this question with a variety of alternative fee arrangements. The primary and now-familiar approaches include fixed or flat fees, capped fees, phased billing, success fees, periodic retainer payments, contingent fees, and hybrids of these.
AFAs may not be suitable for every legal matter, but they have been proven effective in many. At our firm, we have had some success with AFAs in the energy industry, particularly with clean and distributed energy projects. Here, valuing service by the hour is often not consistent with the goals of renewable project investors, developers, or owners. Although these arrangements are tailored to the industry, there are surely ways to apply some of these methods to a multitude of industries and matters.
The AFAs we’ve used with our energy clients have been driven by their investment in multiple relatively smaller projects and portfolios to realize business economies of scale. Each project may face an array of legal issues such as structuring, regulatory, tax, real estate, land use, permitting, and environmental. If costs aren’t managed efficiently, the cost of legal services can threaten the actual economic returns of the project. Innovative fee structures like the ones listed below can substantially reduce the amount and variability of legal costs and the resulting impacts on project economics.
- Amortized portfolio billing
- Per-watt fee structure
- Standing fees for tasks and deliverables
- Fixed per-transaction fee with volume discounts
- At-risk arrangements
- Post-transaction value billing
- Additional value-added services
Alternative fee arrangements work well here because outside counsel can generate incremental value, through steps such as: developing pre-approved model documents; process improvements; anticipating and meeting reasonable needs of transaction counter-parties; minimizing negotiations around immaterial matters; efficient transaction execution; technology enabled knowledge management; continuity of staffing, and optimal involvement of non-legal professionals and local counsel.
The key takeaway for us as outside law firms is that AFAs are not a one-size-fits-all solution. The key is close collaboration between in-house counsel and their outside law firms to explore what value means in a given matter.