ALM Legal Intelligence released a new report "Who Really Drives AFA Use—and Why?". The major theme running through the report is the disconnect between law firms and legal departments. Legal departments claim that they are driving the adoption of AFAs, law firms appear to be getting the short end of the stick- 24% of responding firms reported losing money on AFAs. The key issue may be that until law firms don't have the right kind of data for analyzing the cost of managing a matter... and it may take them several years build up a useful archive of data.
The report is full of nuanced charts and data. Here are a few metrics and trends:
- 24% of firms use AFA for more than half of their billings.
- Half of law departments embrace AFAs.60 % of firms assess AFAs on a matter by matter basis
- 48 percent of law departments saw an Increase in AFA volume between 2013 and 2014.
- Reverse auctions are unpopular, with only 22 percent of law departments saying they have initiated them.
- 70 percent of law departments claim they did in a majority of cases, 24 percent calling it a mutual activity. 49 percent of firms said that it was mutual.
- Half of legal departments say that they work with fewer outside law firms than five years ago, and 49 percent of departments say AFA pricing played a significant role in the change.
- The biggest obstacle to AFA adoption, according to 32 percent of law firms and 38 percent of law departments, was law firm comfort with billable hours. Law firms are perceived as resisting AFAs but no firms responded that they were resistant to AFAs.
- 56 percent of firms and 61 percent of law departments were not training, respectively, attorneys or legal staff on implementing the arrangements.
- 35 percent of firms and 39 percent of law departments did not train personnel in legal project management.
- Firms are better at assessing the financial success of AFAs than law departments.
- Law firms bearing the risk 24% law firms losing money on AFAs only 3% of law departments had lost money on AFA.
- Between 2015 and 2019, firms estimate a 24.1 percent increase in AFA work, but clients say the growth will be 34.1 percent.
- Law departments tend to be more satisfied with AFAs than law firms. (86 percent vs 63%)
- What Is an Alternative Fee Arrangement?
Flat Fee: Client pays an agreed upon sum of money for an agreed-upon amount of work. Unlike hourly fee arrangements, flat-fee arrangements have the law firm assume the risk of cost overruns and the client assumes the risk of a bad result.
Contingent Fee: Law firm gets paid only if it achieves a financial recovery or other result for the client. Typically, the law firm receives a percentage of the total recovery.
Flat Fee with Shared Savings: If at the conclusion of the work fees calculated on the basis of the hours worked would be less than the flat fee, the client and law firm share the savings.
Capped Fee: Client pays up to an agreed upon sum for an agreed-upon amount of work or for an engagement. Capped fees often are used in conjunction with an hourly rate agreement, but the total amount charged by the hour cannot exceed the cap.
Partial contingency or success fee :La w fir might be paid a fraction no f its fee under a hourly , flat , or capped-fee arrangement, and an additional amount of their result exceed agreed upon criteria.
Defense contingency fee: Law firm defends in a client against a monetary claim agrees with the client on an expected outcome . I the firm achieves a better result than the expected outcome , the client pays the firm a percentage of savings.
Phased Fee :Law firm and the client agree upon fees for discreet phases of the work. Different phases might utilize different structures, including the hourly rate, a flat rate, a contingency fee, or an AFA.
Holdback : Client withholds an agreed-upon amount or percentage of the fee until an agreed-upon milestone or result is achieved, or until completion of the engagement. T h obligation to pay is delayed until a specific result is achieved.
Blended rate: A blended rate is an agreed upon hourly rate that applies to all lawyers working on a matter.