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Practice Innovations - Managing in a changing legal environment
Gray Rule
October 2011 | VOLUME 12, NUMBER 4spacer
Gray Rule
The Role of the Alternative Fee Manager
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IN THIS ISSUE:
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»The Role of the Alternative Fee Manager
»LEEDing Law Firms: The Business Case for Sustainability
»A New Approach to Leadership: How Women Are Influencing Leadership Values
»Improving Associate Morale Through Career Coaching
»Outsourcing, Offshoring, and Right Sourcing for the Future
»Untangling the Tangled World of Government Compliance
»Book Review: Total Recall: How the E-Memory Revolution Will Change Everything
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Toby Brown, Director of Pricing, Vinson & Elkins, LLP, Houston, TX
The Role of the Alternative Fee Manager
There are multitudes of articles on alternative fee arrangements (AFAs) that speak to what they are ....

There are multitudes of articles on alternative fee arrangements (AFAs) that speak to what they are, why they should be used, and who is using them, but not many speak to how they actually get done. This article will take an in-depth, practical look at the potential roles and responsibilities of an AFA manager (or equivalent) for a law firm, and will explore the various hands-on tasks related to AFAs.

AFAs?

For the purposes of this article, AFAs are everything but straight hourly billing. Discounts are considered straight hourly billing, using different rates. Therefore, in general, AFAs include:

  • Fixed (or Flat) Fee: A set fee for a defined amount of work. This fee could be for an entire matter, a group of matters, a stage of a matter, or even discrete tasks within a matter.
  • Fee Caps: A maximum amount that will be paid, typically calculated by using hours and rates, so that actual hours up to the cap will be paid, but nothing over the cap can be collected.
  • Discount/Bonus: This fee has many variations. The basic idea is that a discount (against hourly or fixed fees) is given if goals are not met. When goals are met or exceeded a bonus may be given.
  • Contingency: This is the classic fees-contingent-on-success approach used by personal injury lawyers. However, this structure is being used for a broader range of plaintiff-based work and occasionally partial contingency fees are used.
  • Blended Rates: This fee assigns one billing rate for all timekeepers, or has one rate per type of timekeeper (e.g., partners).

For a more involved description of AFAs, check out the ACC Value-Based Fee Primer, a resource in the ACC Value Challenge, at http://www.acc.com/legalresources/resource.cfm?show=967965.

Talking with Clients

An often missed component in the process (and a best practice) is the essential first step: talking with the client. Too often inaccurate assumptions are made about a client's fee needs and concerns. This leads to poor client acceptance and likely failure if an AFA is utilized. The conversation with the client should focus on the client's fee goals, beyond just saving money. Without this key information, any AFA is a shot in the dark at an unknown target.

Having fee conversations with clients, in my opinion, is the highest value an AFA manager provides. Lawyers tend to shy away from these conversations. The ability to facilitate a discussion on the pros and cons of each AFA type and help the client understand the client's own fee needs is a new and unique skill set for law firms. A level of trust and competence with a firm's lawyers must be established before this role is realistic.

Talking with Your Lawyers

AFA managers can provide guidance and coaching to firm lawyers to help prepare them for fee conversations. Lawyers will benefit from coaching on how to ask fee questions such as: "What keeps you up at night when you think about law firm fees?" or "What will fee success look like a year from now?" Lawyers should also be coached on actually listening to the clients' answers since fee conversations need to be a give-and-take process that responds to client needs as they surface.

Crafting the AFA

Once a client's fee needs and concerns are understood, the AFA manager can play a central role in developing an AFA that fits the needs of the client and matter in question. To illustrate this effort, consider a client that has a cash flow issue. In this circumstance, cost savings may well take a backseat to predictability on a monthly basis. Therefore a fixed fee per month over a year may fit best. In another situation, an in-house lawyer may be under pressure to meet or beat whatever budget number is given to leadership. In this scenario, staying under that number is of prime importance, suggesting a fixed fee is most appropriate for the entire matter.

Whatever the situation dictates, a valuable function of an AFA manager is helping the lawyers involved develop a client-driven, formfitting AFA.

Understanding Scope

Project scope is a new and potentially scary term for lawyers, especially litigators. AFA managers should be prepared to hear push back like: "There are too many variables to determine the fee for this matter." When an AFA manager hears these statements, he or she should treat them as an opportunity to help walk lawyers through a scoping process. A few questions about which variables will most likely impact the cost will lead lawyers down a path of defining the variables and isolating them for an AFA. Using this process, many AFAs will actually end up with a list of out-of-scope factors, instead of an in-scope statement of work.

On to the Budget

Most AFAs benefit from some sort of budget. These budgets can range from a single number to detailed plans using phase and task codes. AFA managers are typically not in a position to actually build a budget since this requires extensive knowledge of a matter type, type of practice, and the client's situation and needs. However, since lawyers prefer not to use budgeting tools, AFA managers can work with the lawyers, using spreadsheets or the budgeting systems while the lawyers provide the input. This approach also ensures the budget is actually captured and entered into the right systems. Many times the lawyers involved will want to look at past matters to use as templates or building blocks for new engagements. AFA managers can assist in finding past examples best suited for this step.

Modeling the Budget for Profitability

Once a budget is developed, the next step is acquiring some basic parameters from the lawyers involved in order to model the arrangement for profitability. Of course, the more detail in a budget, such as specific timekeepers and number of hours per task, the more accurate the modeling will be. The modeling effort also includes experimenting with different approaches to help lawyers understand and appreciate the financial impact of different staffing models. Good advice here is to start with less detailed budgets and move to more detail as needed. There are a number of systems on the market to help with this modeling.

Approval Process

With an appropriate AFA type chosen, and a reasonable budget and useful prediction of profitability in place, the next step is moving through a firm's approval process, be it a single partner approval or a formal leadership review approach. The basic concept is to present the designated firm leadership with the right information for review and consideration. The challenge is to keep it as simple and straightforward as possible, while ensuring enough information was captured and shared about the AFA.

Riskier and less understood proposals may require calls or meetings with leadership to ensure the deal makes sense. Many times in these approval processes, an AFA will undergo modifications to make sure it meets the financial requirements of a firm. In best-case scenarios, these modifications will also benefit the client.

AFA managers must possess good communication and organizational skills to ensure approval processes are streamlined and effective, making the best use of non-billable time for the lawyers involved.

Sharing the AFA with the Client

The best method for presenting the approved AFA to the client is in person. If that is not an option, then a video conference or phone call can work. The last resort is email, as it is the least effective way. Discussions about fees are very sensitive and involve a lot of listening. AFA managers can play two roles here: coaching and presenting. Lawyers will benefit from coaching on how to present AFAs (or any fee deal for that matter) to clients in thoughtful and positive ways. Additionally, clients typically respond well to neutral, nonlawyer participation, thus increasing the success rate of AFA pitches.

Dealing with Success

All AFA requests should be logged. This can be done in spreadsheets, AFA software, or homegrown systems. One challenge for AFA managers is that existing systems are designed more for the AFAs acquired and not the ones missed. Having a complete log of all AFA activity is critical for understanding and improving AFAs over time.

Work acquired under an AFA should be entered and flagged in all of the relevant systems. Obviously billings will need to be properly formatted. Beyond that there will be a growing demand for expanded and improved monitoring of AFAs. Strong monitoring tools are necessary for firms to understand AFA performance and continually improve it.

At the end of an AFA engagement, reviewing the deal is the final step. These reviews provide feedback about the AFA process, so future AFAs benefit from the lessons learned and mistakes are not repeated.

AFA managers should plan on committing significant resources to AFA monitoring as they build out their AFA programs. These efforts will establish useful levels of knowledge and continually improve AFAs over time.

What Next for the AFA Manager?

This article describes a number of existing and emerging roles for an AFA manager. Since the world of AFAs is in such a state of flux, expect these roles to evolve and expand. The wide range of potential roles highlights a significant challenge for AFA managers: They will need to possess a multitude of skills and broad knowledge.

AFA managers can have many job titles that include terms like value, pricing, fees, project management, strategy, and others. At the core, these positions are about understanding how firms can embrace new ways of setting fees and working with clients to develop win-win fee approaches. This of course means the role of AFA managers will have increasing value at law firms and can contribute greatly to a firm's ongoing success.

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