5 Big AFA (Alternative Fee Arrangement) Myths: DEBUNKED

Frank Festa

Frank Festa

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AFAs (Alternative Fee Arrangements) are trending in the legal industry, but firms have still not yet adopted them at high rates. AFAs have been shown to improve cost prediction and profit margins, but a recent Bloomberg Law survey finds that 75% of firms have not changed their billing models. Why? There are some serious myths surrounding AFAs — and we’re here to debunk them, so you and your organization can make the most intelligent decisions when it comes to AFAs.

Myth 1: “AFAs have not been time tested.”

Some say that AFAs have not stood the test against time in contrast to other billing models. But some are as old as the traditional hourly rate itself. For example, contingency fees have been commonly used in the United States since the 1850s, and in the United Kingdom long before that. Alternative Fee Arrangements have been time tested as a cost-saving and cost-predicting mechanism for decades. If you’re concerned that AFAs are a ‘fad’ and will come and go by the time your legal department implements them, don’t worry — AFAs are here to stay. 

Myth 2: “AFAs are only beneficial to law firms.”

Alternative Fee Arrangements can actually be mutually beneficial to both the buyer and seller in legal services. Law firms (e.g., the sellers) have found that when they proactively initiate AFAs with their clients, AFAs are more profitable than an hourly billing model 34% of the time. But in addition, corporate clients (e.g., the buyers) have found that AFAs compel firms to leverage technology and increase efficiency to provide better value. These factors, in addition to enhanced cost prediction capabilities for both parties, make AFAs a no-brainer for both parties. 

In this discussion about mutual benefit, it’s important to note the premise of risk-sharing surrounding AFAs. Clients and law firms can better balance the risk that accompanies AFAs, especially when AFAs include a collar. Once risk is shared, clients and firms can worry less about potentialities of unprofitability or extreme expense. 

Myth 3: “In a cost-break down, AFAs are still more expensive than the billable hour.”

Untrue! Why? Let’s look at the incentives behind the billable hour, not the Alternative Fee Arrangement. When law firms are hired at an hourly rate, there’s an incentive to pad hours, stack as many team members on a matter as possible and draw out the matter to the bitter end. Billed hours can get very expensive, very easily.

Now, let’s take a look at the incentives behind the AFA, not the billable hour. Structured AFAs with capped fees and success bonuses incentivize firms to quickly execute on client objectives, leverage cost-saving technology and make efforts to improve efficiency. AFAs tend to save, very easily. 

Myth 4: “AFAs are only for lower-tier law firms.”

Over two-thirds of law firms report that they are actively collaborating with clients to arrange alternative fees. This fraction comprises a number of Am Law 100 firms, because corporations and firms alike recognize that AFAs are a sophisticated solution to the billable hour. As market pressures increase, both parties understand that they need to adopt AFAs to stay competitive, even at the top. 

Myth 5: “Litigation is too unpredictable to set a flat fee or another AFA.”

Fact check — while the outcomes of litigation may not always be predictable, the litigation process can definitely be predictable. By specifically quantifying activities during litigation (e.g., the number of depositions taken or the number of expert witnesses), litigation can become predictable and an Alternative Fee Arrangement can be drawn.