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Alternative Fee Arrangements Explained (Examples & Suggestions)

The billable hour gained widespread popularity among law firms in the late 1970s. Even today, it remains the most popular pricing model in the industry.

Despite its obvious sticking power, the billable hour has its fair share of critics. Such skeptics argue that the hourly billing model does not incentivize outside counsel to resource legal matters efficiently and to bill only the hours strictly necessary to resolve a matter favorably.

Thanks to these critiques and to growing demand from corporate clients, the hourly fee is no longer the only way to charge for legal services.

Every legal ops professional must know what alternative fee arrangements firms offer. The ideal billing structure for each matter or tranche of work depends on your legal department’s goals and the type of legal services you require.

Negotiating the right fee arrangement is a critical tool to help control your legal spend and meet your budget.

What Are Alternative Fee Arrangements?

Alternative fee arrangements (sometimes abbreviated AFAs) are non-traditional pricing structures for legal services, where the client pays the attorney something other than a traditional hourly rate for the legal work performed.

Alternative fee arrangements include fixed or flat fees, capped fees, blended fees, success or performance incentives, and more.

These arrangements provide the flexibility and transparency in pricing clients want, and they are increasingly popular in the legal industry. A 2021 Bloomberg study found 84% of law firms offer some form of fee agreements for their services.

Many alternative fee arrangements are value-based pricing systems rather than hourly-based. That means your outside counsel charges you based on how you value their work or the results they produce rather than just the hours they put into the task.

The Benefits Of Using Alternative Fee Arrangements

Alternative fee arrangements help both you and firms—it’s not a zero-sum decision. Offering versatility in their fee structure helps law firms improve their client relationship. It can also improve a firm’s profitability if it manages its resourcing effectively.

Consider this: instead of paying by the hour, a client proposes to pay $5,000 per deposition. If the firm resources an efficient number of hours at the correct level of seniority, it may make a better margin than it would when using an hourly billing arrangement.

Meanwhile, the in-house team receives predictability, transparency, and efficiency.

  • Predictable Costs: Many types of AFA give greater pricing certainty. Take, for example, fixed fees and capped fees. You know how much you will pay for a piece of work with the former. With the latter, you know the maximum you can expect to pay.That simplifies budgeting and eliminates potentially contentious billing issues between your legal department and outside counsel.
  • Price Transparency: AFAs set clear expectations for legal costs upfront. That transparency makes it easier to set and meet legal budgets.
  • Incentives and Efficiency: AFAs incentivize law firms to work effectively and efficiently, which leads to improved service quality.
  • Improved Billing Workflows: AFAs can improve billing workflows as they offer more price clarity and transparency, reducing the need for extensive bill reviews and adjustments saving time for both law firms and in-house teams.
  • Higher Realization Rates for Your Firms: When law firms use billable hours, they often scrub some of their hours from invoices due to the absence of upfront negotiation on scope with their in-house clients. AFAs eliminate this practice, leading to higher realization rates for firms.

11 Types Of Alternative Fee Arrangements

1. Capped Fee

Capped fees are hourly billing arrangements that establish an agreed-upon maximum at the outset of a matter. This fee arrangement is still based on the hourly billing model. Still, it offers greater predictability because you know the absolute maximum you might have to pay before the work even begins.

Example: Your attorney’s billable rate is $500/hr, but they agree to charge no more than $50,000 for services related to the matter.

2. Fixed or flat fees

When using fixed or flat fees, in-house teams agree to pay law firms a set price for a task, regardless of how many hours it takes to complete it.

The terms fixed and flat fees are used interchangeably. This fee type is popular in practice areas where work is predictable and the effort required to complete specific tasks is well-understood. For example, fixed and flat fees are used heavily in intellectual property (IP) registrations and insurance claims management.

They are less well-suited to types of work that are unpredictable, such as high-risk litigation and M&A. However, even within these areas, fixed fees may be agreed upon for individual phases or tasks of work that are easier to scope. For example, fixed fees may be agreed upon for depositions, while other litigation work is done hourly.

Example: A law firm charges $1,000 for an initial filing of a new patent and $2,000 for a response to an office action.

3. Volume Discounts

This is a sliding-scale discount a law firm offers based on the volume of legal work you assign them.

Higher discounts are reserved for higher work volumes. Volume discounts are particularly prevalent in insurance-related matters. Still, regardless of practice area, this fee arrangement can be a powerful way to control costs for the in-house team while generating more work for an individual law firm.

Example: Once you incur $500,000 in legal expenses in a given year, the firm agrees to supply any additional services at a 5% discounted rate for the remainder of that period. When you instruct $1,000,000 or more of legal services to the firm, the discount increases to 10%.

4. Blended Hourly Rates

Blended hourly rates are a universal hourly rate applied to multiple law firm staff members regardless of seniority. In the absence of a blended hourly rate, each of those staff members would have been billed at separate rates.

Blended rates help provide certainty to in-house teams by ensuring that all work is done at a known hourly rate, and often a rate lower than that charged by senior fee earners under normal circumstances. In addition, blended rates encourage firms to resource efficiently: firms are less likely to provide top-heavy resourcing with partners doing basic work when the blended rate they can charge is lower than the typical partner rate.

However, work instructed at a blended rate still proceeds hourly. To be genuinely cost-efficient with a blended rate, AFA must be monitored to ensure the total number of hours billed is appropriate. ’

Example: Your law firm agrees to work a matter with a blended hourly rate of $500 and charges for all hours billed at this agreed rate, regardless of fee-earner seniority.

5. Contingencies

Contingencies are payment structures based, in whole or in part, on a predefined legal result.

Contingency fees are commonly used in litigation cases where plaintiffs seek monetary relief. They can also be applied to matters involving defendants where the avoided damages determine the contingency amount.

Example: After winning a litigation matter, the law firm bills for a percentage of the awarded recoveries in addition to its baseline hourly rate.

6. Performance-Based Success Fee (Holdbacks)

With success fees, a portion of fees are placed into a separate account and, upon reaching predetermined benchmark fees, are distributed to your law firm, refunded to you, or divided between sides. If the law firm achieves a successful result, it may also receive a multiple of the holdback.

This fee arrangement is most common within corporate practice areas. Holdbacks are more flexible than contingency fees and strengthen the law firm’s existing incentive to work efficiently for a successful outcome.

Example: A performance-based success fee could be applied if your company considers listing on a public market in an IPO. Your law firm would bill a typical rate for their work while charging $10 million regardless of whether your company lists. If you successfully list, they would be entitled to an additional $10 million. This would be the holdback.

7. Retainers

This is a flat fee for specific services provided during a set period.
These fees are largely used in employment and regulatory matters. They are considered the legal industry’s longest-standing AFA and are still growing in popularity. Retainers provide you with pricing certainty and allow your firms to gain knowledge of the unique nature of your organization’s requirements because the law firm is considered an integral part of the team.

Example: Your law firm is kept on retainer for $5,000 monthly to advise on data privacy regulations. Any additional hours the attorney works on this particular matter above the retainer amount of $5,000 will be billed to you. If the case is resolved before $5,000 worth of fees are billed, your law firm will refund you the retainer surplus.

8. Risk Collars

An hourly billing arrangement that rewards efficiency. With risk collars, the law firm receives a bonus if their work is completed under budget or grants you a discount if their work goes over budget.

The actual discounts and bonuses vary from firm to firm.

This fee arrangement is usually reserved for corporate purposes and aims to align your and your law firm’s interests.

Example: You set a budget with your law firm of $10,000 at the start of the matter, but your attorney exceeds that budget by the end. Because of this, you incur a previously agreed-upon 10% discount on the budget total.

9. On-Site Legal Expertise (Secondments)

Secondments are a flexible arrangement in which a law firm employee is placed at a client’s office for a set period to offer dedicated support. Clients cover a portion (or all) of the employee’s salary.

This fee arrangement allows you and your firm to form a true partnership, naturally collaborating and strategizing within the same environment. This provides a unique opportunity for the firm to understand your business and better anticipate your needs intimately.

Example: An attorney from your law firm joins you at your in-house legal department’s office one day per week for five months to help cover your colleague’s absence due to maternity leave.

10. Dead Deal Discount

Dead deal discounts refer to discounts the law firm provides when a deal or matter is terminated or no longer active.

This type of discount is often applied to legal matters, such as mergers and acquisitions, that do not proceed as initially anticipated. The dead deal discount reflects the law firm’s acknowledgment of the change in circumstances and the associated reduction in the scope of work.

Example: A merger deal falls through during the due diligence phase. Your law firm working on the due diligence gives you a 10% discount on work done so far and on any time needed to close the matter.

11. Phased, Budget-Based Billing

This arrangement allows you and the law firm to create a refreshed budget for each phase of a legal matter as it progresses.

You can make more accurate budgets for each phase because you’ll know the obstacles and challenges you faced from previous phases of the legal matter.

Example: During an acquisition matter, you set a separate budget for the valuation, negotiation, and due diligence phases of the process.

Making The Case For Alternative Fee Arrangements

Alternative fee arrangements are a useful tool for legal ops teams looking to manage legal spend.

But you can’t just go by your gut. You need the data to support your decision to pursue an AFA instead of a traditional billing hour. Brightflag gives you those insights.

For instance, Brightflag helps you pinpoint matters that consistently fall within a certain budget range or identify legal services that follow a predictable path. These scenarios are ideal candidates for AFAs like fixed fees or capped billing, ensuring you get the most value for your legal spend.

Brightflag’s robust data analysis will guide you in negotiating the terms of AFAs with your outside counsel. By presenting data-driven arguments about the efficiency and effectiveness of AFAs, you can foster more collaborative and mutually beneficial relationships with your law firms.

Once you have negotiated AFAs, Brightflag automatically reviews your invoices to ensure the AFAs are applied as agreed.

Brightflag empowers legal ops teams to not only react to legal costs but also to manage and optimize them proactively. Embracing AFAs with the backing of solid data from a tool like Brightflag is a strategic move towards more predictable, transparent, and controlled legal spending.

Book a demo with Brightflag today and see how our reporting and A.I.-backed data insights can outline where AFAs would be most beneficial to your legal team.

Alex Kelly

Chief Operating Officer & Co-Founder at Brightflag

Alex co-founded Brightflag after spending more than six years at Matheson, Ireland’s largest law firm, in its financial institutions group. A legal technology thought leader, Alex is a frequent speaker at legal operations conferences on topics related to legal innovation and legal transformation.