THE ALTERNATIVE | AFA
Expectations are Manageable
42 | LitigationManagement | summer 2011
By Jeffrey A. Vanderpool and James A. Loeffler
Mention alternative fee arrangements (AFA) to utside counsel and many are likely to put their hands to their ears, not because they’re unwill- ing to change, but because of the perceived fi- nancial risk they are asked to assume in the face
of unclear client expectations. But when both client and outside
counsel expectations are clearly communicated, client cost predictability and law firm profitability are not mutually exclusive.
Companies want results-driven predictability in their legal spend
and will reward efficiency. They also want an open and transparent environment that caters to flexibility. Companies also want
their law firms to be profitable. After all, a mutually beneficial arrangement is the only way an AFA will work.
Predictability and Profitability
For maximized predictability, a pure flat fee AFA that pays a certain periodic amount, regardless of results and of the time and resources expended can work well for both parties in some situations,
but may be detrimental to the firm in others. While the company
gets the desired predictability, the law firm may assume financial
risk without upside reward. Therefore, clients with successful AFAs
expect to shift both risks and rewards to the law firm.
Defining a Win
The client and outside counsel must agree on how a win is defined. Perhaps a win occurs when the settlement amount is below
a certain threshold or a claim is settled within a certain timeframe
of being filed. A win should consider both the acceptable settlement threshold (effectiveness) and the time to resolution (
efficiency) within the confines of the quality of representation and
other ethical standards. The firm should expect to benefit from
such value-driven results, such as a percentage of the settlement
savings and/or a resolution time bonus. In any case, all details of
this value-reward structure must be clearly articulated.