AFA 3.0 – the Evolution to Effective Fee Agreements: Part 1 (The Problem)
The recent “9th Annual Litigation Trends Survey” by Fulbright & Jaworski revealed, somewhat surprisingly, that the use of AFAs may be trending down. Corporate Counsel summarized the finding of the survey in “AFAs Trending Down in U.S. and U.K.” Notable findings include:
- AFA use dropped from 62% in 2011 to 52% in 2012.
- In 2011, 52% of US companies said they intended to increase AFA use; but for 2012, only 39% expect to increase AFA use.
- The UK shows the opposite: In 2011, only 29% of UK companies intended to increase AFA use; for 2012 that number increased to 42%.
A few more findings about the perceived effectiveness of various AFAs are interesting, and again, differ between the US and UK:
- US companies favor fixed fees, followed by blended rate and capped fees.
- UK companies favor performance-based fees (doubling in popularity from 2011 to 2012) and appear to have had it with blended fees (only 17% rated blended fees “very effective” in 2012, a massive drop from 77% in 2011.
One final finding:
- 76% of respondents reported they were satisfied with the “quality” of work being done under AFAs.
So what gives? One would think that a 76% approval rating would lead to increased AFA use, rather than the reported downward trend. A good starting point to any analysis was set out by Patrick McKenna in “The State of Alternative Fee Arrangements (Post #650).” Mr. McKenna argues that the data suggests that despite AFAs being effective, many GCs still remain resistant – in fact, almost half don’t use AFAs at all. McKenna labels this resistance “Massive Passive Resistance (MPR)”:
The fundamental question remains: What’s in the way? What’s holding us back? The answer – GC passive resistance coupled with politically correct focus on value and quality. Our profession’s general aversion to risk, focus on precedents as opposed to innovation, and self-indulgently skewed view of what really distinguishes legal work from other work conspires to support the status quo. Besides, it’s a potentially career limiting move for an AGC or DGC – let alone a staff in-house counsel – to move to AFA’s unless they have air cover from the GC.
The antidote – CEO and CFO have to break that resistance by making it important to their GC – yet the issue isn’t really on their table of strategically important items.
An even simpler explanation is given by Patrick Lamb in “Why do General Counsel Fear Alternative Fee Arrangements (via the ABA Journal)”: real change of any type, whether dieting and exercise, or switching to AFAs, is “really hard”:
When change is hard, many people default to change lite. Lawyers are no different. When the marketplace suggested that clients hated the hourly fee billing system, lawyers began to offer what they called alternatives to the hourly rate. But rather than making the structural changes to their business models needed to extract maximum value for themselves and provide maximum value for their clients, lawyers opted for change lite. What does this mean? Again, [Richard] Susskind’s book ["Tomorrow's Lawyers"] succinctly states the answer:
“Alternative fee arrangements seem to be failing to deliver significant savings for clients for at least two reasons. The first is that most AFAs are derived from hourly billing thinking. For example, the starting point of many law firms is the amount that would have been charged on a conventional hourly basis.”
Smart companies and clients, however, don’t get complacent and aren’t afraid of hard work – hard work that can and will result in optimizing legal spend through the adoption of effective AFAs (v. 3.0) – which I prefer to call EFAs or WWFAs (Win-Win). But, before we get to where we need to be (v. 3.0), my next installment will examine where we’ve been (v. 1.0 & 2.0).
Update: 3 Geeks and a Law Blog’s “Trends in Legal Pricing?” also discusses the Fulbright survey results.