Six ways to avoid the traps of alternative fee arrangements in legal procurement
“You have 10 minutes to create a financially sound alternative fee arrangement (AFA) with an appropriate law firm based on your client’s instructions, and your time starts…now!”
I used this exercise at the Buying Legal Council’s recent legal procurement conference to see what kind of solutions teams of lawyers, procurement professionals and consultants would create. Of course you would have a far longer amount of time to strike a win-win AFA deal between your stakeholders and your selected law firm. But whether 10 minutes or 10 hours of preparation and negotiation, how do you know you’re not being hoodwinked, taken advantage of or locked into unsuitable terms?
The following are Proxima’s top tips for negotiating and actualizing a successful AFA legal contract:
Obtain up-to- date rates and reference data
While the payments you ultimately make to your contracted law firm are not by billable hour with an AFA, they are based on the hourly rates of all those who work on your account. With ready-at- hand comparative rates from numerous firms during negotiations, you’ll be able to identify market averages for comparable firms and work types, and subsequently agree upon rates that are acceptable to both parties. This rate negotiation can equate to large sums of money, e.g. to the tune of £50,000 off £1 million spend when a £500 per hour fee is negotiated down by just £25/hour.
Use recognized, properly referenced data points
The comparative data you use to negotiate rates also needs to address the location and type of work the law firm is conducting, or you may run the risk of falling victim to partner fluff and subjective arguments. You shouldn’t pay premium London or Los Angeles rates for M&A work if your engagement is for commercial contract work in Brighton or Boise. Be as specific as you can.
Understand your prospective law firm’s current status and strategy
Mergers among law firms, entire teams of lawyers lost to another firm, aspirations to move into new markets and similar disruptions are nearly daily occurrences in the legal market. These can work to your advantage if you have inside knowledge. For example, if a short-listed firm is merging soon with another that focuses on a fully different type of law, you’ll likely be assigned a “B-team” that won’t be optimal, regardless of the price. On the other hand, if you have a sizable program that will help a short-listed firm gain a foothold in an emerging area it’s pursuing, you’ll have a very strong negotiating lever.
Be clear about what your ideal approach looks like
Procurement is evolving into a much more innovation-oriented function. But while it is excited about “the art of the possible,” it must still operate on behalf of and within the parameters drawn by its stakeholders. For example, while a key stakeholder might insist that a contract be secured with a specific law firm at the firm’s stated, non-negotiated rates, procurement should keep its eyes on the prize of what it might be able to negotiate later.
Create messaging, and stick to the script
Although great procurement departments keep their perfect deal in mind for the future, they must agree in advance what their stakeholders want to achieve and will accept, and must adhere to those guidelines during the original negotiation. Doing so is the only way to establish and maintain a solid relationship with your internal stakeholders and the engaged law firm.
Have a clear and transparent record of what has been negotiated
Finally, make sure you document and fully understand all aspects of the discussion with the law firm including the deliverables. There are plenty of choices available including output-based arrangements. For example, a fixed fee agreement for $500,000 each month for six months might sound like a good, money-saving deal to your stakeholders. But do you know what you’re getting for that half a million dollars per month? Do you know what the law firm will actually be doing, and who at the firm will be doing it? Might the agreement actually be more valid at $600,000 for the first ramp-up month, then $350,000 per month thereafter? Full transparency is the only way to know if your deal really is good and will deliver the value you’re paying for. Clarity about what is in or out of scope can also prevent the agreement reverting to T&M when things get difficult.
What’s your experience with AFAs? What levers have you pulled to negotiate and secure the best possible deal?