This just in from ALM: In spite of all the buzz, an increase in use of AFAs proving much more gradual than forecast in aftermath of 2008-2010 recession. [See the chart below for the reasons behind the slow adoption of AFAs.]
According to results from a new survey conducted by ALM Legal Intelligence, alternative fee arrangements (AFAs) for legal services -- billing methods based on metrics other than an hourly rate – are becoming more pervasive, but still failing to gain the traction that was predicted by industry experts in recent years.
The survey report, “Speaking Different Languages: Alternative Fee Arrangements for Law Firms and Legal Departments,” indicates that only 6 percent of law firm respondents used an AFA in 2011 for more than half of their legal work last year, with the majority (67 percent) using AFAs for less than one quarter of their billing. Similarly, only 12 percent of legal department respondents said they used AFAs for more than half of the legal work they assigned to outside counsel in 2011.
Perhaps even more telling about the lackluster adoption of AFAs is that 6 percent of legal departments and 17 percent of law firms did not even know what percentage of their legal work was billed using a method other than the billable hour or discounting.
These results are among the thought-provoking findings of the survey, which was conducted last month by ALM Legal Intelligence and sponsored by LexisNexis® CounselLink®. To download a free copy of the report, please go to http://almlegalintel.com/Surveys/AFAreport.
“To get an all-around and fresh take on the adoption of AFAs, we connected with more than 200 law departments and more than 200 large law firms in the U.S.,” said Kevin Iredell, vice president of research and continuing education products at ALM. “The results of this survey suggest that the billable hour remains entrenched, despite widespread reports that clients are dissatisfied with the practice. However, we also found that the vast majority of both corporate legal executives and law firm partners expect the adoption of AFAs to continue to rise in the next five years.”
According to Iredell, other highlights of the survey findings included the following:
- Law firms’ and companies’ opinions differ as to who they think is responsible for the lag in AFA adoption. According to law firms, the top obstacle to increased use of AFA billing focuses on either side feeling more comfortable with hourly billing in general. Legal departments agree, but they go on to find lack of experience in defining and managing work and billing matters on a basis other than hourly as big a stumbling block for both parties.
- Despite the slow adoption rate, the use of AFAs is clearly growing. About 62 percent of law firms saw an increase in the use of AFAs in 2011, with only 2 percent citing a decrease and the remainder seeing no change. Half of legal departments saw an increase, with 49 percent saying that the number remained the same and only 1 percent that experienced a decrease.
- The top three choices for types of alternative fee arrangements used by both firms and departments were: flat fee (89 percent of departments, 93 percent of firms); blended rate (47 percent of departments, 89 percent of firms); and capped fee (57 percent of departments, 83 percent of firms)
- About 70 percent of legal department responses predicted an increase of AFA use from 2012 to 2016, with 26 percent thinking the amount will stay the same and just 4 percent expecting a decrease. Almost three-quarters of law firms (74 percent) expect an increase in AFA work over the same time period, while 14 percent think that things will be the same and, again, just 2 percent expect a decrease.
“Both corporate counsel and law firms continue to struggle to find ways to make alternative fee arrangements work for them,” said Kris Satkunas, director of Analytic Consulting for LexisNexis CounselLink. “LexisNexis has developed advanced solutions to help both law firms and corporate legal departments identify the types of matters that best lend themselves to AFAs, to model different fee arrangements and pricing scenarios to achieve better cost predictability, and to track performance throughout the lifecycle of the engagement.”