Inside Straight: Alternative Fee Agreements For Beginners
Egad! The General Counsel just announced that your target for next year will be to handle 20 percent of all outside legal spend on an alternative fee basis! What do you do?
You can’t just do flat fee agreements! What happens if you agree to pay too much, and you’ve given away your client’s money? And success-based fees are a great idea, but they’re impossible to calculate! How does anyone know at the start of a piece of (non-routine) litigation what the case is worth? Since you don’t know the value of the matter, you can’t set the target from which you’ll judge success.
What’s an in-house lawyer to do?
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Calm down. Here’s a way to ease into alternative fee agreements that will put neither you nor your outside firms at risk, will educate you slowly over time, and will meet your internal objectives….
Simply agree with outside counsel that you’ll withhold 20 percent of each month’s bill. At the end of the matter, you’ll rate the outside lawyers’ performance on a scale of one to five. If the firm gets a one, then the firm receives no success fee. If the firm gets a three, then you pay the firm the withheld 20 percent. If the firm gets a five, then you pay the firm 120 percent of its usual hourly rates.
If that’s too radical for you, then don’t withhold 20 percent of the firm’s fee. Withhold only ten percent. That makes your little experiment even safer, but it still creates some experience upon which you and outside counsel can build in the future.
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How do you grade the firm?
However you like, but be transparent. At the outset of the engagement, pick some factors that matter to your client and that should logically matter to the firm. Those factors could include quality of work product, ability to manage to a budget, ultimate outcome of the matter, diversity, accuracy of the firm’s early case assessment, or whatever else you like. If you don’t know what you like, then some e-billing systems (such as Serengeti) will propose criteria by which you can judge your law firms.
(If you’re interested in using more alternative fee agreements in the future, then “accuracy of the firm’s early case assessment” might be a particularly good metric. If your concern about success-based billing is that you can’t judge at the outset the value of a case, then let outside counsel value the case at the outset, and have part of counsel’s fee turn on the accuracy of that assessment. At the end of the case, you still may not know precisely what the case was worth, but you (and outside counsel) may have learned a great deal from having run that experiment.)
What’s the benefit of taking this baby step into alternative fee agreements?
First, if your corporation set a goal that a certain percentage of matters should be billed on an alternative fee basis, you can meet your goal.
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Second, using baby steps helps you to educate yourself (and outside counsel) about the pros and cons of alternative fee agreements without putting you (or outside counsel) at too great risk.
Third, baby steps are a good place to start. If you run an experiment this year putting 20 percent of a firm’s fee at risk, perhaps next year you’ll be emboldened to move to 30 percent, and who knows where you’ll go from there?
There are, of course, limitations to taking only baby steps. The proposal that I’ve just outlined is still tied to a firm charging you by the number of hours worked times an hourly fee. For the true innovators in alternative fee agreements, anything that smells of hours times rates isn’t sufficiently radical.
But at least it’s a start. Take the baby steps, and see where you go from there.
Mark Herrmann is the Vice President and Chief Counsel – Litigation at Aon, the world’s leading provider of risk management services, insurance and reinsurance brokerage, and human capital and management consulting. He is the author of The Curmudgeon’s Guide to Practicing Law (affiliate link). You can reach him by email at [email protected].
