Alternative Fee Arrangements 101: The Why, What and How of AFAs

By Gabriella Khorasanee, JD on October 28, 2013 | Last updated on March 21, 2019

Alternative fee arrangements have been growing in popularity, especially among GCs of Fortune 1000 companies. With company budgets getting smaller, it's imperative that in-house counsel find more cost-effective ways to work with outside counsel on complex matters and litigation.

Shy about approaching outside counsel about alternative fee arrangements? Don't be. Chances are, you are not the first to raise the issue with her, and you won't be the last. If you are unsure about how to broach the subject, here are some of the most popular types of alternative fee arrangements. If you know what kinds of existing agreements are out there, you'll have something in your back pocket in case your outside counsel is at a loss.

1. Contingency Fee

Contingency fees are normally a pre-agreed upon share or percentage of the lawsuit recovery, normally seen in workers' compensation and personal injury claims, according to the ABA. However, in large firm/company practice, the client may also carry the expenses associated with litigation, such as the cost of exhibits and experts, notes Kirkland & Ellis LLP.

2. Fixed Fee

You can decide up-front what you want to pay outside counsel, and not a penny more, for a particular service. You can structure the fixed fee so that it's paid in one lump sum, in monthly installments, or after certain phases of the project.

3. Success-based Fee

These go by different names, performance bonus, success fee or holdback fee -- regardless of what they are called, they are basically the same. If outside counsel successfully closes a matter, then she will get her fee. Often, success-based fees are coupled with some form of payment up front in the form of a discounted hourly rate.

4. Volume Discounts

If your company is going to give a firm a lot of business, don't be afraid to ask for a volume discount.

5. Blended Rates

If you (or outside counsel) want to approach AFAs slowly, you can try with discounted hourly rates, or blended hourly rates. Blended hourly rates dictate that "[a]ll lawyer time is billed equally, regardless of seniority," according to the Association of Corporate Counsel.

6. Hybrids

The beauty of alternative fee arrangements is that they are customizable to what suits your company, and outside counsel. Not all lawyer-client relationships are the same, so you can tailor your fee arrangements to what makes sense in your industry. Don't be afraid to negotiate or convince outside counsel of your point of view -- you're a lawyer -- that's what you get paid to do.

If your company has not yet begun to use alternative fee arrangements, you should seriously consider it. Based on industry trends, it seems like AFAs are the future of legal billing.

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