Alternative Fees cannot simply be a different route to the same end. If AFAs merely become a surrogate for what would have been charged under the hourly model, nothing has changed and we have learned nothing. The wolf in sheep’s clothing is still a wolf.
In the absence of hard before and after data, the only way to know whether an alternative fee is a surrogate for that which one is seeking to avoid or something truly different is to find out what changes the firm proposing the alternative fee has made to change the firm’s historic reliance on the hourly rate model. A few simple questions will reveal whether subtantive chance has occurred at the DNA level or whether the firm is merely grasping at any revenue to come along. The latter ought be avoided.
For example, every lawyer proposing an alternative fee should be able to describe how he or she will handle the matter differently than it would be handled on an hourly basis. It is a really uncomfortable question, though, because the answer almost necessarily carries within it an admission that too much needless lawyering has been conducted previously. The lawyer should be able to point to different business tools being utilized, such as project management, early case assessment, more aggressive mediation efforts, decision trees and so on.
Beyond use of tools and practices directly related to the specific matter, the lawyer must be able to point to cultural changes as well. Are there minimum hour requirements? Does the firm track the billing lawyer’s realization rates by comparing the amount received to the the amount that would have been received had the matter been billed hourly? How is the firm incentivizing cost reduction? Does the firm analyze profit margins on particular engagements? If so, how? Changing cultural DNA does not happen with the flip of a swith. It is a long and painful process, and there should be plenty of stories one experiencing it can share.
Changes must happen in-house as well. Pam Woldow of Altman Weil has just published a fantastic article, GPS for General Counsel: Navigating Fee Transition. This must read article addresses the change in mindset that inside counsel must make to derive real value from AFAs. Pam offers the best response to the "how do I know I’m getting a good price" concern that I have yet heard:
Some general counsel worry about whether it can be shown that AFAs
were in fact set at the “right” level. What they fail to grasp is that there
is no right or wrong price. There never has been, and there never will
be. Existing billable hour rates don’t necessarily represent the “right”
price; they are variable and only reflect what a firm hopes the market
will bear or how much pricing leverage it believes it enjoys.
In other words, there is nothing inherently right about the price paid when paying by the hour. The hourly fee is simply a point of reference. Pam drives home the point when she quotes John Chisholm of JC Consulting, who notes “This is how the CEO and the CFO of a company operate. Indeed it is how the company operates.” For General Counsel, who for so long have longed to have a place at the business table, failing to seize this opportunity to place the law department in league with their business colleagues will be a huge lost opportunity.