How Many Alternative Fee Arrangements Are There?
The death of the billable hour has been greatly exaggerated over the years. Billing by the hour for services rendered is standard and will always be on the table — in the legal industry and beyond. But, clients are increasingly demanding alternatives fee arrangements (AFAs). In other words, clients want efficiency, transparency, and affordable and predictable costs for legal services and law firms must comply or lose the business. It’s a component of delivering exceptional client service.
There are many such special or alternative fee arrangements to consider, including fixed or flat fees, contingency and reverse contingency fees, and value or success based fees. These arrangements can be firm-wide, by client, or matter-specific. A firm can have as many different types of arrangements as they have clients. However, it helps to have a core few to work with so clients and the firm don’t feel overwhelmed with too many choices. Here’s a summary of the more commonly used alternative fee arrangements, many of which can be, and is often, combined to form a hybrid fee model.
Fixed or Flat Fee – The firm negotiates an agreed-upon cost for handling a case or matter. This is generally simple and straight-forward, and is among the most popular alternative fee option. The advantage for the client is predictable cost, and for attorneys, the catalyst to improving processes, productivity, and technology. The downside for the firm is unexpected costs, so these arrangements are most useful for routine legal services with little or no risks for complication.
Contingency Fee – Another popular option is a contingency fee model where the firm assumes the outcome risk: the firm gets paid only if the case is handled successfully – collecting a percentage of the settlement or money won at trial. This is often used in cases such as personal injury and workers’ compensation where money is being claimed. Regardless of the outcome, the client generally pays for court filing fees and other administrative functions related to the case.
Reverse Contingency Fee – Fee is based on the difference between the amount being demanded from the client by the party making the claim, and the amount obtained from the client — usually, a percentage of the amount saved for the client.
Success Fee – The client and the firm first define what results will constitute “success.” The firm then charges the client a reduced base fee up front with an additional fee due if the outcome of the case is successful. The firm shares in the downside (reduced base fee) and the upside (additional fee for successful outcome). The upside for the client is a lower base fee and incentivizing the firm to obtain a successful outcome.
Retainer Fee – This popular fee arrangement is when a client pays a fixed recurring fee over a period of time for specific work. When the period expires, the arrangement is reviewed and adjusted. It provides predictable costs and attorney availability for the clients. A typical retainer agreement runs for one year with a fixed monthly fee.
Hybrid Fee – Any combination of the fee arrangements listed here is considered a hybrid fee arrangement. Hybrids appeal to cost-conscious clients while allowing the firm maintain cash-flow. A typical hybrid arrangement may involve negotiating a lower hourly rate with a contingency fee model allowing the client affordable access to legal services with the promise of a payout to the firm if a favorable outcome is achieved.
Some fee arrangements are better suited to transactional work while others may find a comfortable home in litigation firms. And, just how many alternative fee arrangements are there? As many as you need, crafted to fit the needs of a particular client, matter, or case.