Many company authorized departments and legislation companies have gone “all in” on various charge preparations, whereas others have chosen to not undertake them in any respect. After greater than a decade in frequent use, solely a mean of 23% of authorized work is carried out beneath an AFA regardless of vast acknowledgement of their advantages. Why does this divide exist? It isn’t nearly monetary threat but in addition execution.
The most important barrier to AFA success: overcomplication
The primary advantage of implementing AFAs into authorized operations is that it simplifies authorized billing by shifting the main target from hours labored to worth delivered. Nevertheless, many organizations unintentionally introduce complexities that diminish their effectiveness.
A typical mistake is layering conventional billing oversight onto an AFA mannequin. Authorized departments usually add necessities that make it tougher for legislation companies to execute AFAs effectively. For instance, when authorized departments count on compliance with hourly billing pointers and in depth reporting, it contributes to the complexity of AFAs and creates further administrative burdens for out of doors counsel. Requesting {that a} agency present hourly breakdowns whereas adhering to a fixed-fee mannequin undermines effectivity and may make AFAs unattractive.
With that in thoughts, let’s discover how departments could make AFAs a win-win for everybody.
4 important pillars of a profitable AFA
To realize the very best outcomes from AFAs, legislation departments and companies ought to concentrate on 4 key pillars when negotiating phrases.
1. Effectivity
AFAs ought to cut back administrative work, not enhance it. If a authorized staff requires the identical stage of oversight as conventional hourly billing, or probably much more, it negates the effectivity beneficial properties that make AFAs engaging for either side. Saving time on matter-by-matter bill evaluation and steady finances and forecasting updates are additionally value-add causes for leveraging AFAs. To streamline the strategy, focus the success of AFAs on worth not line gadgets. Is the specified end result to keep away from trial? Did the agency get you a decrease than firm common settlement quantity? In that case, the price ought to mirror the worth of that end result. The variety of hours labored and whether or not they’re invoiced at an agreed upon charge shouldn’t matter and diminish the aim of utilizing AFAs.
2. Predictability
AFAs create predictability, which may in flip extra precisely forecast authorized prices. With flat or fastened charges, you understand upfront what you will spend. For portfolio work, when a brand new matter is available in you understand what it’s going to price and have already included that in finances. Decreasing volatility and guesswork may also help authorized departments higher allocate budgets, plan for future bills and negotiate favorable phrases with outdoors counsel.
3. Value financial savings
Value financial savings are a key driver behind the shift to utilizing AFAs, however financial savings can not come on the expense of effectivity. A hyperfocus on lowering prices on each particular person matter can result in restrictive charge constructions that discourage legislation companies from taking over work as a result of the executive price of adhering to the AFA will possible outweigh the advantage of the association. For AFAs to succeed, some stage of threat should be current for each the legislation agency and the company authorized division. Legislation departments and outdoors counsel should work collectively to steadiness monetary management and operational flexibility for AFAs to achieve success.
4. Relationships and strategic alignment
Past effectivity, predictability and value financial savings, the success of an AFA additionally is dependent upon the standard of the connection between the company authorized division and the legislation agency.
AFAs needs to be grounded in a strategic partnership based mostly on belief, transparency and shared enterprise targets. Organizations implementing AFAs efficiently acknowledge that pricing constructions ought to align with broader authorized and enterprise goals. If lowering litigation spend is a enterprise goal, create phased AFAs specializing in incentives for the legislation agency to settle issues earlier, recognizing {that a} greater price to settle the case earlier nonetheless achieves long-term financial savings and in addition preserves enterprise status—one other value-add. If an organization is seeking to develop market share, making a portfolio-level charge association with a single agency for environment friendly contract evaluation won’t solely velocity up turnaround instances, but in addition save administrative work to supply and evaluation a excessive quantity of invoices for each company authorized departments and legislation companies.
The simplest AFAs incorporate open communication, clear expectations, and a shared understanding of threat and reward. When each events strategy AFAs as a collaborative effort moderately than a cost-cutting train, they create a sustainable mannequin that advantages everybody concerned.
The position of generative AI
A lot dialogue exists about how generative AI might catalyze the authorized trade to maneuver away from the billable hour, however it’s too early to say if that can occur. Most legislation companies’ and authorized departments’ constructions and processes stay firmly constructed round billable hours. Moreover, companies and authorized departments are nonetheless testing generative AI use instances, and lots of legislation companies are nonetheless studying and deciding easy methods to take in the prices related to generative AI implementation.
Generative AI may also help make engagement between legislation companies and authorized departments extra environment friendly, productive and communicative—beginning with the “Request for Proposal” stage. For instance, generative AI can evaluation massive information units to find out prices, budgets and end result expectations for repeatable duties or sure matter sorts, all of which may set clear expectations from the start based mostly on previous billing and efficiency. Company authorized departments can use generative AI to assist create the RFPs and evaluation responses, whereas companies can make the most of AI of their evaluation and response.
What generative AI can not do is take the place of individuals in “individuals, course of and expertise.” It doesn’t negate the necessity for clear and candid communication about expectations, targets and values. As a substitute, generative AI embedded in current authorized applied sciences can monitor issues from consumption via execution and evaluation. It could actually pick inefficiencies and spark precious conversations about managing issues successfully and staying on monitor to ship optimum outcomes.
The trail ahead: Making AFAs work
For AFAs to ship on their promise, organizations should transfer past a cost-savings mindset and undertake a completely strategic strategy. Somewhat than focusing solely on lowering authorized spend, company authorized departments and companies ought to use AFAs to:
- Streamline administrative processes.
- Enhance finances predictability.
- Align authorized work with enterprise goals.
- Foster stronger, extra collaborative relationships.
By treating AFAs not simply as a pricing mechanism however as a partnership framework, authorized groups and legislation companies can transfer past the inefficiencies and poor notion of hourly billing and create a extra sustainable, value-driven strategy to authorized work. This strategy will undoubtedly require a cultural shift from each company authorized departments and legislation companies, however legislation departments are in prime place to extend communication and lift consciousness of the need to shift the pricing framework.
Rising communications and embracing the change will enable AFAs to flourish, leading to better effectivity, predictability and strategic alignment. When this stuff come collectively, inner groups and outdoors counsel can focus their time predominately on outcomes over processes.
Jennifer McIver is the director of authorized operations and trade insights at Wolters Kluwer ELM Options.
Thoughts Your Enterprise is a sequence of columns written by legal professionals, authorized professionals and others throughout the authorized trade. The aim of those columns is to supply sensible steering for attorneys on easy methods to run their practices, present details about the newest developments in authorized expertise and the way it may also help legal professionals work extra effectively, and methods for constructing a thriving enterprise.
Focused on contributing a column? Ship a question to [email protected].
This column displays the opinions of the writer and never essentially the views of the ABA Journal—or the American Bar Affiliation.
