K&L Gates does it. O’Melveny & Myers is now doing it, and a whole raft of firms are said to have been considering it recently. We’re talking of course, about AFAs – alternative fee arrangements – a trend sweeping across the global legal industry. It’s all thanks to the financial crisis, which has caused clients to cut back their legal spend and scrutinise their bills more closely than they may have done during more prosperous times.

Clients are putting pressure on firms for flexible billing arrangements, whether it’s offering a discount or fixing fees. Those law firms that have recently implemented AFAs have done so for a number of reasons – in response to client demand, to keep their customers loyal, or to stabilise the balance sheets. As one in-house counsel put it, it certainly is a buyer’s market.

The right price

While the AFA is certainly not a new concept, its fuller implementation has arguably gained momentum with the advent of the financial crisis. “People asked for alternative billing before the crisis,” explained Benny Tabalujan, the director of a Melbourne-based consultancy, Institute of Knowledge Development. “It’s just that the crisis has made clients very cost-conscious. From an in-house counsel’s perspective, uncertainty in their legal bill is undesirable and they’re all watching out for costs. Whether it’s through a capped or formula-based billing method, [it] has certainly refocused their attention.”

Jane Niven, Asia-Pacific general counsel at real estate and financial business Jones Lang LaSalle, said the GFC had changed the relationship between in-house and law firms in a positive way. “In Asia, the crisis has impacted on the way some law firms are beginning to respond to queries,” she said. “Once upon a time you’d never question your lawyer’s bill but now it’s almost as if they expect it.”

Niven’s legal department can more freely push for discounts or cutting back the hours clocked by partners overseeing junior lawyers on transactions. “We are certainly pushing back hourly billing, and we’re getting a relatively positive response,” she says, estimating that on a global basis, the company fixes 20% of its legal fees. Her department is not the only one pursuing AFAs. Recently, multinational corporations such as Citigroup, Cisco Systems, American Express and Pfizer have all asked external counsel for alternative fee arrangements.

The Institute of Knowledge Development claims that up to 40% of the external legal spend of some of the largest companies in Australia are now fixed. “Fixed fees have grown in popularity simply because clients are saying, ‘in any other part of our business when we purchase a service we get a fixed fee, so why does law have to be different?’” said Tabalujan. “Increasingly, this is not driven by in-house counsel but their CEOs. At the end of the day they’ve got to stick to a budget.”

There is growing concern among clients that hourly billing is no longer a satisfactory arrangement. “The obvious downside for time-based fees is that they could spiral out of control,” said Karl Chong, head of legal, compliance & secretariat at DBS Bank Taiwan. “It also creates an environment for law firms to be less efficient.”

One of the other big problems is that in a traditional service-provider arrangement the provider assumes risks, but with the billable hour arrangement, risk is assumed by the client. “If you don’t have a consistent methodology to review your invoice from outside counsel, you have essentially encouraged inefficiency,” said Nicky Mukerji, global director of business intelligence at Legalbill, a costs consultancy for in-house counsel.

Firm flexibility

With preferences for AFAs growing, are law firms just jumping on the bandwagon? International firms such as K&L Gates, Mayer Brown, O’Melveny & Myers and Reed Smith have recently made headlines for endorsing AFAs as part of new initiatives. According to a leaked five- year strategic plan, OMM is looking to become “the leader in providing high-end legal services on a fixed-fee basis.”

Mayer Brown chairman Bert Krueger said that his firm is adjusting to the times. “When we enter into these arrangements we understand that they must work for the clients, and the clients understand that they must work for us. To be durable, we may need to make adjustments over the course of time to ensure that the arrangement meets those mutual goals,” he said. Mayer Brown did not confirm whether its Asia merger partner JSM would be affected by the directive.

The Asian legal market is characterised by many smaller players who, because of their size, are sometimes more flexible than international firms in offering AFAs. Indeed, Jones Lang Lasalle’s general counsel suggests it’s the smaller firms that are more responsive to providing alternative arrangements. Some are even approaching clients first with a proposal. “Many smaller firms are actually coming up with these solutions and I think that is in part driven by the fact it’s much harder for small and mid-sized firms to get access to multinationals and it’s also more likely they will lose out in a bad economy,” Niven said. “They’re looking to make proposals for alternatives and it’s definitely very interesting.”

Niven has mixed feelings on the question of whether it’s worth paying high hourly rates for international firms. “Generally speaking, with the large firms you do tend to get quality,” she said. “But particularly in situations where you have a longstanding relationship, you also tend to get complacency about quality and cost-charging. I like to throw smaller firms in the mix, to make the bigger firms understand that they are not the ‘be-all-and-end-all’ and I have alternatives, which does tend to help.”

Introspection

The recent debate around the billable hour is not new and we may never see the ‘death of the billable hour.’ Many in-house counsel (who may themselves once have been private-practice lawyers) are more familiar with the hourly model. “Even if the world’s biggest firms get together and move to flat fees, personnel management and case strategy will still be based on the hour [rate],” Legalbill’s Mukerji said.He estimates that currently only 2% of billing worldwide is on a fixed-fee basis.

Nevertheless, if there’s one thing which the crisis has provoked it is introspection and innovation within firms, something that in-house counsel are always happy to see. DBS Bank’s Chong said that regardless of the crisis, firms should always tailor services to client needs. “While I think many are able to accept that cost is not the only factor in determining price or value, law firms should bear in mind that clients will always look for value from them,” he said. “If the market moves in the direction [of AFAs] … law firms are more likely to be motivated to provide the best solution for clients. We will favour the firms that support this approach.”

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