As I have said before, the push to Alternative Fee Agreements (AFA) on the part of attorneys is due to two factors and two factors alone. The primary factor for attorneys is that so many are maxed out on what they can earn through traditional hourly billing and the only available avenue to increase revenue is through the use of AFA.
The other factor driving the push by attorneys to AFA is that many corporate clients including most insurers have turned to either internal or external legal bill review programs to wring out excesses in legal billings. So padding legal bills to increase revenues or to try to make up for lower hourly rates is no longer an option for many attorneys.
For clients, particularly insurers, they are not concerned at all about attorneys making more money. Quite the contrary. The one and only factor for isnurers to even consider an AFA is it will save on legal costs. Thus it is that the siren song appeal of flat fee agreements is sometimes too alluring for some insurers to resist. But, of course, an AFA which merely caps legal costs is no cost savings at all as it may actually lock in excessive legal costs. To truly benefit the client, an AFA must actually reduce legal costs.
As I stated in “Reverse Auctions: Racing to the Bottom for Lawyers,” for any AFA to work, it must be a true win-win situation for both the attorney and the client. But is a “win-win” situation even possible if the attorney and the client have polar opposite goals when it comes to making or saving money by using an AFA?
In a future post, I will discuss some things that insurers should consider when evaluating an AFA proposal to ensure that the AFA is actually going to meet their goal of saving on legal costs. I will also discuss some things that law firms should do to be able to not only support the insurer’s goal of saving on legal costs, but also support the firm’s goal of not just increasing revenue, but of making more profit.
In the meantime, please feel free to contact me if you have an AFA you would like to discuss.