A Word About Evaluating Alternative Fee Agreements

I am often asked what is the one thing that insurers should look for in evaluating an AFA agreement.  My response is always to not just look at the bottom line but to also look at the firm’s business model.   Can the firm’s business model support the AFA?

If you want to get the “deer in the headlights look” from an attorney who is pushing an AFA as a way to save defense costs, ask what has the firm done differently in its business operations to be able to support the AFA.  If they have made no real changes, then they probably don’t have a clue whether they can sustain an AFA model for their insurance defense work.

In questioning a firm on what they have done from a business model perspective to be able to support an AFA, focus particularly on what changes the firm has made to its office operations and in particular, how it uses technology.

At the Indiana State Bar Association  2012 annual meeting, a Mississippi attorney who has turned to exclusively using AFAs stated that one of the first things he did to be able to support the AFAs was to fully utilize technology in his practice.  He gave an illustration of how utilizing technology helps him do in 7 minutes what it might have taken him an 1 hour or more to do.  His message to the audience was that embracing technology in his practice was one of the main things that enabled him to move to using AFA.  While all law firms use technology, I have found that this mainly consists of using computers for exchanging e-mail.

Unfortunately, most law firms today still follow a mid-20th century business  model when it comes to running their office operations.  In what other business today, do you find non-senior executive level employees in private offices?  In what other business today do you find non-senior level employees dictating correspondence to private secretaries?  In what other business today, do employess download electronic documents and convert them to paper documents just so everyone on the “team” can have their own separate paper file of documents?

I could go on with other examples.  But I think you get the point which is that if a law firm has not made any changes in their business model to be able to support what is being sold as a more cost effective AFA, then it is likely that the firm will not be able to sustain the AFA.

Where firms are trying to fit a AFA business model into an hourly business model, I have found that invariably corners likely will be cut by the attorneys or the attorneys will not be responsive to or resist insurers’ requests for certain additional work in the assigned cases.  In the end, the insurers just will up paying cut rate fees for cut rate defenses and the law firms will wind up not making a profit on assigned cases.  Not exactly a “win-win” situation for anyone.

Of course there are other considerations that need to come into play when considering an AFA  including what motivates the firm to want to enter into an AFA.  If the firm is doing so mainly because they have had past problems with being able to ethically bill their time, then you probably should not enter into an AFA with that firm.  This is because “ethical lawyers don’t have   . . . problems with hourly billing  . . . and unethical lawyers will have problems no matter what kind of billing system is used.” David Waxse, Comments and Alternatives to Hourly Billing, 68 Kan. B. A. 1.

Please feel free to contact me if you are considering an AFA or would like help in evaluating the cost effectiveness of a current AFA.

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One Response to A Word About Evaluating Alternative Fee Agreements

  1. Ted Waggoner says:

    Good points John. But counsel has to be prepared that “sharing the process changes” will result in further cuts by the corporate client. Reading this reminds me of the recent tax discussions: raise taxes vs. cut loopholes. So we accept raising taxes, and demand the loophole cuts. The win-win is when the client gets better results and the law firm makes higher profits.

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