Alternative Fee Agreement Savings: Real or Illusory?

As I have stated in prior posts,  when it comes to the subject of alternative fee agreements (AFA), clients and their lawyers have diametrically opposing reasons for wanting to enter into them. When lawyers bring up the subject of AFA, it is usually with the idea of possibly making more money than they could than by doing straight hourly billing. And when insurers or other corporations bring up the subject of AFA, it is usually with the idea of possibly saving money.

When it comes to whether clients can save on legal costs by moving to flat fee billing – especially when lawyers are looking to make more money – I must admit to being a skeptic. Most flat fee agreements produce winners and losers which is hardly a good basis for measuring the true success of a flat fee agreement or to promoting a long term relationship. Moreover, most flat fee agreements that I have seen are focused too much on costs and ignore other vital measurements of success.

Adding to my skepticism are the articles or posts on discussion group sites I have read. The attorneys and insurers or corporate lawyers who write the articles or posts boast about the success of their flat fee agreements but offer few details on how that success is measured.

The absence of specific details that would substantiate the success being claimed  in articles or posts promoting flat fee agreements does little to allay my skepticism.  The lack of supporting detail causes me to question just how the success (i.e., “cost savings”) is being measured.  I am always left to wonder that if by using a flat fee agreement agreement, did the insurer or corporation just lock in or only slightly reduce overly inflated legal costs?  Or if the insurer or corporation actually reduced legal costs by some degree, are they still paying too much for legal expenses? (If not, how do they know this?) Also with regard to insurers, how did the flat fee agreements affect cycle times or indemnity results?

In a future post, I will discuss the results of an evaluation of a $1 Million flat fee agreement I did for an insurer.  The evaluation involved several key factors including the review of hundreds litigated files handled by the flat fee firm and by a “control” firm that billed on an hourly basis over the same time period and in the same geographical area. The evaluation provided the insurer all the information needed to make a decision on whether or not to renew the flat fee agreement.

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