When I interviewed chairmen, senior partners, and C-level executives from AmLaw 100 firms (in the LegalBizDev Survey of Alternative Fees), nine types of AFAs were reported most frequently:
Fee caps: In a fee cap, hourly rates are charged up to an agreed maximum amount for a particular matter. Beyond that, if additional work is required to complete the matter, the law firm pays for it. Of course, this is really just hourly billing with a twist: a hard limit on the maximum. While this arrangement clearly benefits the client more than the law firm, some firms see it as an important way to get new work.
Fixed fees for single engagements: A fixed fee for a single engagement sets a firm price for a set of well-defined services. In order to succeed with this approach over the long run, firms must do many such deals, since they will surely win some and lose some. This arrangement can be risky with new clients, before mutual trust and understanding has been established.
Fixed fee menus: A fixed fee menu provides a list of fees for related services, or for segments of a particular matter. For example, a fee of $25,000 might be quoted for a particular type of real estate transaction. Then charges would be added to this base for different situations, such as plus $5,000 for assumption of an existing loan, $5,000 for a joint equity partner, and $7,500 for new financing.
Portfolio fixed fees: Portfolio fixed fees set a single price for a large number of matters, such as all of a Fortune 100 company’s US labor and employment cases in a single year. As in other fixed fee arrangements, the key to success is to have a large volume of matters, so that there will be enough wins to offset the inevitable losses.
Retainers: A retainer is a fee that a client agrees to pay every month, or on some other regular basis, in return for specified services. These have been in place for many years, but may become more frequent when alternative fees grow in influence. Many firms see them as a great marketing tool, since clients are more likely to pick up the phone than they would be if they were paying by the hour, and this can lead to discussions of other new business.
Partial contingencies/Success fees: In a partial contingency arrangement, a law firm typically receives part of its normal hourly fees as a matter proceeds, and a lump sum—or success fee—at the end of the matter, depending on the result. Criteria for success fees are sometimes spelled out at length, and sometimes left entirely to the client’s discretion. Clearly this can have the benefit of aligning the interests of clients and their law firms.
Holdbacks: A holdback is a type of partial contingency arrangement in which the law firm is guaranteed part of its fees, but the other part is contingent upon the case’s success. For example, a firm may receive 80% of its normal rates while a matter is underway. At the end, it may be given the remaining 20%, or less, depending on the client’s satisfaction with the result. This may also be combined with a success fee that provides a bonus for a positive result.
Full contingencies: In a full contingency arrangement, fees depend entirely on success. This approach has long been used by plaintiffs’ lawyers, but it is now becoming more common for the defense to use as well.
Risk collars: Lawyers use the term risk collar to refer to an hourly billing arrangement built around an estimated budget for a particular matter. The client pays a bonus if work is completed under budget and/or gets a discount if the work goes over the budget. Like a fee cap, this is really just a variation on hourly work, but unlike a fee cap it may align interests and offer incentives to both clients and law firms. The actual discounts and bonuses vary widely.
This list has been reprinted in my new book, the Legal Business Development Quick Reference Guide.