The most recent episode of the Wolters Kluwer ELM Solutions podcast Legal Leaders Exchange features a discussion about billing, pricing, and outside counsel relationships. Our guests on the episode bring perspective and offer insights from both sides of this collaboration. Joy Thorpe, Director of Legal Operations at Altria, and Jorge Arevalo, Director of Strategic Pricing at Faegre Drinker, talked with our Jennifer McIver, Associate Director of Legal Operations and Industry Insights, and started by describing how they optimize their relationships with law firms and clients, respectively.
A successful relationship between a corporate legal department and outside counsel begins with a win/win approach to collaboration. In such an engagement, law firms understand the client’s needs and priorities, and legal departments recognize that outside counsel can only succeed and thrive by meeting their business goals.
Creative pricing
Alternative fee arrangements (AFAs) are a popular discussion topic among corporate legal departments that seek more predictable and cost-effective legal services. However, despite the buzz around AFAs, their adoption remains relatively low. According to surveys, only a small percentage of outside counsel work is billed under AFAs, with figures ranging from 5% to 20%.
Jorge finds that even when clients do not explicitly request an AFA, it can be beneficial for law firms to proactively offer alternative pricing options that might suit client needs better than a traditional hourly rate. This approach not only demonstrates the firm's commitment to the client but also opens the door to innovative fee structures that could provide mutual benefits.
Joy agrees that the successful implementation of AFAs often requires creativity, along with a willingness to explore new pricing models. For instance, Altria's legal department successfully negotiated an all-in fixed AFA with one of its core law firms. This arrangement provided cost predictability and allowed the firm to take on new work within the agreed-upon fee structure.
One key to making AFAs work is clear communication about expectations and outcomes. Both parties must agree on the scope of work, the definition of success, and the mechanisms for adjusting the AFA if necessary. Flexibility is crucial, as unforeseen circumstances may require modifications to the original agreement.
Addressing challenges
Not all AFAs will perfectly meet expectations once work gets underway. Legal departments should be prepared to modify or even cancel an AFA if it proves ineffective. The key is to maintain open lines of communication and a collaborative relationship with outside counsel.
Joy shares a valuable lesson from her experience: when an AFA isn’t working, it’s important to have a candid conversation with the law firm. By presenting the data and discussing the issues, both parties can agree on the best path forward, whether that means adjusting the AFA or reverting to hourly billing. This collaborative approach helps preserve the relationship and ensures that both parties are working towards a mutually beneficial outcome.
Beyond pricing discussions
Ultimately, the success of any pricing arrangement depends on the strength of the relationship between the corporate legal department and outside counsel. Jorge suggests that legal departments should not limit their interactions to discussions between lawyers and relationship partners. Instead, they should involve pricing specialists from both sides early in the process. This approach can lead to more effective communication and better aligned expectations.
Fostering a positive relationship with outside counsel and establishing effective pricing policies requires a combination of clear communication, creativity, flexibility, and a willingness to learn from both successes and failures. By focusing on these principles, corporate legal departments can build strong, productive partnerships with their outside counsel, with outcomes benefiting both parties.
Listen to the episode or read the transcript to dive deeper into these topics and others, such as the importance of shadow billing and what type of work is less likely to lend itself to a successful AFA: Bringing efficiencies to outside counsel collaboration and the adoption of AFAs.
