This article was originally published in the ABA Journal.
Many corporate legal departments and law firms have gone “all in” on alternative fee arrangements (AFAs), while others have chosen not to adopt them at all. After more than a decade in common use, only an average of 23% of legal work is performed under an AFA despite wide acknowledgement of their benefits. Why does this divide exist? It's not just about financial risk but also execution.
The biggest barrier to AFA success: overcomplication
The main benefit of implementing AFAs into legal operations is that it simplifies legal billing by shifting the focus from hours worked to value delivered. However, many organizations unintentionally introduce complexities that diminish their effectiveness.
A common mistake is layering traditional billing oversight onto an AFA model. Legal departments often add requirements that make it harder for law firms to execute AFAs efficiently. For example, when legal departments expect compliance with hourly billing guidelines and extensive reporting, it contributes to the complexity of AFAs and creates additional administrative burdens for outside counsel. Requesting that a firm provide hourly breakdowns while adhering to a fixed-fee model undermines efficiency and can make AFAs unattractive.
With that in mind, let’s explore how departments can make AFAs a win-win for everyone.
Four essential pillars of a successful AFA
To achieve the best results from AFAs, law departments and firms should focus on four key pillars when negotiating terms.
1. Efficiency
AFAs should reduce administrative work, not increase it. If a legal team requires the same level of oversight as traditional hourly billing, or possibly even more, it negates the efficiency gains that make AFAs attractive for both sides. Saving time on matter-by-matter invoice review and continuous budget and forecasting updates are also value-added reasons for leveraging AFAs. To streamline the approach, focus the success of AFAs on value, not line items. Is the desired outcome to avoid trial? Did the firm get you a lower-than-company-average settlement amount? If so, the cost should reflect the value of that outcome. The number of hours worked and whether they are invoiced at an agreed-upon rate should not matter and should not diminish the purpose of using AFAs.
2. Predictability
AFAs create predictability, which can, in turn, more accurately forecast legal costs. With flat or fixed rates, you know upfront what you are going to spend. For portfolio work, when a new matter comes in, you know what it’s going to cost and have already included that in the budget. Reducing volatility and guesswork can help legal departments better allocate budgets, plan for future expenses, and negotiate favorable terms with outside counsel.
3. Cost savings
Cost savings are a key driver behind the shift to using AFAs, but savings cannot come at the expense of efficiency. A hyperfocus on reducing costs on every individual matter can lead to restrictive fee structures that discourage law firms from taking on work because the administrative cost of adhering to the AFA will likely outweigh the benefit of the arrangement. For AFAs to succeed, some level of risk must be present for both the law firm and the corporate legal department. Law departments and outside counsel must work together to balance financial control and operational flexibility for AFAs to be successful.
4. Relationships and strategic alignment
Beyond efficiency, predictability, and cost savings, the success of an AFA also depends on the quality of the relationship between the corporate legal department and the law firm.
AFAs should be grounded in a strategic partnership based on trust, transparency, and shared business goals. Organizations implementing AFAs successfully recognize that pricing structures should align with broader legal and business objectives. If reducing litigation spend is a business objective, create phased AFAs focusing on incentives for the law firm to settle matters earlier, recognizing that a higher cost to settle the case earlier still achieves long-term savings and also preserves business reputation—another value-add. If a company is looking to grow market share, creating a portfolio-level fee arrangement with a single firm for efficient contract review will not only speed up turnaround times but also save administrative work to produce and review a high volume of invoices for both corporate legal departments and law firms.
The most effective AFAs incorporate open communication, clear expectations, and a shared understanding of risk and reward. When both parties approach AFAs as a collaborative effort rather than a cost-cutting exercise, they create a sustainable model that benefits everyone involved.
The role of generative AI
Much discussion exists about how generative AI could catalyze the legal industry to move away from the billable hour, but it’s too early to say if that will happen. Most law firms’ and legal departments’ structures and processes remain firmly built around billable hours. Furthermore, firms and legal departments are still testing generative AI use cases, and many law firms are still learning and deciding how to absorb the costs associated with generative AI implementation.
Generative AI can help make engagement between law firms and legal departments more efficient, productive, and communicative—starting with the “request for proposal” stage. For example, generative AI can review large data sets to determine costs, budgets, and outcome expectations for repeatable tasks or certain matter types, all of which can set clear expectations from the beginning based on past billing and performance. Corporate legal departments can use generative AI to help create the RFPs and review responses, while firms can utilize AI in their review and response.
What generative AI cannot do is take the place of people in “people, process, and technology.” It doesn’t negate the need for transparent and candid communication about expectations, goals, and values. Instead, generative AI embedded in existing legal technologies can monitor matters from intake through execution and review. It can pick out inefficiencies and spark valuable conversations about managing matters effectively and staying on track to deliver optimal outcomes.
The path forward: Making AFAs work
For AFAs to deliver on their promise, organizations must move beyond a cost-savings mindset and adopt a fully strategic approach. Rather than focusing solely on reducing legal spend, corporate legal departments and firms should use AFAs to:
- Streamline administrative processes.
- Improve budget predictability.
- Align legal work with business objectives.
- Foster stronger, more collaborative relationships.
By treating AFAs not just as a pricing mechanism but as a partnership framework, legal teams and law firms can move beyond the inefficiencies and poor perception of hourly billing and create a more sustainable, value-driven approach to legal work. This approach will undoubtedly require a cultural shift from both corporate legal departments and law firms, but law departments are in prime position to increase communication and raise awareness of the desire to shift the pricing framework.
Increasing communications and embracing the change will allow AFAs to flourish, resulting in greater efficiency, predictability, and strategic alignment. When these things come together, internal teams and outside counsel can focus their time predominantly on outcomes over processes.
