Managing outside counsel is complicated. And, so are their bills. With complex itemizations and unclear formats, the bills trigger misunderstandings and lead to frustration. For many reasons, forecasting your annual budget is a challenge. You often wonder what you can do to help simplify the bills and drive predictability in your budget. Many in-house teams are looking to Alternate Fee Arrangements. More specifically, BTI Consulting recently reported that the majority of AFA’s used in 2015 were fixed fees. So… are fixed fees the answer? Certainly not in every instance. But in some cases, fixed fees can be a great fit.
Fixed Fees: the Bees’ Knees?
So when are fixed fees a good choice?
The sweet spot for fixed fees is with predictable, repeatable work. Be it patent prosecution or immigration visa processing or simple, repetitive, litigation like EEOC claims, fixed fees fit like a glove. With these types of matters, firms have a good handle on how much time the work takes and can more easily estimate a fee that is fair for both them and you. When the work is unpredictable, however, making that fair fee-estimate is more challenging. In those instances, firms are much more likely to include a notable buffer to mitigate their risk in case the matter does not unfold as expected. With the latter example you will get predictability, but you won’t necessarily get the best value.
Are there other downsides to fixed fees?
If a firm has offered a fixed fee, it may impact how they process your work. This is more of a concern on complex matters that are prone to unexpected twists and turns – such as significant litigated matters, complex M&A, etc. To avoid cost overruns, firms working under a fixed fee on these engagements may make less than ideal choices around:
Staffing – Law firms may be inclined to use lower cost, less experienced attorneys disproportionately on engagements that are subject to fixed fees. It’s important to ask how the matter will be staffed at the onset, so you have a line of sight here.
Working with Counter Party Counsel – Law firms are more likely to allow counter-party counsel to take the lead on time intensive tasks (e.g. agreement drafts) more so that on matters with no fixed fee. This becomes increasingly true as they time they invest in prosecuting the engagement increases.
Sticking to the Fixed Fee – Although many firms are noted for standing behind their fixed fees (BTI Consulting), many others are inclined to ask for adjustments to the agreed fees. Make sure all are clear on the assumptions before you agree to fixed fee.
How to avoid the pitfalls?
You can avoid these potential pitfalls by having the law firms build a line-item budget at the onset of the engagement. The budget should include details around how many hours the firm expects each staff member to work on each phase of the engagement. While the budget may not hold, you will have a solid point of departure for conversations about how the engagement has unfolded and whether the firm is using the right people to do the work.
About the author – Kathy Heafey is President of BanyanRFP, a cloud-based RFP platform that helps companies control spend on legal services. She has over 20 years of management experience working with large brands such as Pillsbury, Green Giant and Progresso Soup. A proven leader in Cost Management and Continuous Improvement, she enabled over $20MM in annual cost-savings for General Mills. As both a consumer of professional services and a key partner with strategic sourcing at General Mills, she has a deep understanding of professional services procurement. For more information, visit www.BanyanRFP.com