When not to use AFAs

AFAs, AFAs, AFAs. Despite being a legal operations nerd, I am almost tired of hearing about them. They seem to have acquired a reputation as a panacea or per se “innovative,” when in actuality they come with their own set of pitfalls and have been used by a lot of organizations for decades. None of this is to say they don’t have their place but, as with most things, the key is not whether your claims or law department uses AFAs but whether it is any good at doing so.

The first step to getting good at AFAs is to know when not to use them. There are situations in which they just aren’t appropriate. Here are three examples.

When the current situation is satisfactory

One of the drivers among law departments interested in AFAs seems to be that they want to be innovative. But innovation is a means to an end, not an end in itself. If you analyze the data and determine your current hourly arrangement is cost-effective and gets excellent results, don’t change it. Instead, find an area of your law department operations that really should be improved and fix that, whether through alternative pricing or some other means. Otherwise, your AFA program is a solution looking for a problem. Changing an arrangement that is working well is a waste of your time and that of your outside counsel, who is apparently doing a great job for you and probably has better things to do than spend a lot of unbillable time being “innovative.” Respect the hard work they put in by letting them do their jobs.

When the stakes are high, and you have no substantial experience scoping and pricing the kind of matter in question

If you are new to AFAs, for your own sake, don’t jump straight into the deep end of the pool. I once consulted for a law department that wanted to be “innovative” by using an AFA for an M&A deal. They wrote up a contract whereby outside counsel would be paid up to $750k on an hourly basis, at which point they would enter what they called a “donut hole.” Counsel would continue to bill hourly but wouldn’t be paid until they got up over $1M in billings, which of course they did (no surprise there). The trouble was, the contract not only wasn’t explicit about but was totally silent on the subject of whether reaching $1M in billings would entitle outside counsel to be paid for the donut hole between $750k and $1M. Naturally, outside counsel interpreted the silence to mean they were entitled to that money, and in-house counsel interpreted it to mean they weren’t. The situation took months to resolve and left everyone involved feeling like amateurs.

So, don’t go there. Start small or not at all.

You lack any one of the following prerequisites to success:

  • Good data on a body of matters that at least seem similar to the one you are considering the AFA for.
  • The time, patience and institutional memory to sift through those matters and identify which ones are actually similar, as well as any differences. Do this by talking to the people who claim the matters are all similar and interrogate them like the KGB. It will likely come out that some matters bear only superficial similarities to the one in question, and they should be excluded from the analysis. In fact, after subtracting irrelevant matters, you may find your sample size has diminished to the point where you can no longer do a proper analysis. Game over.

  • A sharp legal data analyst to help you price the matter. This person should be empowered to tell an attorney that they are wrong. Otherwise, they will just tell you what you want to hear.
  • At least three firms who are sincerely interested in doing this type of work on an AFA basis. You need as many as feasible, not only to keep bidding competitive but also because they will bring different perspectives to the table and help generate options a smaller group couldn’t.
  • The recognition on both sides that you are probably going to have to continue administering the AFA even after the initial agreement is signed. There will be issues. If you are running a portfolio of AFA matters, the way the portfolio is run will need to be continually monitored and iterated. All of this is hard work, so don’t spike the football on the five-yard line.

Keep in mind that even if you check all the boxes above, you have only confirmed that AFAs are not inappropriate. That’s a necessary first step, but it’s not proof of which AFA is the best option. From here, though, you can proceed with the hard work of actually deciding what will work best for you.

About The Author

Nathan Cemenska

Nathan Cemenska, JD/MBA, is the Director of Legal Operations and Industry Insights at Wolters Kluwer's ELM Solutions. He previously worked in management consultancy helping GCs improve law department performance and has prior experience as a legal operations business analyst.

In past lives, Nathan owned and operated a small law firm and wrote two books about election law. He holds degrees from Northwestern University, Ohio State University, and Cleveland State University.