Navigating the Waters of Alternative Fee Arrangements: Three Tips for Smooth Sailing

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Despite the rumors of its demise, the billable hour won’t be found in Davy Jones’ Locker—not just yet, anyway. Truth be told, the billable hour is unlikely ever to give up the ghost, in no small part because it is so familiar and easy to understand. Still, that venerable measure of value no longer commands the high seas like it once did. Both in-house and outside counsel are beginning to navigate the waters of alternative fee arrangements instead.

Anyone who’s been paying attention recently knows the allure of the alternative fee arrangement. It has the potential to provide great improvements over the billable hour. At its best, an alternative fee marrangement is a win-win relationship that aligns the interests of the client and the attorney, providing predictable costs and recognizable benchmarks of success. But without proper planning and preparation, the allure of the alternative fee arrangement can turn into a siren’s song, leading the unwitting client and attorney toward an undesirable end. Dashed expectations—not to mention needless frustrations—await those who fail to plot their course with care. To ensure smooth sailing for an alternative fee arrangement, keep the following three tips in mind.

Tip Number One: To avoid choppy waters, and the accompanying seasickness, a clear understanding between the parties is absolutely crucial. The billable hour has been around for so long that everyone already understands exactly what it means. Not so with alternative fee arrangements. For one thing, the very term “alternative fee arrangement” encompasses a number of different possible structures. These include flat fees, capped fees, success hold backs, and blended rates, to name but a few. When parties begin discussing an alternative fee arrangement, they should be sure that everyone is referring to the same basic structure.

A shared understanding of the basic structure becomes even more important when parties explore the possibilities of additional customization. An alternative fee agreement can be further tailored to reflect any and all concerns of the parties. For example, many alternative fee arrangements include an opportunity for renegotiation if the work unexpectedly exceeds the original scope. Others provide incentives in the form of bonuses when outside counsel reach a certain goal, such as dismissal or settlement, within a certain period of time. The possibilities are limitless. Such flexibility can be a boon, but it can also make the parties a little green around the gills if they are not communicating effectively.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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