In-house legal – what does an EFA look like, and why should you care?
Global | Publication | November 2022November 22, 2022
You’ve probably come across AFAs, but what about EFAs?
Whilst the term AFA (Alternative Fee Arrangement) could be applied to any pricing mechanism that is not an hourly rate, EFAs (Effective Fee Arrangements) set a higher standard, requiring that the pricing mechanism agreed is based on the value of the output of the service (e.g. a renegotiated contract or a settled dispute) rather than the time input, and should reflect the most effective commercial arrangement to deliver this value.
AFAs – at least as they are usually constructed at present – are at risk of being calculated based on time input (for example, a fixed fee calculated using estimated hours). Whilst this is an AFA in construct, in essence, it is a repackaging of an hourly rate and fails to encourage alignment with what a legal department truly values.
Of course, this all sounds good on paper, but what does a good EFA look like in practice? There are a few key elements to consider.
Based on value
At its core, an EFA should price the service based on the value of the output which that service aims to deliver. But how do you define value?
Simply put… it depends. Every legal department (and sometimes even an individual matter) should have its own set of criteria depending on priorities. Sometimes, speed is critical (for example a cyber-security response service). In others, industry knowledge (for example, regulatory advice in an emerging area). For many, how the service is delivered (for example, providing advice via a shared knowledge management hub rather than an email) is increasingly becoming a crucial value-driver.
For most departments, it will likely be a combination of various factors, but the most crucial step is taking the time to identify what factors you value at the outset, so you can structure pricing accordingly.
Where possible, an EFA should be based around clear scoping, with a matter being ‘broken down’ into its component deliverables and associated work, which makes the process of agreeing on value-based pricing significantly easier, as you can see specifically where the cost of a matter lies and what will be delivered in return for that price.
Additionally, clear, granular scoping helps to set clear expectations on deliverables at the outset of a matter, quickly highlighting any areas where the scope may have been misunderstood or expanded upon by your law firm(s). This, in turn, minimises the risk of difficult conversations and remediation once the work has already been completed.
Resourced in a smart, efficient way
A strong EFA should be created on the basis that smart resourcing practices will be used to deliver to you as efficiently as possible. This works particularly well where a matter has been effectively broken down and scoped as above.
This may mean, for example
- providing a multi-disciplinary team (e.g. lawyers; legal design professionals; data analysts) to deliver a holistic, joined-up service;
- employing formal resource management practices to ensure the right people are working on your matters;
- utilising lower-cost offices and/or resources; and
- leveraging established processes, supporting technology, and economies of scale
with the goal of ensuring that the right work is being done in the right place, in the right way, by the right people.
Proactively managed and governed
To ensure an EFA is useful in practice, it is essential to put in place a framework to manage and govern adherence to the agreement throughout the lifecycle of the matter. There is little use in crafting a sophisticated, well-thought-out pricing agreement if it is forgotten about as soon as the work starts.
There is no ‘one size fits all’ framework to put in place for governing EFAs, and what is appropriate will depend on both the type and complexity of the matter and the type EFA put into place. However, most should at the very least have clear governance in place determining:
- how progress against timeline(s), assumptions (or budget where hours/fees aren’t fixed), and scope will be reported upon; and
- how proposed changes to the timeline(s), assumptions/budget, and scope will be managed, approved and priced.
Clear and transparent
A good EFA should be clear and transparent, articulating the rationale behind the pricing mechanism, and how improvements and efficiencies being leveraged on the law firm side will benefit you specifically.
For example, whilst it might be interesting to know that a law firm is using machine-learning technology to improve the way it delivers document reviews, this does not articulate any benefit to you.
Instead, a good EFA proposal might outline, for example, how a newly-developed process uses machine-learning technology to reduce the work required at first-pass review by 60% with minimal reduction in quality, enabling the firm to now offer profitable pricing on a per-document basis. This clarifies how efficiencies will flow through to your matter specifically and can give you confidence that the EFA is realistic and sustainable.
An EFA should be as predictable as reasonably possible, providing you with complete clarity on the costs of the matter should everything go to plan, and a reasonable understanding of how pricing will be handled if it does not.
In practice, this usually comes down to clear and predictable assumptions. Whilst you might have a brilliant EFA in place for the initial scope, if the assumptions are vague and aren’t comprehensive, with out-of-scope work simply reverting to hourly rates, you risk exactly the same issues arising as if you hadn’t put an EFA in place at all.
To mitigate this, consider taking a more prominent role in defining assumptions during the pricing stage of a matter. Whilst it is tempting to pass this exercise to your law firms, spending the additional time early on to create a clear, comprehensive set of assumptions can make life much easier for both you and the firm as things progress.
Above all, an EFA should be a win-win arrangement for both you and your law firm. With the pace of change over the last few years, it is increasingly reasonable to expect services to be delivered in line with these principles, whilst remaining profitable for the law firm.
Getting to a win-win agreement of course requires collaboration, so being transparent and open-minded is essential. Start the conversation with your law firms, and you may be pleasantly surprised at the response!
If you are interested in exploring how EFAs could be used for your legal department, please feel free to contact Tom Evans.