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Alternative Legal Fee Arrangements: What GCs Get Wrong

Jessica Nguyen
Jessica Nguyen

September 23, 2026

Jessica Nguyen is President, Chief Strategy and Legal Officer at Sandstone.

General counsel have discussed alternative legal fee arrangements for more than a decade, yet 90% of legal dollars still flow through hourly billing, according to the Thomson Reuters Institute's 2026 State of the US Legal Market report. That gap persists because most legal departments enter these negotiations without the scope definitions, historical data, and internal alignment needed to make an alternative structure hold. Five mistakes account for most failed arrangements, and each one has a practical fix.

What Are Alternative Fee Arrangements

Alternative fee arrangements (AFAs) are billing structures between an in-house legal team and its law firms that replace or modify the billable hour model. The most common are fixed fees for a defined scope of work and capped fees that set a ceiling on hourly charges. Blended fees apply a single blended hourly rate across partners and associates, and volume discounts reduce standard hourly rates in exchange for a committed book of work.

Structures tied more closely to outcomes include success fees, partial contingencies, and contingency fees for affirmative litigation. Holdback provisions withhold a portion of fees until agreed results are delivered, while collared fees share savings or overruns when actual time falls outside an agreed band. Departments with steady demand also negotiate either sliding scale fees, which decline as volume rises, or a portfolio fixed fee covering an entire category of work. A monthly retainer suits ongoing advice, and unbundled legal services leave the internal team the tasks it can handle itself.

Each structure shifts risk from client to firm, aligns the firm's incentives with the client's goals, or makes the department's budget predictable. The strongest arrangements do all three.

Five Mistakes GCs Make with Alternative Fee Arrangements

Most failed arrangements trace to how the legal department prepares for and manages them.

1. Treating AFAs as a Cost-Cutting Tactic Instead of a Strategic Partnership

Many GCs approach alternative pricing with the single goal of lowering the invoice. A firm that accepts a fixed fee it considers too low protects its margin on that matter through thinner staffing and slower responses. The result is an adversarial attorney-client relationship in which both sides spend more effort monitoring the deal than moving the matter forward.

GCs should first state what the department wants to achieve, such as predictable budgets for routine commercial work or a shared stake in a litigation outcome. Savings follow once the firm has a reason to work efficiently, because efficiency then increases its own margin. Sliding scale fees fit this approach, because the firm accepts a lower rate only as it wins a larger share of the portfolio.

2. Failing to Define Scope Before Negotiating Price

A fixed price holds only if both parties agree on what it covers. When scope is vague, any unplanned work becomes a change order, and the predictability that justified the arrangement disappears in disputes over what was included.

Precise scoping starts inside the department, before it asks for a quote. The team must agree on the matter's objectives, likely complexity, and acceptable risk, and gather historical data on how similar matters unfolded. Engagement letters should then spell out assumptions, exclusions, and a process for handling scope creep, so that a change triggers a pre-agreed conversation rather than a billing dispute.

3. Layering Traditional Billing Oversight onto AFA Models

Some departments negotiate a flat fee and still require detailed timekeeping, task codes, and line-item invoice review. That oversight adds administrative cost for both sides and signals that the client does not trust the arrangement it agreed to, eroding the goodwill the structure was meant to build.

Time records still have a place, since they help both parties judge at the close of a matter whether the price was fair. Day-to-day oversight, however, should move to milestones, deliverables, and outcomes. A holdback tied to specific milestones gives the department a stronger enforcement tool than line-item review, because it links payment to results the business cares about.

4. Lacking Data to Benchmark or Measure AFA Performance

Most legal departments cannot say how long similar matters took, what they cost, which firms staffed them, or how often the scope changed. Without that baseline, a GC cannot tell whether a proposed fixed fee is generous or inflated, or judge afterward whether the arrangement delivered value.

The data usually exists, but it is split across invoices, email threads, matter management tools, and the memories of the lawyers who handled the work. As a result, assembling it for a single negotiation can take weeks. Platforms like Sandstone surface this historical context automatically, linking each matter to the firms, documents, and decisions behind it so the benchmark is ready when the negotiation starts.

5. Waiting for Law Firms to Propose AFAs Instead of Leading

Many GCs wait for outside counsel to raise alternative pricing, but firms have little financial reason to propose one. Billable hours reward time spent and protect realization rates, while an alternative structure transfers risk to the firm and requires pricing expertise that many firms have not built. Offering flexibility also does little to win business. A November 2025 Best Law Firms survey found that 72% of US firms offer AFAs, but only 1.9% said pricing flexibility was a significant factor in winning or retaining clients. Firms can afford to wait because they hold pricing power, with worked rates growing a record 7.3% in 2025, according to the Thomson Reuters Institute.

GCs should lead the conversation, arriving with a defined structure, historical data, and clear expectations for staffing and reporting. Leading also improves price transparency, because the department sets the terms of comparison and can evaluate competing bids on the same basis. Firms that price accurately under AFAs often see better collection rates because clients dispute fewer invoices, giving a GC a concrete argument for a hesitant relationship partner.

How AI Changes the Alternative Fee Arrangement Equation

Generative AI shortens the time required for research, first drafts, and document review, directly pressuring hourly billing. A firm billing by the hour loses revenue as its AI tools get faster, while a firm charging a fixed price keeps the time savings as margin.

Clients who pay by the hour save on each task only until firms raise rates to recover that revenue, and many firms are not passing the savings on even now. In a 2025 ACC and Everlaw survey, nearly 60% of in-house respondents had seen no noticeable savings from outside counsel's use of generative AI. Of that group, 58% said their firms had not adjusted pricing to reflect the efficiencies. Sixty-one percent of all respondents said they were likely to push for pricing changes. GCs should therefore renegotiate fee structures before firms settle on pricing that captures the productivity gains. Alternative structures let the department share in those gains through lower fixed prices for AI-assisted work or reduced rates for tasks that are now largely automated. Unbundled legal services go further, letting the internal team run the AI-assisted portion itself. GCs should also ask firms how they use AI on client matters and how those efficiencies appear in their pricing. The answer shows whether a firm plans to share the savings.

Why Legal Technology Is Essential for AFA Success

Three of the five mistakes, covering scope, benchmarking, and negotiation, come from missing information, and the other two are harder to correct without it. GCs cannot scope precisely, benchmark legal spend, or measure outcomes when their matter history is spread across disconnected systems. Traditional legal billing software does not close that gap, because it tracks invoices without capturing the context behind them. The capabilities that matter most are:

  • Historical matter data: Knowing what similar work cost and how long it took, so the department negotiates from its own record rather than the firm's estimate.
  • Scope tracking: Monitoring work against the agreed scope so that drift is caught and discussed early, before it becomes a dispute at invoice time.
  • Outcome measurement: Evaluating each arrangement against its milestones and results, with billing workflows built around deliverables rather than timesheets.
  • Knowledge surfacing: Giving the internal team ready access to precedent and playbooks, so it can handle more work itself and send less to outside counsel.

Sandstone unifies this context inside the tools the legal team already uses, connecting every matter to the firms, people, documents, and decisions behind it. That context gives GCs the visibility to structure and manage AFAs.

How GCs Can Build AFAs That Deliver Results

Alternative arrangements succeed when the legal department prepares for them by defining scope, gathering historical data, and leading negotiations. With the right technology in place, the department can run these arrangements with little administrative overhead. It can then use them to secure better pricing, stronger firm relationships, and a clearer view of what its legal work is worth.

Learn how Sandstone gives GCs the data and AI tools to structure and manage alternative fee arrangements with confidence.

FAQs about Alternative Fee Arrangements for GCs

How can GCs enforce alternative fee arrangements when law firms resist?

GCs enforce alternative structures by tying panel inclusion, matter allocation, and relationship reviews to each firm's compliance. A firm that resists agreed terms receives less work. Clear contractual terms, documented scope assumptions, and scheduled performance check-ins create accountability on both sides.

What metrics should GCs track to evaluate alternative fee arrangement performance?

The core metrics are total spend against budget, cycle time, frequency of scope changes, and internal client satisfaction. Tracking them across multiple matters shows whether an arrangement delivers sustained value or only looks favorable on a single engagement.

How do alternative fee arrangements differ for litigation versus transactional matters?

Transactional matters with predictable scope suit fixed or flat fees, and capped fees work for deals with some variability. Litigation carries more uncertainty, so it often calls for phased budgets, success fees, or a partial contingency that shares risk between client and firm. Ongoing advisory work, such as employment counseling, often fits a retainer better than either. In every case, the right structure depends on how much the matter is likely to vary.

Can alternative fee arrangements reduce legal spend without sacrificing quality?

Yes, when the arrangement rewards efficiency and aligns the firm's interests with the department's goals. Quality suffers when GCs use alternative pricing mainly to cut what they pay firms, because firms respond by cutting the time and seniority they devote to the work.

Works Cited