Alternative fee arrangements (AFAs) have long been trumpeted as a creative way for legal departments to cut costs. Well, the billable hour isn't dead yet. In fact, the number of both U.S. and U.K. law firms using AFAs dropped in 2012—by 1 and 3 percent, respectively, according to Fulbright & Jaworski's 9th Annual Litigation Trends Report. Still, 51 percent of U.S. firms used such alternative arrangements last year, as did 63 percent of their U.K. counterparts, an indication that AFAs are here to stay.

“Even though our survey respondents showed a slight decrease in 2012, about four out of every 10 companies [in the U.S.] said they were going to use more AFAs in the coming year,” says Otway Denny, chair of Fulbright & Jaworski's global litigation department.

What are the most popular AFAs?

The most popular AFA among U.S. legal departments is the fixed fee arrangement, in which a company and a law firm agree in advance on the full payment for a matter or part of a matter. Fixed fees give companies a degree of certainty, but are often flexible enough to appeal to law firms. “They often have a flexible collar—something that allows people to come back to the table and renegotiate if necessary,” says Brian Lee, managing director of CEB.

Across the pond, performance-based fees are in vogue. These arrangements, in which law firms can earn bonuses for meeting pre-set benchmarks, allow legal departments to reward their outside counsel for qualities such as speed.

What other AFAs are available to legal departments?

Companies also have a host of other AFAs to choose from, among them, the capped fee, which sets a fee limit for all or part of a matter; the blended-rate fee, in which all law firm lawyers working on a matter bill at the same rate; and the contingent fee, in which firms are paid only if their client wins its case.