From Expectations to Execution: 5 Silent Killers of Alternative Fee Arrangements

Topics: Alternative Fee Arrangements, Billing & Pricing, Business Development & Marketing Blog Posts, Client Relations, Data Analytics, Law Firm Profitability, Law Firms, Legal Innovation, Midsize Law Firms Blog Posts

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I find it’s often an interesting exercise to look beyond the legal profession for guidance on how to improve how we do business as lawyers. Certified Public Accountants (CPAs), in particular, can be a good source of ideas. In fact, the American Institute of CPAs (AICPA) is one of my favorite sources of discussion that readily translates to the legal profession. Now, not everything is on point, but every so often they run with an idea that really rings true.

Such was the case when I read an article a few weeks ago entitled “5 Silent Killers of a Financial Plan.” As I read it, it struck me that the title could just as easily have been “5 Silent Killers of an Alternative Fee Arrangement (AFA).” The issues the author identified as potential landmines for a financial plan apply quite directly to an AFA.

  1.      Unrealistic Expectations

The AICPA piece decries “building a financial plan on highly aspirational, or worse, totally unrealistic expectations.” The same woe can befall an AFA.

Law firms are still hesitant to teach their attorneys how to discuss pricing with clients. In the absence of a true understanding of how and why matters are priced as they are, many AFAs may be based on unrealistic expectations regarding their desirability and profitability. Without a data-driven analysis to support profitability assumptions, and a meaningful conversation with the client to better set expectations, attempts at building an AFA strategy at your firm may not get off the ground.

To be sure, AFAs are an iterative process involving trial and error. But without clear expectations, future iterations may not move you any further toward the goal.

  1.     Emotional Decision-Making

For most people thinking about how to employ AFAs, the emotion they must contend with is fear. Not paralyzing fear, but rather a pervasive hesitancy and uncertainty in the face of the unknown that prevents them from being bold.

Clients will request that their firms give them AFA options. The firm responds by asking what the client wants in an AFA, only to get the answer “I don’t really know.” The client is hesitant to commit to an AFA strategy they’ve never tried. And now the law firm is hesitant to provide an option that may upset the client. So ultimately both parties just agree to proceed on an hourly basis with a discounted rate, and a general understanding of an expected budget, which may or may not be enforced.

Not exactly innovative — but it does seem safer. Emotion, driven by uncertainty, in turn drives us to seek safe harbor, sticking with what we know. But if we can’t move past that emotional response, an initiative to truly rethink our pricing strategy is unlikely to ever get off the ground.

  1.      Inflexibility

What happens when (not if) the unforeseen happens? Even attorneys who have become comfortable with the idea of an AFA will likely grow uncomfortable having to revisit the agreement with the client in the event of unchecked matter cost overruns or “scope creep”. And how accommodating will the client be to reopening discussions around what is covered by the AFA?

If an AFA isn’t structured to allow for some revision of the scope, following a mutually agreeable framework, it’s likely to leave at least one party — and quite possibly both — dissatisfied. Law firms and clients that speak publicly about the success of their AFA efforts often highlight the need to have candid and frequent conversations regarding scope. The law is fluid, and each matter is unique. Failing to account for that when structuring an AFA can set the matter up for trouble.

  1.      Inaction

As the AICPA piece says, a perfect plan “is worthless without proper follow-through.” An AFA that does not have the full team on board is similarly set up to fail. A perfectly structured AFA will fail if the attorneys on the team are unmotivated to follow the plan, or uncertain of how to implement it.

It is incumbent upon the firm, and those partners responsible for the matter, to ensure that the plan is followed. Are scoping conversations being had? Is the client aware of the progress? Was a project plan built for the matter and is it being followed? Do the people working on the matter understand why they are facing these expectations?

Following the plan isn’t a guarantee of success. Failing to follow the plan is a guarantee of failure.

  1.      Unclear Values and Priorities

What does the client consider a win? Understanding that will help define what the AFA needs to look like. You can’t create a map if you don’t know the destination.

Here again, many law firms struggle because they don’t take the time to ask their clients how they want pricing to be structure or how they define success in a matter. That’s not always an option available to law firms, particularly if the client is using formalized procurement procedures. But any time it is an option, it’s one the firm should take. Does your client want a flat fee? Or are they the type of General Counsel who likes to report back to their board about the size of the discount they were able to secure from their outside counsel? Or maybe their one of the plethora of GCs who don’t really know what they want in terms of pricing, and would really value a firm that asked the question then gave them options they could discuss.

Sometimes the client’s priorities aren’t even clear for the client. But having the conversation can help bring much needed clarity.

And certainly, more and deeper conversations can help avoid many of these AFA “silent killers”.