The Alphabet Soup of Law Firm Pricing: Alternative Fee Arrangements, Behavior, Cost-Predictability, Demand and Efficiency! (Part 3)

Topics: Billing & Pricing, Business Development & Marketing Blog Posts, Law Firm Profitability, Law Firms, Midsize Law Firms Blog Posts

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In Part 1 and Part 2 of this series we noted the trend in greater demand for legal services walking hand-in-hand with pricing pressures, and came to the unavoidable conclusion that law firms that wish to have a competitive edge and differentiate themselves among their competition will need to be proactive about initiating an alternative fee arrangements (AFAs) strategy. We also explored examples of AFA structures that law firms are using to promote client value and cost effectiveness. In our final installment, we will discuss which how firms are using AFAs and review the profitability metrics being used to benchmark their success, and how some firms are framing the AFA message to gain the strategic marketing advantage.

The immediate question comes: “Are law firms using AFAs and achieving profitability?” The short answer is “yes and yes.” Some firms are generating profit while other firms are losing money while continuing to make the same mistakes. There are a variety of different reasons why one law firm can achieve great profits while others struggle.

To get to these answers, attorneys have to ask the tough questions — “Are we making money?” and “Are we looking at all of the various metrics that contribute to the success or failure of an AFA?

Once determined, law firms can move on to measurement. Below are a few profitability metrics that law firms may want to consider as ways promoting value, monitoring and managing time and minimizing write-offs:

Fees Collections — No matter what type of fees/payment arrangement the firm has in place for a matter, the firm still needs to get paid in a timely fashion. Many firms will outline their payment terms at the beginning of an engagement, but seldom follow through on those terms. Payment expectations must be established at the beginning of the relationship and must be enforced. AFAs are developed based on factors of cost and efficiency, and much of that planning goes to the wayside when collections are not made a priority.

Contemporaneous Timekeeping — Historical timekeeping records play a very important role in developing a solid AFA. Time is the firm’s only inventory and a powerful planning tool for determining costs. If attorneys are not recording all of their time contemporaneously, statistics show that an attorney can lose up to 30% of their time when recording/recreating their time weekly or as much as 50% or more beyond one week. Contemporaneous timekeeping can assist in preparing improved estimates for legal spend, provide a better handle on firm investment and assist the firm in generating profit. Attorneys who do not keep contemporaneous time can seriously compromise the planning necessary to arrive at an AFA that works for the client and the firm. If a law firm does not have a time entry policy in place, it needs to get one.

Time and Accounts Receivable Write Offs — There are many reasons why attorneys will write off time or accounts receivable. Sometimes write-offs are justified when acclimating new attorneys or done in the interest of client relations. In any event, some write-offs are a necessary evil with some clients, but should never be considered absolute. When using AFAs, you are promoting client focus, value and efficiency. So, while it is easier said than done, attorneys must educate their clients to perceive the value of their time and expertise and not be so quick to get out the red pen.

Marketing Strategy for AFAs — Planning, Implementation & Management

As noted in Part 1, only 31% of law firms are proactive in approaching AFAs with their clients. The first step is to “cherry pick” clients that your firm believes would be suitable to approach about an AFA and start off simple with a basic AFA. Look at what other firms that are geared primarily to AFA and value billing are doing, including Summit Law Group and the law firm that has “trail blazed” AFAs since 2008, The Valorem Law Group. Both firms have websites that discuss their respective approaches to AFAs and are definitely worth reviewing for ideas on how to get started.

Once your firm has identified a client to approach and develop an AFA, planning, implementation and project management become essential. Here are some points to consider:

  • Budgeting is Critical — Remember the firm’s financial due diligence and profitability metrics when establishing and monitoring AFAs;
  • Prepare an Outline — Track progress on the matter, identify delays and overcome them;
  • Schedule Weekly Meetings — Get together regularly to discuss progress and problems and identify forthcoming issues and plan for same;
  • Monitoring and Management — Accountability and keeping within the cost structure is critical to the pricing process; and
  • Create the Right Mindset — Change can be very difficult for attorneys so managing that change and making sure attorneys understand the process is vital.

How Can Firms Help their Attorneys Succeed with AFAs?

The word that sums up AFA success? Monitor! Law firms need to see that as an opportunity rather than a hardship. Those that do will reap the benefits of working with AFAs. There are three components to consider in helping your firm and its attorneys achieve success with AFAs:

  1. Tools and Training — Get the project management training necessary to assist the firm in moving from hourly to value billing. This is a major paradigm shift for most firms, and as with any change initiative, the key is to provide the tools, training and patience.
  2. Resources — Attorneys need to become familiar and proficient with the firm’s historical and economic data. This can and will make or break an AFA. Be sure your team is informed!
  3. Personnel Management — Attorneys need to assign and utilize the necessary and appropriate resources. In order to work within an AFA cost structure, firms need to be mindful of how they staff AFAs. The goal is to obtain the best result for the client in a cost-effective manner and proper leveraging of attorney staffing is essential to that success.

As Tommy Lasorda famously once said, “There are three kind of baseball players: Those who make it happen, those who watch it happen, and those who wondered what happened.”

With respect to AFAs, which one best describes your firm?