May 2010 • Vol. 30 No. 5 | An E-Publication of the Los Angeles County Bar Association

Mastering the Basics of Alternative Fee Arrangements

By Norman Mullock, founder of Redwood Analytics, and vice president of product strategy and innovation with LexisNexis Business of Law Software Solutions. He can be reached at norman.mullock@lexisnexis.com.

Rising client demand for alternative fee arrangements has forced an increasing number of law firms to move away from the hourly billing model. In many respects, firms are implementing AFAs in rather entrepreneurial fashion without the benefit of proper planning and controls instead of more formalized initiatives with enhanced tools and processes borrowed from best practices in innovation. Law firms should consider the following tips when planning and implementing new client pricing models. These steps can be implemented sequentially or in parallel prior to engaging a new fee structure.

Set up a team with financial and project management expertise. Comb the firm, and bring together a “hot team,” a diverse, strategic decision-oriented team with financial, legal, and project management background.

Get baseline knowledge. Arm the team from finance and project management with information about how matters of certain types have been historically staffed and priced. Use this valuable information to create a series of planning templates to guide discussions around matter types that lend themselves most readily to AFAs. How informed a firm is about historical service delivery contributes to improved future alternative fee arrangements.

Get top-down buy in. Executive partners need to announce firmwide new AFA initiatives, introduce the team, and encourage partners and associates to be accountable and make new billing models work. At the same time, ask executives to validate the AFA core team that has been given authority to implement AFAs. Don’t talk about “death of the billable hour,” even in an environment with 100 percent adoption of AFAs. Firms will still need hours as a basis to measure inputs and profitability.

Train partners. Partners should understand the basics of law firm profitability and the mechanics of how costs are incurred. When partners understand new pricing models and are able to manage to desired outcomes, then project management is more efficient. Equip partners and associates with appropriate tools to promote accountability and detailed time management. Provide incentives to partners as a means of motivation to adopt and conform to new pricing structures.

Identify clients and establish trust. Proactively select a client with which the firm has strong rapport and who may be open to discussing new, beneficial ways to price matters. Begin with casual conversation to gauge acceptance for AFAs. With consistency, transparency, and proof points, trust can be established, and relationships can be strengthened long term. Remember, your clients fear getting this wrong more than you do. Also remember, for obvious reasons, most clients do not want to be an unprofitable “burden” to their law firm partner.

Understand whether clients seek predictability or lowest cost. Is the piece of work tactical, strategic, or operational? Understanding this distinction helps firms and clients identify the most appropriate fee structures. With experience and consistent client dialogue, law firms will begin to understand and better assess relative value any given legal matter represents for the client. Priority will vary and be solved for clients’ specific needs.

Prepare for trial and error. There’s a fear among some firms (and clients) that they will get alternative fees horribly wrong. Sometimes they do. By managing down scale of risk early and by adopting a portfolio management approach, what goes wrong will be of little consequence. Already faced with depressed utilization rates, a firm’s risk exposure may be smaller than thought. Trust that there are inefficiencies in how things are done today, and look to eliminate these inefficiencies as a form of risk mitigation.

Be innovative. Recognize innovative firms do well when they try a variety of things frequently on a small scale. Failure will not hurt as much, and knowledge gained will only help with the end result. As has been said, “Don’t waste a perfectly good crisis.”

Celebrate learning. Celebrate and share the news when innovative processes lead to a client’s success story. Treat failures as learning experiences that are a necessary, if painful, part of the growth process.

Put business processes in place. Fixed fees and other AFAs are not managed like hourly arrangements. Put procedures and systems in place such as tracking to budget, meeting margin requirements, pricing policies, and the usage of task and phase codes. These allow for course correction, scope expansion, and post-mortem reviews.

Start with work that is predictable. Legal work consisting of granular steps with little change, such as estates, trusts, wills, repetitive litigation, or bond work, are good areas to begin implementing AFAs. Analyze repetitive cases, and seek patterns throughout. Draw conclusions, and then create a fixed fee structure as a test.

Don’t reinvent the wheel. Remember, you’re not scoring points on original thought but on delivering high-quality services at value to the firm. Borrow heavily from what has worked in the past for others to follow and for your clients to understand.

Set up tools and technology. Having the right tools in place to plan, track, and provide alerts for matters are a must for real-time analysis. It’s also the ultimate form of leverage. With data in hand, the ability to alter perception and create change is supported with proof points. Examples can be shared with clients in support of fixed fees.

Redwood offers law firms a leading Planning Application that connects day-to-day matter management with increasing client demands for alternative billing arrangements. For more information, visit www.lexisnexis.com/redwood-analytics.




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