By now most lawyers are aware of what an alternative fee arrangement (AFA) is. While other industries, such as global management consulting providers, have been working with alternative pricing for many years, the legal industry is just now catching up. To understand the various types of AFAs and which ones will work well for your firm, there is no reason to reinvent the wheel. A set of concepts and standards is readily available from the Association of Corporate Counsel (ACC). The ACC promotes member experiences with these concepts and standards, and created models to enhance its knowledge base. You can find common types of AFAs or value-based arrangements, along with examples of when they might be used and describing situations for which those fee structures may be ideally suited. (See, e.g., acc.com/valuechallenge.) This article explains tactics on pricing, value or alternative fee arrangements, and the ways to track the commitments clients desire that are part of the process.
SHOULD FIRMS PRODUCE THEIR OWN AFAS?
Some firms seek key differentiators and attempt to create their own variants on AFAs, but this is not the difference maker we seek. All firms have preferences based on the types of matters they handle and what they know works best within their organizations. But the questions we must ask are, “What do our existing clients like?” and “What do potential clients want?” In answering these, we must recognize there are only so many choices and “best price” routes available. To ensure value to clients, attorney experience and who can manage a matter well will determine who is best suited for the job.
Clients value the following concepts:
- Competitive pricing
- Value services
- Project (or matter) management
Sounds good, right? Well, these concepts are great promotional responses, but they take hard work to ensure. So let’s roll up our sleeves and consider how they are achieved. Alternative value pricing, and, most importantly, proper matter management, play a major part in the solution. My firm leverages our client covenant and manages matters with a task-based billing approach. (The covenant can be found at squiresanders.com.) We thoroughly examine historical revenues and costs to accurately forecast the fees of future matters. This internal due diligence is continually incorporated into our AFA approaches and philosophies.
We also continuously examine all aspects of our service delivery, which spans across industry groups, practice groups and regions, to understand and implement our best practices and align them with client needs and goals. We leverage our legal project management processes together with our extranet solution MyMatter, finance and time entry tools to accomplish this.
It’s one thing to understand pricing options, but it’s another to leverage the appropriate one that fits the needs of both the client and the firm. First, you need to determine who runs the pricing process in your organization. Pricing support directors and managers are a new and upcoming resource in the legal market, and they work with the attorneys and finance teams, helping to map the appropriate pricing structures. If no such person exists in your firm, odds are someone on your finance team can help you. Many variables must be considered while assessing the type of proposal you will choose.
Among the factors you may need help with are operational costs, utilization, realization and, in some cases, special leadership approvals. Then you must consider tracking these factors for future needs; it’s a full-time job that you need not take on. It’s better to take advantage of the resources you have available to help you. Tracking this information is extremely important so that the firm can not only standardize processes but, more importantly, track what works best and why.
Second, this can all fall apart if the matter is not properly managed to coincide with the budget. You measure progress against what the firm committed to and how the client is communicated to throughout the life cycle of the matter. One of the best ways to track matters is through budgets and task-based billing. Leveraging task codes mapped to the tasks within a matter’s budget is the only way to track this kind of detail. The benefits are astronomical, and if done correctly, you can systematically find out what type of AFA works best for you, and gain more control on what is marked up and down, based on your firm’s experience in handling similar matters. You just can’t get this kind of information from sending out firm-wide emails or using generic templates—or anywhere else for that matter.
Over the years, knowledge management has largely been focused on technology. Leverage this new push with matter management, concentrating on how you can best leverage firm-wide expertise and availability. With proper statistical tracking and analytics, you can effectively staff a matter with more-expensive resources by properly justifying the need to the client.
The same applies to internal firm leadership regarding the task turnaround time efficiencies. Having the metrics and quantifiable data that permits “fair return” is a powerful demonstration in these cases and builds on trust.
Important points to remember
- Beware of the ever-present “scope creep” problem within engagements. It’s important to assess project management, and the tools and systems you have in place in order to manage transparency with billing, expenses, invoices and, most importantly, changes to the agreement. This is done to specifically avoid those uncomfortable discussions about altering the budget of a specific project.
- Some applications and external systems come with templates. However, aside from these tools being expensive, outside systems do not contain your firm’s knowledge management of how you would staff, track tasks and manage a matter, let alone factor in the training of future talent in the firm. Write-offs and markdowns are often a direct result of poor matter and budget management, and this can be avoided with the proper use of your tools and systems.
- Avoid making the mistake of only tracking AFAs within your firm. Tracking tasks on an array of matters is extremely valuable, even ones not driven by AFAs. Tracking matters that are aligned with your firm’s strategic direction is essential so you can get better at analyzing how you price, manage and report on matters. Internal operational costs in other locations may be more expensive hourly on an operational side, but the efficiency could outweigh the cost.
- Stop devaluing legal services. Contrary to some experts’ beliefs, lawyer talent, firm experience/presence and knowledge are not as easily a commoditized service as some may have argued years ago. The trends have reversed, and clients have seen that cheaper quotes sometimes have larger overruns due to the lack of experience or capacity of the cheaper solution. Clients are comfortable with spending a little more if it is justified with metrics and committed to with service level agreements.
- It’s okay to offer free things. Just take some time to audit and assign values to the value-added services you provide, and report on them through training, seminars and project management.
- Know your client key contacts. Who are the decision-makers—the general counsel, the chief executive officer or perhaps the chief financial officer? Understand also who the procurement contacts are and what’s on their mind. Each client has different goals. Make sure you listen to them and follow up. It’s a mistake not to audit your client commitments.
- Work with your internal pricing and project management resources.
- Recognize that an AFA can sometimes be more expensive than hourly billing for a particular matter. If it doesn’t make economic sense for a certain matter, your careful assessment of the potential costs and thorough presentation to the client regarding the basis for your projections will protect everyone against unexpected surprises later. If hourly billing is the most suitable method, it’s a good idea to present the actual statistics to the client and provide validating facts because real numbers make the most sense to people.
Without question, AFAs have changed and will continue to change the legal profession. The industry is witnessing the birth of a new set of roles within law firms, where certain individuals are now specifically responsible not only for ascertaining the economic feasibility of fixed-fee and other AFA engagements but also for managing the teams doing the work under those structures. As director of value and project management at Squire Sanders, part of my focus is comprised of pricing and matter management, as well as overseeing internal and external resources, creating cost-efficient strategies and ensuring matter profitability.
Alternative fee and value arrangements offer our lawyers a competitive advantage that gives us the ability to lead the field through innovation, becoming better businesses in the process.