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
KNOWLEDGE MANAGEMENTOver 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.
MOVING FORWARDWithout 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.