It Wasn’t About AFA’s

By on May 6, 2012

I recently hosted a, standing-room only client discussion at Aderant’s Momentum on AFA’s. The funny thing was that the discussion turned out to be not about AFA’s (Alternative Fee Arrangements) but about Project Management and Profitability Modeling. Sure, most of the firms in attendance were already providing their clients with AFA’s, one large UK firm even indicated that about 50% of their litigation was now fixed-fee work.

What firms wanted to hear about was how they could better manage projects and use matter planning tools to predict profitability. Many of the firms that contributed to the discussion were already rolling out matter planning tools, almost like “job costing” tools to their attorneys. One can note that some industries like construction have used job costing tools for years to bid on and then manage ever-more complex projects. Law firms can learn from these experiences while using similar tools.

Here are the key takeaways from this session:

  1. AFA’s are just a pricing model for services
  2. AFA’s require a commitment to project management, most importantly resource management
  3. Matter planning tools allow the firm to use past matters to help predict both the process and staffing levels for future projects.
  4. Managing attorney resources most often involves moving work down to the lowest practical levels within the team.
  5. Partners on the team who are doing associate level work will cause problems.
  6. Project Management will allow the team, and possibly the client to see actual dollars worked vs. budgeted. However, the key
    component normally difficult to determine is, estimate to complete.
  7. An AFA fixed fee should also mean “fixed scope” of work.
  8. Most participants indicated that in litigation, Most AFA fixed fee work was all done pre-trial. Once the case went to court, firms
    operated on a traditional hourly basis.
  9. AFA’s can be used as either loss-leaders, or marginally profitable, as a way of getting more profitable trial work.

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Categories: AFA - alternative fee arrangement, Best Practices, Financial Management, Law firm billing, Productivity

How Matter Planning Actually Works – Part 2

By on February 26, 2012

In my blog posting on Matter Planning – Part 1 we examined how using Matter Planning software can leverage existing information in their time and billing software to build easily a “roadmap” for revenue, hours, rates, costs and expected profit for a new matter. In this posting we’ll look at how to manage the matters and track budgeted vs. actual performance statistics to then better forecast future matters.

There are key components to managing a matter once the plan is in place, they include:

  1. The ability to report on actual to budgeted revenue, hours, costs and profit at any moment or at defined thresholds. For example, we have hit 50% of the hours budgeted for a matter, however we are only completed 30% of the work. An immediate red flag goes up.
  2.  The ability to do “what if” scenarios by, for example, swapping a lower rate attorney for a high rate attorney in the plan and quickly seeing the influence of the change.
  3. The ability to set-up workflow and alerts that notify various people when for example, a new matter intake is processed for approval and requires a matter plan, or a variation in the actual to budget has transpired.
  4. The ability to run a P&L for a matter comparing actual vs. budgeted revenue, internal costs and profitability at any point in time.
  5. The ability to run reports showing larger selections of matters, clients or other criteria to get a higher level view of multiple projects.
  6. The ability to apply a prior, similar matter plan to a new matter with few keystrokes.

The bottom line for firms is that Matter Planning software automates an otherwise almost impossible task of planning and managing a matter to a detailed budget to provide the firm with more predictable results and improved profitability.

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Categories: AFA - alternative fee arrangement, Best Practices, Financial Management, Law firm billing, Management

Win-Win AFA’s at Work – Stage Engagements

By on November 12, 2011

We are hearing from more and more firms, especially those doing insurance defense work, about how they have implemented an Alternative Fee Arrangement that seems to be a good compromise. We’ll call it Stage Engagements and it’s quite simple. A firm will take on a volume of matters from a carrier in trade for a fixed fee for various early stages of each case. Each stage has a start and end point, the end point is a “triggering event”. There can be multiple stages prior to outright litigation.

Here are some examples of triggering events:

  1. End of the “Presuit Period”.  This is a specific date, sometimes extended upon agreement of the lawyers.  But typically it is 90 days from the notice of intent.
  2. X dollars for all work up performed up to the first three depositions including plaintiff’s deposition.
  3. X dollars for work performed during the phase of trial preparation.
  4. X dollars for work performed during the initial discovery up to and including the plaintiff’s deposition.

 The Client Wins. Clients are looking for fixed price, especially in early case work. The early stages tend to be very low cost to the client and with a fixed price, outside counsel has no incentive to delay, or expand the scope of work required. Clients maintain the option of handing-off the case to another litigation firm if it deems the case if too complex or risky for the early-stage firm.

 The Firm Wins. Even though the firm doesn’t make a lot of money on the fixed price stages, it does position itself to inherit the case if an early settlement can’t be reached and the case goes to trial. As we all know, litigation scales up the value proposition and the billable hour normally rules. Furthermore, with the volume of work being acquired, firms can push the work down to the lowest practical level of competency, build best practices and use technology to keep internal costs down.

 Here are some tips to firms looking to take on Stage Engagements:

  1. The first key is to clearly identify what tasks are required in each Stage. Keep in mind that fixed scope = fixed fee. Any material “out of scope” tasks or turn of events requires a re-negotiation with the client.
  2. Normally a Stage isn’t billed until it is complete. Firms need to figure in the impact on cash flow when taking on a large number of new files. Also keep in mind that clients are taking 45-90 days to pay even under flat fee arrangements.
  3. Most modern legal billing systems will easily allow a firm to track all time entries in WIP for any Stage, and then simply bill them at a fixed fee amount. The timekeepers working on the matter get their utilization (hours billed) calculated based upon the fixed fee and see some sort of adjustment. More advanced systems might send an attorney a SmartAlert email when 90% of the budgeted fixed fee has been worked. SmartAlerts might also be sent to billing when a triggering event takes place from the Docketing system, notifying them it’s time to bill.
  4. Firms can run internal reports comparing profitability (or the lack of) on not just the Stages, but also on the entire matter if it goes beyond Stages and becomes hourly billable. The idea here is to look at the big picture, not just small chunks.
  5. Improving internal processes and lowering costs will give firms the inside track on their competition securing additional work, use this as a key component of your business development process.

 Fixed fee work doesn’t sound very innovative; however this Stage Engagement approach can be a simple win-win for both sides while we all invent a better set of AFA’s.

 Let me know what   you have experienced in Stage Engagements.

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Categories: AFA - alternative fee arrangement, Best Practices, Financial Management, Law firm billing, Management, The Legal Market

What is Your “Rate of Change”?

By on October 30, 2011

 Jack Welsh, the former Chairman and CEO of General Electric once said:

 “When the rate of change inside the institution is less than the rate of change outside, the end is in sight.”

  It reminded me how hard it is for a law firm to make changes, especially in the areas of finance and practice management. The claim is that law firms have been trailing behind corporate America for many years in such areas as; innovative use of technology, development of business and marketing plans, and communications with clients, and now Alternative Fee Arrangements. Many times it is frustrating to see firms hang onto the status quo for no good reason. Why is this?

  One reason might be that firms don’t have a “Vice President of Change”.  Successful corporations all have these people, many times there is on-going competition among the up and comers as to who is the best or most compelling Vice President of Change. You can probably guess, of course, where I’m going with this …. there really isn’t anyone with this actual title. The Vice President of Change is the brave soul who is willing to risk rejection, humiliation and being labeled as “not understanding” by just trying to improve the way things have always been done.  

  Law firms don’t control the rate of change on the outside; they can however embrace a Vice President of Change internally. Encourage attorneys and staff to be creative and propose changes that will benefit the firm. Let them know that the Vice President of Change is a welcome position.

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Categories: AFA - alternative fee arrangement, Best Practices, Financial Management, Management, Practice Management

How about if I bill for double the hours I spend ….another AFA?

By on April 24, 2011

Bob Pozen, chairman of MFS Investment Management and a senior lecturer at Harvard Business School wrote:
“…… I worked for a law firm in Washington, D.C., for six years. While many lawyers stayed at the office late, I soon realized that charging clients by the number of hours worked did not make sense for me. In my view, it’s not the amount of time you spend on helping a client; it’s the result you’ve produced for your client. After a few years, my clients knew that I was efficient, so I ran an experiment. I sent them a letter explaining that in the future I would be billing them for double the time I actually spent on their work — unless they objected. Not one client objected.”

Do lawyers believe that clients are impressed by the hours poured into a case? The point made is that many clients are willing to pay for results and efficiencies. This can be a win/win for firms that can work this into a premium rate, without chewing up unnecessary hours. The secret is to prove to the client that the firm can get results in a highly efficient manor. Investing in infrastructure and technology should help accomplish this.

See my posting on becoming the low cost provider.

Do you have examples of innovative ways to improve profitability while increasing client satisfaction, just pass them along.

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Categories: AFA - alternative fee arrangement, Best Practices, Financial Management, Law firm billing, Technology, The Legal Market

Can Lawyer Bill Like Doctors – Similarities in the Business. Part 2

By on April 17, 2011

In my first blog posting I discussed how legal activities could be billed similar to medical procedures. The two businesses have more in common than one might think.

 The similarities:

  1. Large companies including insurance carriers pay for most patient/client bills.
  2. Procedures/legal tasks rates can be negotiated.
  3. Hard cost items in both businesses are billable to the patient/client.
  4. Many items can be outright billed as a complete flat fee.
  5. Nurses/paralegals (medical and legal assistants) can do much of the prep work not requiring the professional.
  6. The patient/client can choose a big name facility like the Mayo Clinic or their local attorney.
  7. Areas of specialization may be called in to consult or provide specialized procedures.
  8. The phone call in the middle of the night from the patient/client is “billable”.
  9. The outcome of any patient/client matter could be life or death.
  10. Not every matter is simple or well defined and sometimes the results don’t go as planned.
  11. There are always billing disputes and special considerations; these can be handled as one-off situations.
  12. Health care and legal costs can spiral out of control and both have their own issues beyond the costs per procedure.
  13. No patient/client seeks services without some level of pain.

The differences:

  1. Doctors must be efficient and their offices must run pretty smooth or they don’t make the kind of money they want. They have no incentive to take longer than necessary to complete a task.
  2. Doctors have no problem referring out patients for special procedures.
  3. Legal billings are based on inefficiencies and lack of structure, the billable hour fits inefficiencies very well.
  4. Lawyers don’t want to admit there are well identified procedures for everything they do. They will claim that almost everything they do is really a one-off special task.
  5. Income, at all but the smallest firms, is based upon leverage. Associates contribute substantially to partner income. Lawyers may be compensated based on hours worked. This is almost nonexistent in medicine.
  6.  No one seems to have the power to force lawyers into a procedure type billing methodology. There may be little financial incentive for lawyers to do this on their own.

 If lawyers wanted to bill like doctors, they could. An Alternative Fee Arrangement for lawyers has a reasonable business model to follow, doctors in private practice.

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Categories: Best Practices, Law firm billing, The Legal Market

Can Lawyers Bill Like Doctors – Another AFA Option. Part 1

By on April 10, 2011

A viable AFA (Alternative Fee Arrangement) option is to have lawyers bill like doctors.

 The patient is sick and visits the doctor, it is quite unclear what the ailment is and how much medical care will be required to make the patient well. It could be anything from the flu to cancer. One thing is certain though, every step of the way through the medical system, billing for services will take place based on specific tasks performed. Each task has a procedure code, based on a diagnosis. The diagnosis can change as more is discovered, the degree of expertise and type of skill required changes also based on what is discovered. Each and every billing is based on a series of well-defined procedures. A single procedure can have a different set of rates attached based on negotiations. Starting to sound similar to the practice of law.

 So why can’t lawyers bill based on similar tasks? They can, and there is no substantial difference between the professions in regards to the task concept. For every area of law there can be identified the exact tasks that will be used to handle all possible outcomes. For example, in litigation there are task and phase codes that could cover all litigation tasks. Yes, we don’t know how many depositions will be required for any one matter, and a doctor doesn’t know how many procedures will be required ahead of time either.

 In general, medical bills are easy to read as compared to legal bills. Doctors don’t write creative narrative (sometimes impossible to understand even by other attorneys), they just check off the procedure codes from a master list, for example 90060 might be an intermediate office visit.

 If lawyers wanted to bill like doctors, they could and maybe should. In my next blog posting I’ll examine further similarities between medicine and law from a business point of view.

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Categories: Best Practices, Financial Management, Law firm billing, Productivity

Attorneys as Consultants – High Value Work

By on April 3, 2011

The discussion in the press regarding AFA (Alternative Fee Arrangements) is often based on trying to change the basic business model away from the Billable Hour world for law firms. So the ultimate question is, what’s the most valuable type of work that attorneys do and, therefore, should it be priced as such?

 The answer is clearly “Consulting”, it is the advice they provide based on all the other activities that might take place surrounding a matter. Even the most complex matters an attorney might handle, the matter can be broken down into somewhat routine components:

  • Understanding the matter – low value
  • Discovery and research – low value
  • Internal processing, document creation, scheduling – very low value
  • Consulting on the clients course of action – high value
  • One-on-one negotiating, appearance in court – medium value

 The secret to profitability in the AFA world is to become as efficient as possible doing the low value work. High quality at low costs. There are many process improvement platforms available to law firms from the business world such as Sigma Six and the Crosby quality process. I’ll talk about the Crosby process in a future blog posting.

The bottom line; when evaluating an AFA arrangement, separate out high and low value work components, show the customer a matrix of fees based on value. Consulting should have the highest value and carry the highest premium.

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Categories: Best Practices, The Legal Market

AFA’s might look really good.

By on March 20, 2011

Flat fee work is a mighty attractive form of AFA (Alternative Fee Arrangement) for clients; it “contains” cost and can be budgeted. Law firms are many times hesitant to quote flat fees for two basic reasons, they prefer the billable hour and secondly they fear lower margins associated with flat fee work. Flat fee work can be combined with hourly billings to present an overall attractive arrangement for a client

 Flat fee work can be very profitable under the following conditions:

  • The tasks to be performed can be clearly defined, including the skill/person requirements.
  • The firm has the skill/person resources readily available.
  • The firm understands their internal costs, the real cost based on past experience across a wide selection of similar work.
  • The firm can control the work schedule to insure the maximization of efficiencies.
  • The firm is willing to accept the profitability of the flat fee work based on averages across a reasonable cross section of work.

 Clients expect firms to make good money on flat fee work. A series of tasks might “cost” a firm $3,500 to accomplish, clients will gladly pay a flat fee of $7,000, netting the firm a 50% margin. This may not be as profitable as billing by the hour, but it can help secure additional work with higher premiums.

 Clients are looking for value and predictability. Providing an a la carte pricing scheme might help secure a long lasting client.

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Categories: Best Practices, Financial Management, Productivity, Technology
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