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

How can corporations reduce legal costs …. Just make life really difficult.

By on October 23, 2010

It is just a classic love-hate relationship:

  • Corporations love the problem solving and risk aversion help from law firms, they hate the overall costs and partner compensation model.
  • Law firms just love the billable hour business model of getting paid for activity, they hate the stringent rules and complications for billing and short-payments.

 It’s just amazing how well all this balances out for both parties. With all the talk of “alternative fees”, there is really little being done to make sweeping changes.

 So what can law firms do to deal with complicated billing and short-payments?

 New technology developments provide a way to “scrub” client bills prior to submission to insure they meet client requirements. Bill “scrubbing” checks each bill for a series of client rules and points out time and cost entries that need “help” prior to submitting the bill. Firms using this new technology will make it harder for clients to reject bills or short pay because of not following the billing guidelines.

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Categories: Financial Management, Law firm billing, Practice Management, Productivity

Alternative Fee Arrangements – Using Threshold Discounting

By on August 22, 2010

Law firms can use Threshold Discounting in a creative way to offer clients a way to control costs and also build volume (loyalty).

 Controlling Fees

The billable hour, as we all know puts firms and clients at complete odds. The firm benefits from more hours and the client is looking for a way to control costs on an engagement. The best situation for a client is a fixed price. If the firm has a good deal of expertise in an area they might be less concerned about taking a “hair-cut” with even a small bit of risk a fixed price matter might bring. Clients are looking for an alternative arrangement other than just billable hours. The firm might be creative by offering the client a “Threshold Discount” based on either hours or dollar value. For example, The firm believes they can handle the matter for $100,000, they offer the client a 25% discount for any dollars from $100,000 to $110,000 and a 40% discount for any billings over $110,000. In this scenario both parties share in the small but ever present risk involved. Likewise, the firm could instead offer 500 hours at a standard rate and a 25% discount for any hours between 500 and 600 and an additional 15% discount on any hours required over 600. The client likes this arrangement and the firm uses this as a marketing tool to generate work in areas where they excel.

 Incentives

In this scenario the firm wants to encourage a client to provide the firm with more and more work. This is an everyday marketing issue. If you go out to buy widgets the price can fluctuate between buying just 1 widget, a box of 100 widgets, or a box car load of a million widgets. This method of pricing also has its own checks and balances, firms like the reliability of “guaranteed” work, however they have to better manage the engagements since the more work they do the lower the rate might be. An additional twist might be to lock in a “stop date”, for example the firm offers an additional 10% discount on all work done before November 1st. The firm would use this incentive in hopes of get payment (income) in the same fiscal year (assumes a calendar fiscal year).

 Most time and billing system can automatically handle Threshold Discounting engagements either by progressive discounts on hours or dollars billed. The system will even assign one or more discounts during a single billing month.

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Categories: Best Practices, Financial Management, Productivity, Technology, The Legal Market
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