One of the big issues in the management of legal practices is securing revenue. The basis on which firms seek fees from clients is a fundamental calculation, so it is worth considering what’s at stake when choosing between traditional and alternative models, as this piece explores.
Is your firm considering making the switch towards alternative fee arrangements? Some considerations before you make the leap
The ability for clients to exercise greater purchaser sovereignty than any other previous time period has had a dramatic impact on how many industries conduct their business, and the legal industry is no exception. The increased demands from clients to provide greater value and cost transparency have resulted in many firms reassess the traditional practice of hourly billing, and instead seek alternative fee arrangements. Firms have to accept that there has been a discernible shift in consumer behaviour and we’ll take a look at how your practice can take advantage of the new legal business landscape, while avoiding some of the alternative fee arrangement pitfalls.
Clients can’t get no satisfaction (with traditional hourly billing model)
Well… rather than no satisfaction, clients would be more satisfied with some cost certainty as Rob Knowsley of Knowsley Management Services says when discussing fixed fees for Thomson Reuters.
“Fixed fees are expanding their application in the marketplace,” he says. “There is a growing trend away from time recorded as one of the principal methods of setting fees.”
The demands for greater cost transparency isn’t exclusively within the domain of consumers with in-house legal departments both in Australia and New Zealand looking to reduce their spending as well as the findings from the 2015 In-house Report: Benchmarks and Leading Practices (the ACLA Report), produced jointly by the Australian Corporate Lawyers Association (ACLA) and Corporate Lawyers Association of New Zealand (CLANZ), suggest. The ACLA Report found that only 51 percent of organisations felt that their main external firm provided advice at a reasonable price, and furthermore, only 60 percent of the respondents of the ACLA Report said the quotes were realistic.
ACLA chief executive, Trish Hyde said, “[i] t should be a wake-up call for law firms that as many as one in ten in-house lawyers are unhappy with their main firm. In the current environment, it’s no longer acceptable simply to coast on the historic strength of a relationship. Law firms need to always be focussed on what their clients want, innovate where necessary, and constantly validate why they deserve the business.”
You can’t always get what you want (if you get the billing model wrong)
There’s no mistaking the desire from clients for better value, but it’s essential that firms get their billing model right from the get-go. As the ACLA Report highlights, of the two-thirds of organisations that have utilised alternative fee arrangements which incorporate blended rates, volume billing, value-based billing, fixed pricing or risk-reward billing, 29 percent of respondents rated the experience as a failure, and only half rated their alternative fee arrangements as a success. Therefore, it’s essential that firms recognise who their clients are, understand their needs, and take account of any budget constraints.
Sympathy for the devil (sorry lawyers, that was coming)
Any firm that doesn’t conduct adequate research but rather, derives its pricing models from the competition may be setting itself up for failure. When attempting to get the billing model right, the overarching consideration that firms should keep in mind is that providing fair value and cost transparency rates highly amongst clients.
“The drivers are varied but the need for firms to be perceived as client focused and to increase the chances of keeping or getting more desirable clients in the face of proactive and adaptive competitors has to be front and centre,” says Mr Knowsley.
The biggest takeaway for firms moving away from the hourly billing model is that they can still be profitable if they conduct the necessary due diligence as to what billing model best suits their practice and clientele, all the while offering greater value when compared to the competition.