This is the first installment of a three part series based on my presentation on “Win-Win Alternative Billing Strategies” at the CBABC Sixth Annual Branch Conference in Las Vegas November 18-20, 2011.
Alternative billing has been done in conjunction with commodity work for decades in Canada. Fixed fees are common for personal services commodity legal work such as residential conveyances, wills, etc. However, alternative billing is not common for most business law and litigation work in Canada. Canadian law firms are not proactively offering alternative billing to their clients either. And clients aren’t happy about that!
Alternative billing is growing rapidly in the US and Europe, however. Large clients are pushing big firms to offer alternative billing and they’re getting price discounts of 20% +. This is what’s coming to Canada soon as well. So you need to get ready for how to deal with that.
The New York State Bar Association “Report of the Task Force on the Future of the Legal Profession”, published in April, 2011, has a set of recommendations on alternative billing, and it predicts that alternative billing will be the dominant form of billing in the future in the legal industry. Clients are pushing for it, and Bar associations are supportive.
The Association of Corporate Counsel (ACC) is going to be setting up shop in British Columbia and Alberta soon, so it’s coming very fast.
What Do Clients Want From Alternative Billing?
Clients want lawyers to provide more value for money. Legal chargeout rates have risen dramatically in the last decade, and clients want a price rollback!
Clients also want more predictability in legal costs. They want fixed fees. They want to be able to budget their legal costs as close as possible in order to satisfy their CEO’s desire to reduce overall legal costs.
Clients want law firms to share the risk when working for them. At the moment, clients have all the risks under hourly billing. Clients want to pay for results, not hours spent. If results aren’t achieved as planned, law firms should be sharing the downside as well.
Many clients are looking for lower overall legal costs. Legal costs are spiralling out of control, and clients are fed up.
What Do Law Firms Want From Alternative Billing?
Law firms want to maintain or enhance profitability when doing alternative billing.
Law firms want to manage risks, and may prefer not to take on all the risk, but are willing to share risks with the client. But the risks are a spectrum, and there is a different price all the way along the risk spectrum. The more risk, the higher the risk premium, just like a stock portfolio. The higher the return, the higher the risk. Clients are willing to pay a premium for less risk as well.
Law firms want to retain clients, so they need to offer alternative billing, as clients are looking for it now. And you want to offer alternative billing before your competitors offer it and steal your clients away.
Law firms want to satisfy clients, and alternative billing offers ways to satisfy clients even more than you are now!
Value Pricing – Part I
So what’s your unique value proposition? What do you offer that no one else offers for the same value as you do? Many firms do not focus on this question, and it’s the most important question you need to answer, because it’s the first question a client will be thinking about. Why should I use you instead of your competitors?
You will need a unique value proposition in order to succeed with alternative billing. If you don’t, it’s just about price, and that’s a losing game in the end. You have to distinguish yourself from your competition in order to price at a premium and achieve profitability with fixed fees.
Ron Baker is a CPA who has been talking about the concept of value pricing for over 30 years. He is the real guru of alternative billing.
Ron presents the formula: Value = Customer Profit minus Price. What this means is that Value equals the impact your legal work has on a client’s profit less the price of your legal service. Everything you do for a client will have a positive or negative impact on a client’s bottom line.
Some of the value you provide will be in the form of a tangible benefit, eg. hard dollars recovered or saved, and some will be intangible benefits such as enhanced reputation eg. client gets public financing with the help of your law firm’s blue-chip reputation.
The document “51 Practical Ways To Add Value” on the ACC website is an excellent overview of how you can add value for clients. It is from a large firm’s point of view, but many of the points are relevant for small firms as well.
For example, ask the client what their strategic plan is. Many clients are very impressed by firms that actually talk to them to find out what their company goals are. From there you can find out what the client values, and organize your legal services and resources in a way that can truly benefit the client. And when you start thinking about the client’s profits before your own profits, then you really add value. If you can help the client become more profitable, your profits will flow naturally as a result.