Value Pricing a Win-Win Scenario

Value Pricing a Win-Win Scenario 

My article on “Win-Win Alternative Fee Arrangements” was kindly mentioned and summarized in the highly regarded Virtual Intelligence Legal Innovation Blog based in Stockholm, Sweden.

Win-Win Alternative Billing Strategies – Part III

This is the third 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.

What are the innovators doing?

The first innovator I’ll talk about is Patrick Lamb’s firm, Valorem Law Group based in Chicago.  Patrick was formerly with an Amlaw 100 firm, and decided to leave to start his own 9 lawyer litigation boutique to focus on fixed fee litigation services.  

Patrick has two main concepts he promotes in his billing approach.

First, he sets up fixed fee estimates for the various phases of a litigation file, in consultation with his client.  Then, at the end of each phase, the client is invited to add or subtract from the fixed fee for that phase, depending on perceived value provided.  And often the client is premiuming the fixed fee based on value perceived.  

Second, at the end of the file, when all the results are in, the client is invited to again adjust the final bill based on results and Patrick has the opportunity to gain a significant bonus based on results.

Only a handful of firms are doing fixed fee billing on litigation files, so Patrick is certainly at the leading edge here. 

Seyfarth Shaw is a 750 lawyer full service law firm with multiple offices in the US.  They’ve focused on “Lean” Six Sigma techniques in a big way.  Six Sigma is a technique that’s been used by many Fortune 500 companies to improve quality while reducing costs and getting more efficient.  “Lean” Six Sigma is a cut-down or leaner process than regular Six Sigma, which can be very resource and time hungry.  Seyfarth uses Lean Six Sigma techniques to significantly reduce the cost of producing legal work in conjunction with alternative billing and makes clients very happy in the process.

Orrick is a very large firm in the US which is offering portfolio billing, essentially a flat fee to provide all of a Fortune 500 company’s legal work on an annual basis.  Orrick signed such as deal a couple of years ago with a Fortune 500 company for a price totalling 20% less than what the client paid last year.  This will give Orrick tremendous incentive to get more efficient in the way it handles the file in order to maintain its profitability for this client’s work.  As a result of its experience with alternative billing, it is willing to take that chance, and it’s doing what it can to satisfy the client and their needs to reduce overall legal costs. Now that’s innovative.

The Economics of Alternative Billing

A 20 per cent discount with a 40% profit margin is equal to a 50 per cent cut in profit. That’s a big hit.  You’re going to have to really pedal hard to make up for that loss in profit when you get into alternative billing.

Leverage still works, and you should be optimizing where the work is done, making sure it’s done as efficiently as possible, at the lowest possible level, keeping in mind overall cost for the client is kept to a minimum. 

Realization is key to profitability, and you need to get more efficient.  The fact is that’s how many smart law firms track their profitability, it’s the realization on their time.  And that’s an opportunity cost that you have.

Some will say you don’t need your timesheets any more. I say, think twice about that, because you’ve got a lot of valuable information in your time and billing systems and you don’t want to lose that information by not recording time. 

Legal Project Management 

So that brings us to the latest “hot” thing in legal management.  Legal project management.  There are a few consultants out their touting this as the panacea to your alternative billing problem.  They talk about Six Sigma, LPM, getting more efficient while lowering costs and increasing quality, etc.

So, is LPM the solution?

As a first comment, lawyers are not good project managers, and have never had to be since they’ve been doing hourly billing for decades, which doesn’t reward efficiency.  It rewards more hours under most partner compensation systems.  So law firms have to do a total rethink of their partner compensation systems and criteria to operate effectively under alternative billing.

So how do we deal with this? 

I think there are some simple things that can be done to improve efficiency, without going whole hog into project management now.  Jim Hassett of LegalBizDev has some good advice, with just in time training of LPM, as an example. Look at where simple efficiencies can be gained, and experiment a bit.  

Law firms want to be seen as being proactive in reducing clients’ legal costs, so the smart firms are learning about project management now, and approaching their clients with the objective of getting more efficient if clients are receptive.

Legal project management can also be done whether you’re doing hourly or fixed billing, and similar benefits can result without as much risk for either side.

Legal project management is also being looked at as an alternative to alternative billing. Interest amongst law firms has gained rapidly over the last couple of years, as firms are rapidly trying to get themselves more efficient without clients forcing them to do AFA’s first.

Preparing for Alternative Billing

– Go slow at first, and experiment using pilot projects with understanding clients.  Don’t start with “A” clients, as they may get unrealistic expectations, and get upset when they aren’t offered alternative billing after all.  Start with B and C clients.

– Ask clients what they want

– Determine the value of your services to the client as we discussed earlier.

– Add value, as we discussed using 51 ways to add value, etc.

– Don’t throw away your timesheets, as they will be invaluable for tracking the profitability of your alternative billing files, and will also help you with costing and pricing future AFA’s. 

– You don’t have to be profitable on every AFA file.  This is a tough one for many partners to get their minds around.  With fixed fee billing, you will make some mistakes at first, so treat those as learning mistakes.  Just reduce the amount of risk at first by trying this out on smaller files until you get the hang of alternative billing.  The idea is that you will win some and lose some, but you are sharing risk with the client, and you will get better at it the more AFA’s you do.

– Improve your fee budgeting skills.  Lawyers aren’t good at budgeting, as they’ve never had to be under hourly billing.  You must do more work on this up front to optimize your profitability and produce a win-win result for your law firm and the client.

Call to Action

Prepare for alternative billing now.  It’s not going away anytime soon, so get educated on the topic and start looking at ways to implement alternative billing in your firm.

Look for ways to add value.  There’s many ways to add value for your clients, so start looking at this area now.  Clients are getting more demanding and want more value for their dollar, which they haven’t been getting in many cases under hourly billing.

Become more efficient.  You can do this in various ways, but start simple and work with your clients on ways to reduce wasted legal steps and get more efficient.  Learn more about Legal project management and how it can be applied in your firm.

Communicate with clients.  Find out whether they’re interested in alternative billing, and give them options.

Finally, partner with clients on alternative billing.  You can work together on this and hopefully create a win-win situation with a very satisfied client for a very long time.  That is the ultimate goal.

The Small Firm Advantage

Originally posted on Small Firm Innovation 

Large law firms today are in a real bind.  Their large clients are looking for lower legal costs, but large firms have big overheads, lots of partners to feed, and little experience in providing alternative billing solutions.  They have increased their chargeout rates significantly in the last decade, and large clients are understandably upset.  The rise of the Association of Corporate Counsel (ACC) is an indicator of just how upset they are and their need for retribution.

Small firms, on the other hand, are sitting in the catbird seat.  They have what large clients want.  They have low overheads, their chargeout rates are significantly lower than large firms, and they have lots of experience with fixed fee billing for commodity work.  They’re also hungry to get their hands on large firms’ institutional client work.  Large clients are interested in what small firms have to offer, since large firms aren’t responding to their repeated requests for alternative billing.

The time is ripe for small firms to turn their better value offering to their advantage and steal good work away from large firms.  It’s there to be had, and large clients are looking for options.  Take the advantage now.  The economy is in tough shape, and the opportunity won’t get any better for small firms. Put together an alternative billing strategy and lure away large firm partners looking for more flexibility and better work/life balance.  These partners can make more money in less time with a lean platform that’s already in place in a small firm. They can be the big fish in a small pond.  And many large firm partners are doing just that.  They’re jumping ship from large firms that have retirement policies that force them to retire in their prime practicing years.

Why not take your clients with you and create something new, that’s truly yours, and not be treated like an employee in a mega-firm where you have no say? No oppressive rules, no national firm overheads, no one telling you what to do.  Be creative, experiment a little, and have fun.  What more can you ask for?  Use the technology you want without the constraints imposed by some large firm tech department.  Use LegalZoom technology, outsource to the best lawyers available, work virtually and create virtual teams of like-minded partners from other large firms who are ready for a change.

The legal industry is in turmoil, and that’s a real opportunity for small firms. Develop a new strategic plan with a unique value proposition.  Offer value pricing and make clients very happy.  The Valorems of the world are already doing it, and have done all the groundwork for you.  Market yourself as the expert in your field on your terms, and no one else’s.  Use social media as you see fit, and take advantage of this very effective and inexpensive marketing technique that large firms just can’t seem to do as well as a small firm can.

Make your legal working life a lot easier and more fulfilling.  Work with like-minded people who want to create something new, something exciting, and something that can allow you to make twice as much money in half the time. Now that’s real work/life balance!