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.

Win-Win Alternative Billing Strategies – Part II

This is the second 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.

Value Pricing – Part II

In Ron Baker’s book “Implementing Value Pricing”, he puts forward an eight-step plan on how to price a job up front on a fixed fee basis.

The concept of value pricing that he talks about is different than the value billing concept that lawyers have talked about for years.  Lawyers usually work on an hourly basis, and then try to charge a premium at the end of the file based on the extra “value” as perceived by the lawyer.  So on a $30,000 file, if a significantly higher recovery is obtained than expected, the lawyer may try to charge a premium of $6,000, or 20%.  The client’s response might be, “Why are you charging me a premium at the end of the file. We had a contract for an hourly rate, right?”  Ah yes, the lawyer says, but in the fine print of the engagement letter there is a clause that allows the lawyer to charge a premium of whatever the lawyer wishes on top of the hourly rate based on the lawyer’s perception of value provided.   The client either says no, or thinks twice about using that lawyer the next time.

Instead, the value pricing system calculates the value up front, not at the end of the file as value billing does.  A very important distinction.

Another benefit of pricing for value up front is that it also allows you to obtain a larger retainer up front as well.  If you have scoped out the work properly and provided a fixed fee quote, with some measure of certainty for the client on the total amount of legal fees to come, they will be much more willing to give you a third or a half of the fixed fee up front.  If there is uncertainty as there is under hourly billing, the client is much more hesitant to pay a retainer, or will only provide a very small retainer up front.

So you need to negotiate the value and the price of the legal work in a conversation with the client up front.  Ask the client what he or she values. That value will determine what price you can charge for your legal services.

How is value determined? 

Does the client or the lawyer determine value?  The answer of course is the client.  Notwithstanding that the lawyer may have many years of experience in the practice area, every client has a different perception of the value that your firm provides.

Ron Baker says, “Price the customer, not the service.”  So each client needs a different value/price proposition.  What that means is that you may charge a different amount for the same service to different clients. However, keep in mind that each client wants service provided in a different way.  So each client has a different value “package” that it requires.  One client may want a service guarantee, one may want a fixed fee, and another may want the service provided tomorrow, not next week.  Each service feature carries a different price tag.  So it’s like a new car, which is provided with several different option packages, and each client gets to choose the options she wants.

The most important point here is that it’s all about choice.  The client wants choice.  They may decide to go with either a fixed fee or an hourly fee, or a hybrid fixed and hourly fee, but they want to have the choice to select from.  You need to provide them that choice.

4 Main Ways To Add Value For Clients

– Increase revenue – such as increasing the recovery for a plaintiff in a lawsuit

– Reduce the payment required as a defendant

– Reduce risk for client with a fixed fee

– Enhance reputation, such as using a blue chip law firm’s reputation to secure public financing that you may not have received otherwise.

Costing Out The Work

Once you’ve determined the price for your fixed fee service, you can then determine what it will cost to do the job.  You will need to to budget costs to arrive at the desired profit.  If you can’t make the cost work in order to get the desired profit margin, you simply decide right now not to take the job.  Why get involved in a loser if you know the answer up front?

Another key to Ron Baker’s pricing on purpose is that timesheets are actually done up front, instead of as the work is done.  By doing your timesheets ahead of time, you are able to determine what your costs are for pricing purposes to obtain the profit margin you require.

Do you still need to track time?

Yes! You still need to track time in order to understand what your costs are on each file and whether you were profitable.  This is one area where I disagree with Ron Baker, who says he wants to trash the timesheet.  Timesheets are still important for costing your files, and ensuring that you price your future jobs to optimize profitability.

Keep in mind that as you get into alternative billing and fixed fees, there’s always a danger that you will get involved in price wars.  Don’t.  This is a race to the bottom, as there’s always someone who will do the job cheaper than you.  Instead, do whatever you can to distinguish your legal services from the competition, and “uncommoditize” them. Any service can be “uncommoditized”.   If not, and it truly is just about price, get out of that business and replace it with something else where you can make money.

Another rule to consider is the 80/20 rule of profits.  Under this rule, you make 80% of your profits from just 20% of your clients.  Read Ron Baker’s “Implementing Value Pricing” and you’ll see the study backing up this guideline mentioned in one of the appendices.

So what that means is that you have to be ruthless in evaluating the profitability of your clients, and cut the bottom 20% on a regular basis and replace them with more profitable clients.  The first step is to determine profitability of each client, however. We’ll talk more about that in a future post.