Tag Archives: Alternative Fee Arrangements

Realistic Approach to Innovation in Law Firms: Collaborate with Your Best Clients

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We addressed innovation (disruptive and otherwise) in a series of articles last summer.  The topic is certainly not resolved as evidenced by the many posts responding to and expanding upon a recent discussion of disruptive innovation at Harvard Law School.  Both that Harvard Law panel and the subsequent responses to it have underscored (at least for us) the need for some pragmatism as law firms invest in innovation – and perhaps a refresher on some fundamentals regarding disruptive innovation.

Fundamental Truths

Let’s start with some fundamental truths about disruptive innovation.

  1. Disruption is happening in the legal industry.  The longer it takes you (and your firm) to recognize that fact, the more vulnerable you are to disruptive competition.
  1. Disruptive innovation is rarely a pure technology play (i.e., disruptive technology directly displacing existing, presumably people driven, competitors).  Rather, technology enables new business models that disrupt incumbent competitors – generally by targeting “over-served” customers (see Clearspire, Axiom and other LPOs) or entirely unserved customers (see Legal Zoom).
  1. Incumbents rarely succeed in adopting disruptive business models – mainly because it cannibalizes their existing business and their margins.  Michael Raynor’s Innovator’s Dilemma explores the data at some length and concludes that incumbents are highly successful at sustaining innovation, while new entrants excel at disruptive innovation.

Raynor Disruption Graphic

Source:  Michael Raynor; Innovator’s Dilemma; Crown Business; 2011

Raynor’s findings are unsurprising if you think about them in the context of today’s sophisticated law firms.  For instance, if a firm were going to adopt the disruptive model(s) at work at firms like Axiom and Clearspire, they would need to be prepared to get rid of 80-90% of their current office space, half or more of their associates, and a likely a majority of their partners (equity and non-equity) as well.  Who is ready for that kind of change?

Rather than trying (almost certainly unsuccessfully) to imitate the disruptive innovators, incumbents have a couple of reasonable alternatives.

  • First, incumbents can (and in some markets do) acquire a disruptive competitor.  To make that acquisition work, the acquired entity needs to largely be left alone by the incumbent parent (i.e., it provides a source of new revenues and perhaps a place to direct lower margin work, but it should not be integrated into the traditional business).
  • Alternatively, incumbents can co-opt a disruptive competitor – outsourcing activities to them that are done better (and usually much more cheaply) in the context of the disruptor’s business model.  In this scenario, the revenues are lost, but the relationships are preserved (and possibly strengthened).

So, am I arguing that large and mid-size incumbent law firms should give up on innovation and surrender to the disruptors?  Heck no.  There are tremendous advantages associated with being a high service, high value incumbent service provider.  However, to survive, evolve and prosper over the long run, you will need to innovate – pragmatically.

Pragmatic Approach to Innovation

We provided some background and some examples of an innovation model (co-creation) here and here.  In addition, we talked at some length about the growing importance of non-lawyers in successful, sophisticated law firms here.  All of that can be put together in a pragmatic approach to innovation.

Consider launching a pilot innovation program following these basic steps.

  1. Pick a client with whom you have a broad (i.e., multiple practices, multiple partners), deep (i.e., significant volume and revenues), and warm (i.e., mutually trusting) relationship.
  1. Empower (and hold accountable) your firm’s senior business development person (or your managing partner if you do not have a highly experienced and polished BD person) to start a dialog with that client.  Note that this dialog may require multiple conversations with multiple people in the client organization.  The dialog should include the following topics.
    • A review of the work the firm has been doing for that client over the past three years with an emphasis in the discussion on two topics:  1) what was the best work, the work where the firm delivered the most value; and 2) what was the most disappointing work, the work that fell short of expectations for value?
    • A discussion of the work the client is doing in-house with an emphasis on who is doing that work (e.g., level of experience, lawyers or not, etc.); what costs are associated with that work (e.g., salaries, benefits, bricks and mortar, etc.); and why the work is in-sourced (e.g., value assessments, risk management trade-offs, etc.).
    • A discussion of the work that the client is sourcing to other law firms and contractors.  That discussion should focus on categorizing work that is going elsewhere because:  the competitor delivers at a cost/value that is hard to beat; the competitor has irreplaceable expertise and/or experience; the competitor has tenure, a long standing relationship, or other intangible reason(s) for having that work.
    • What new legal issues and/or projects are coming down the pipe?
  1. That client input should lead to analysis with/by the client service team.  That analysis should focus on the full portfolio of legal issues, matters and risks the client manages.  The analysis should include (at a minimum):
    • The volume of work associated with each category of work;
    • The cost sensitivity of that work;
    • The risk profile associated with the underlying legal issues;
    • The level of expertise/specialization needed;
    • The firm’s current capabilities in each area;
    • The firm’s ability to improve the value the client currently captures (e.g., via process, people, technology improvements).
  1. In turn, that analysis should lead to a plan of action and recommendation to the client for each substantive category of work within their portfolio.  There is a broad range of outcomes you may recommend for each category of work:
    • Some things should continue largely as is (status quo, whether done by the firm, the in-house team, or someone else).
    • Some things should continue to be done by your firm, but with a new approach, model, or set of tools (e.g., KM, project management, other).
    • Some things may call for a more robust in-house team – that may include moving things out of your firm to the client’s in-house team.
    • Some work should probably be moved to your firm (either from in-house resources or from other firms – be prepared to demonstrate the superior value you will deliver as a result of that change).
    • Some work should probably be moved to others – either to low cost vendors (some that you will manage and some that your client will manage) or to highly specialized experts.
  1. Finally, those recommendations and the related plan should be presented to the client’s team – ideally by a team from your firm (e.g., relationship partners, selected legal experts, selected functional area leaders, etc.).  That presentation should include a discussion of the investments the firm is prepared to make on the client’s behalf (e.g., new technology, tools, process improvements, etc.); the cost implications associated with managing the portfolio of work as recommended (presumably a reduced total cost, improved total value, and/or a reduced risk exposure for the client); and the benefits the client can expect from adopting the recommendations.

Now, there will almost certainly be additional dialog – some changes may not be easy for the client to make (for instance, they may not want to make additional in-house hires and/or make in-house lay-offs).  But, the net outcome should be a stronger relationship – greater transparency and trust – and ultimately, more work done by your firm at sustainable (and presumably improved) margins.  Most importantly, it will lead to continuing (i.e., sustaining) innovations on the portfolio of work your most prized clients turn to you to execute.  And that it a pragmatic form of innovation that you can control and do with a high probability of success.

 

 

 

CO-CREATION OF UNIQUE VALUE WITH CLIENTS: A Strategy Tool for Winning the ACC Value Challenge (Part Two)

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Our last post introduced the principles underpinning a valuable strategy tool – co-creation.  We noted that co-creation is a tool particularly well suited to sophisticated legal practices for two reasons.  First, in many respects co-creation principles align well with attorneys’ instinctive approach to managing client relationships.  And second, co-creation is proverbially “just what the doctor ordered” relative to having an effective tool to respond to the Association of Corporate Counsel’s (ACC) Value Challenge.

As we noted in that last post, co-creation is built on four principles:  open dialog; access to information; shared risk assessment; and transparency (especially on costs and pricing practices).  We promised to share a few real world examples of how those principles were put into play by forward-thinking law firms and partners – working collaboratively with clients.  We share three real world cases below (disguised sufficiently to protect both the identity of the law firms and their respective clients).

Managing A Large, Growing Patent Portfolio

A global technology company, spending well into the seven figures to manage and expand their patent portfolio in the U.S. (exclusive of litigation costs), approached their leading intellectual property law firm looking for an approach that would save money, while effectively supporting a core business strategy that highly valued a strong and growing portfolio.  The existing relationship was long-standing and strong.  The law firm currently supported more than 60% of the company’s patent portfolio.  Further, the primary relationship manager was predisposed toward open dialog, access to information, and shared risk assessment.

Supported by solid financial analysis on the law firm side and progressive thinking in the general counsel’s office (including the associate GC for intellectual property), the following solution was crafted

  • An open dialog regarding the full scope and nature of the company’s patent portfolio – and the law firm’s technical capabilities – led to a realization that efficiencies could be gained by having one firm support the entire portfolio in the U.S. (as well as much of the rest of the world).  Essentially, consolidating the work with a single firm would free-up resources in the GC’s office and the law firm and would streamline docket management.
  • The law firm already provided real time visibility to the client’s patent docket.  By consolidating all the work in a single firm, it also became feasible to have secure access to the underlying documents (e.g., applications, USPTO responses, etc.) across the law firm’s and the client’s networks.
  • Real savings emerged from shared risk assessment.  The company had a highly sophisticated strategy for its patent portfolio.  They had a very clear sense for which patent families were most valuable and/or integral to that overall strategy – and the law firm became a valuable partner in helping to assess both value and risk.  That in turn enabled the firm and the company to deploy the right level of resources to each element of the patent portfolio – especially in areas driving the greatest costs (e.g., the application docket and management of the pipeline of new technologies and patents).
  • Entrusting the entire portfolio to a single firm enabled the company and the law firm to create a rational budget for managing the entire portfolio (i.e., via transparency on costs and pricing).  That budget included meaningful insights into what work should be done in the GC’s office and what should be done at the law firm – in the process optimizing total costs to the company.  And, because the right work was being done in the right place by the right people (including administrative support), the law firm was able to maintain profit margins even as the company’s total spending on outside counsel declined.

Controlling Costs on Recurring Litigation

A large petro-chemical company with recurring litigation in the toxic tort arena was looking for a way to gain greater control over the costs associated with that litigation.  Costs ranged from the mid-seven figures to the low eight-figures (excluding judgments and settlements) in any given year.

  • The company’s general counsel started a dialog with the lead partner of a range of litigation matters for the company (across multiple sub-specialties – including some toxic tort work).  He was open about his objectives: to save money overall; and to introduce some predictability in his budget for this recurring work.
  • The relationship benefited from an established set of tools that provided access to documents (via a secure document management system) and to regular status reports on all open cases.
  • The partner was well respected for his ability to understand the risks associated with complex litigation – and his ability to cut through complexity to put a value on cases.  That included an ability to assign solid ranges to the potential outcomes for any given case, as well as an ability to develop litigation strategies to manage cases toward controllable outcomes.  This provided a dual ability to better manage ongoing litigation costs and achieve agreed upon outcomes vis-à-vis judgments and settlements.  Settlement decisions could be made more strategically as a result – better managing risk and reducing the company’s total cost of litigation (not just the cost of outside legal counsel).
  • The relationship was characterized by a high level of trust (and transparency).  Thus, when the company approached the partner looking for savings and predictability, he suggested putting all of the recurring work on a single fixed annual budget.  Time would be tracked against the budget and the budget would be reset annually – some years up and some years down (a real reflection of mutual trust).  As a means of saving the company significant legal fees, the partner suggested staffing routine, but labor intensive aspects of the ligation with low cost contract attorneys (rather than his firm’s higher priced associates).  That took money out of the law firm’s hands, but created additional credibility and trust – as well as substantial cost savings.

Innovative Financial Services Products

One of the largest banking and financial services companies in the U.S. was searching for innovative product ideas to respond to the post-financial crisis banking environment (e.g., low interest rates, higher reserve requirements, more stringent regulatory oversight, etc.).

  • General Counsel at the bank began a dialog with partners at one of its most forward thinking law firms.  The bank and its competitors were responding to the low interest rate environment by adding a substantial quantity of government bonds (in particular municipal and other tax advantaged government bonds) to their balance sheets.  However, the process through which those assets were traditionally created (e.g., underwriting and disclosure by investment bankers, public offerings and market making, etc.) was both cumbersome and costly.  The bank was looking for a creative solution to simplify and streamline that process.
  • That initial dialog led both the bank and the law firm to open access to the key stakeholders at the bank (e.g., investment bankers, commercial bankers, law department, etc.) and to subject matter experts at the law firm (e.g., securities, public finance, banking/bank regulatory, etc.).  The combination of dialog and access led to the development of what amounted to a new product in both the banking and public finance world – direct purchase by the bank of newly created government bonds.
  • The success of the product was strongly influenced by the ability of the bank and the law firm to effectively manage risk.  That included strong risk assessment of the municipalities and other entities originating the bonds (i.e., no distressed municipal debt in this product mix).  It required effective documentation of underlying disclosures by the issuing entities, as well as other regulatory compliance (another form of risk mitigation).  And, to manage the longer run balance sheet risks, it required the creation of products with appropriate durations to protect both the borrower’s and the bank’s balance sheets.
  • Creating what amounted to an entirely new product (both for borrowers and lenders) raised critical transparency questions.  Should this product be considered highly proprietary (which in the world of financial services meant it would take a few quarters before other banks figured out their own way of offering the product) or should it be trumpeted as a new industry standard (enabling faster followers)?  In addition, having created a product that was essentially a winner for all stakeholders (borrowers, the bank and the law firm), how repeatable and predictable could the process become?  Direct purchase of municipal (and other public) debt has been moving rapidly toward industry standardization (answering the first question).  There are tremendous efficiencies in the product/process, however the unique qualities of each asset (i.e., municipality/project/etc.) limit how entirely repeatable the process can be (partially answering the second).

Hopefully these three examples – across markedly different legal specialties and markets – help to provide some insight into how you might adopt and apply a co-creation strategy in your own firm and/or practice.  At a minimum, co-creation ought to be in the “strategy toolbox” of every law firm of reasonable size and capability.

As always, we welcome your comments below and via telephone (312) 543-6616 and email (jsterling@sterlingstrat.com).

 

CO-CREATING UNIQUE VALUE WITH CLIENTS: A Strategy Tool for Winning the ACC Value Challenge (Part One)

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This is the first in a two-part discussion of a valuable innovation tool for law firm leaders – “co-creation.”  Co-creation has its greatest value at the individual client level, but can be applied at practice level as well.  Co-creation dovetails directly with the kind of call to action at the heart of the Association of Corporate Counsel’s (ACC) “value challenge.”  Namely, that increasing the value law firms deliver to clients requires “that solutions must come from dialog and willingness to change things on both sides.”

 Co-creation is quite distinct from disruptive innovation (see our article from April 2013) which provides a process and roadmap for creating low end solutions that fundamentally alter established markets.  On the contrary, co-creation is a process for creating solutions that have unique and enduring value for clients (often enhancing or at least preserving profitability).  It is essentially a process for taking practices to higher levels of value and for strengthening client relationships in the process.

This first article provides an overview of the tool and how it applies in a law firm setting.  Our follow-up article next week will provide a few examples to provide some practical, real world insights into the process.

Origins of the Tool and Principles

Co-creation emerged and was defined by C.K. Prahalad and Venkat Ramaswamy – both professors of business at the University of Michigan.  They identified a number of foundational shifts in the nature of relationships between businesses and their customers – shifts that alter how and where value is created.  Those shifts include:

  • Growing access to information on the part of clients; globalization regarding viewpoints and perspectives (i.e., not only do clients have increased access to information, that information is global in scope);
  • Networking among clients (for example, via the Association for Corporate Counsel, LinkedIn interest groups, and other formal and informal networks); and
  • A willingness to experiment – particularly with digital and/or information driven products and services.

Given that backdrop, Prahalad and Ramaswamy found that increasingly value was created at the point of interaction between businesses and their clients.  Value was becoming less a function of creating a product or service to be purchased (i.e., take it or leave it).  Rather, value was being created as businesses and their customers created unique solutions together.

For many in the legal industry, this insight is not particularly novel.  Because legal services often require dynamic interaction and unique tailoring of solutions via direct interaction with clients, the idea of co-creating value is a standard operating practice for many lawyers.  Prahalad and Ramaswamy approached this dynamic from a mass market, product oriented perspective, and as a result they were able to develop some basic principles that are potentially valuable to law firms.  In short, they have codified the foundational approach that makes co-creation based innovation a repeatable process with clients.

Using the Tool in a Law Firm Setting

Co-creation tools provide a roadmap for taking client interaction to a higher level – recognizing that the world has become more interconnected and information is more readily available to clients than it had been in the past.  By recognizing and embracing that change, more value can be created for clients and in the process, relationships can be strengthened.

Applying co-creation in a law firm setting involves embracing four fundamental, ongoing principles in client interactions.

  • Dialogue – “Dialogue means interactivity, engagement and a propensity to act – on both sides (client and law firm).”  Beyond simply listening to clients, dialogue suggests shared learning on the part of two problem solvers.
  •  Access – Access focuses primarily on providing access to information and tools.  For instance, many firms have implemented extranets and/or cloud-based solutions for managing shared information with clients.  Embracing the access principle takes that one step further, ensuring access to the insights, knowledge and other foundational tools the law firm uses on behalf of clients (e.g., knowledge management tools, project management tools and processes, etc.).
  • Risk Assessment – To fully engage in co-creation, clients need to have a deeper understanding of the risks (and trade-offs) they face when selecting and creating a particular solution.  Some attorneys are extremely good at helping clients assess risk and make wise choices – others are not.  Helping clients assess risk is fundamental to co-creating value.
  • Transparency – Historically, there has been a natural imbalance regarding some elements of the relationship (e.g., pricing, underlying costs, profit margins, etc.).  Some of that imbalance has already broken down.  For instance, starting salaries for associates are published openly at NALP and profit levels are openly reported in the AmLaw 100 and 200 rankings.  The transparency principle calls on firms to continue and expand that openness.

While many will object to (or fear) the level of openness called for by the principles above, that fear is generally unsubstantiated in actual practice.  Clients do not object to their law firms earning a healthy profit – they understand that profitability is the cost of doing business into the future.  Furthermore, because they are actively part of key decisions regarding the creation of solutions and the management of risks, the value received relative to the fees charged is generally perceived to be very high.  In addition, having co-created approaches that deliver high levels of value, incentives to switch firms falls dramatically – increasingly client loyalty in the process.

Co-creation works most effectively when complexity is high and resulting solutions are genuinely unique and of high value.  In those high end settings, law firms are well served adopting principles of co-creation.  However, the principals work in many other settings as well (e.g., improving value on high volume work, integrating legal process outsourcing vendors into ongoing relationships, etc.).  In summary, co-creation is a natural extension of long standing traditions and leads to deeper, stronger and more loyal client relationships.

Next week we will follow-up with a few examples of how these principals work in practice.

 

 

Top Insights from 2012 Strategy Questions of the Month

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Throughout the course of 2012, Sterling Strategies conducted monthly mini-surveys, each focused on a single strategy topic.  The intent was to develop some empirical data on what works and what does not work relative to a variety of strategic management challenges.

We certainly learned something every month.  Often the findings and insights were entirely new (if not entirely counter-intuitive).  Occasionally, the findings confirmed something we believed, but lacked the data to support.

Before setting our sights on advancing the state of strategic management in 2013, we thought readers might enjoy a highlight reel of sorts of the most significant findings from the 2012 strategy question of the month series.  The list is presented as a “top ten,” but the insights are ordered for readability and flow.

  1. Grow your own – When developing a strategy for generational succession, it is best to develop people yourself (rather than seeking to hire future leaders laterally).  Our November 2012 survey found that “high lifer” firms (i.e., firms with higher percentages of people who were hired at the entry-level and stayed) have dramatically higher confidence that future leaders exist within every experience level of their firm.
  2. Confront the elephant under the rug – The August 2012 survey focused on what approaches to managing under performing partners actually work and which do not.  What we found was that under performance rarely improves without frank discussion and accountability.  More importantly, confronting under performance actually has a reasonable success rate.
  3. Show me (more than just) the money – What characteristics make up a “model partner?”  That was our question in July 2012 and what we found was that, while originations and billings are very important characteristics in a model partner, subjective factors (e.g., training associates, bringing legal acumen to the table, being a good corporate citizen) comprise nearly 50% of the mix of characteristics firms want from the hypothetical ideal partner.
  4. See no evil, hear no evil, speak no evil (at least when it comes to partner compensation) – Our inaugural survey in January 2012 examined the question of what approaches to setting partner compensation lead to the highest levels of satisfaction.  It turns out, objective (i.e., formula) systems correlate with the highest levels of satisfaction.  And, so-called “closed systems” in which compensation and other data are not published are also closely correlated with higher satisfaction.
  5. The “vision thing” is a key to effective strategic planning – We took an objective look at what tools and approaches lead to more effective strategic planning in law firms (beyond, obviously, hiring Sterling Strategies) in June 2012.  The firms with the most effective strategic planning processes are much more likely to have articulated a vision for the future, a set of shared values, and measurable objectives to track progress toward achieving major goals and strategies.
  6. Focus practice group leaders on things that make a real difference in group performance – Firms with the most effective practice group management experiences are much more likely to ask practice groups to focus on cross-marketing, on profit drivers for their respective group, and on aligning practice strategy with firm-level strategy.  Meanwhile, the least effective groups get bogged down in administrivia.
  7. Better budgeting practices – Firms with the most effective budgeting processes are more likely to plan for growth (in addition to looking for cost savings).  And, the more effective budgeting processes are considerably more likely to involve practice group leaders in the budget development process.
  8. 2012 profit growth was driven by production and realization improvements – The bloom was clearly off the rose relative to using rate increases to drive profit growth (unlike the decade before the financial crisis).  Bonus question – is leverage dead?  On the surface the answer would appear to be ‘yes,’ but the reality is that leverage is wearing new disguises (e.g., more income partners, larger top-to-bottom compensation differentials, growing use of contract attorneys, etc.).
  9. Data, data, data (if you hope to be successful with AFAs) – Alternative fee arrangements are growing across a number of categories.  Law firm leaders were emphatic in noting that the key to success with AFAs is well analyzed data (both cost data and historical work load data).
  10. Practice portfolios are driving domestic law firm mergers – Allowing for alignment of fundamentals (e.g., firm cultures and economic compatibility), the most important driver of mergers these days is finding a merger partner with complimentary practice area strengths.

As a bonus (since many may have missed it with the crush of year-end collections and the holidays), see our December 2012 findings regarding the use of objective measures and scorecards in law firms.  Short summary – firms are universally good or excellent at measuring financial objectives and results, but do a poor job measuring the strength of client relationships, people development, or much of anything else related to their operations.

We are immensely grateful to the many, many law firm leaders who completed the short (usually two-minute) strategy surveys throughout 2012.  That input enabled us to build a nice body of empirical data regarding a number of important strategic management topics.  It was helpful for law firm managers – and to us as strategy consultants.  We intend to take a slightly different approach in 2013 (shooting for five-minute surveys on a quarterly basis).  That will reduce the number of times we have to pester you all for input over the course of the year.  In place of some of the monthly surveys, we will share insights and proven approaches gained directly via other channels.

Best wishes for a very healthy and prosperous 2013.

Survey Results – Alternative Fee Arrangements

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In the midst of the market meltdown in the fall of 2008, we were in the field doing research on behalf of DRI (Defense Research Institute) on the Future of Litigation.  Alternative Fee Arrangements (AFAs) were one element of that research.  Extensive interviews with general counsel and law firm leaders highlighted three primary motivations behind the search for AFAs:

  • Some simply needed to cut costs.  Fee arrangements trend toward discounts and blended rates in these contexts.
  • Some needed predictability, particularly if they have a block of recurring or continuing litigation.  Fee arrangements in this context trend toward fixed caps for matters – or more often for blocks of business.
  • Some were driven by risk management models or strategies.  In this context fee arrangements trend toward some form of contingency.

Now, that research focused solely on litigation.  Further, there has been considerable growth in non-hourly based fee arrangements since that time.  For instance, in early 2009 only 29% of law firm leaders believed growth in non-hourly billing was a “permanent trend.”  That has grown to 80% in spring 2012 (see Altman Weil’s Law Firms in Transition survey).

Our  law firm strategy question of the month focused on AFAs this month.  Roughly, two-thirds of respondents indicated that AFAs are growing (about a third find AFAs continue to grow at an accelerating pace).

Anecdotally, we have seen many clients ask for AFAs only to revert to a simple discount off standard rates – continuing to rely on hourly billing for a variety of reasons.  For purposes of this month’s survey, we did not include discounts as an AFA – focusing instead on non-hourly forms of fee setting.  In order of most prevalence, AFAs in use today include the following.

 

The question also allowed respondents to add other AFAs (not on the list above).  Other AFAs in use include collars/monthly retainers; deferred billing arrangements for start-ups awaiting venture funding; and highly customized approaches that provide predictability for clients.

Finally, an open-ended question at the end of the survey invited people to share “unique insights you have gained from the deployment of AFAs.”  People were very generous with their insights and the key insights are summarized in the following points.

  •  Firms have learned the value of well analyzed data – on costs and on the work being subjected to an AFA.  For instance, one firm reports very good results on contingency oriented arrangements – in cases where experience informs their understanding of the  upside for recovery.  Others noted that they have learned to improve the profitability of fixed fee arrangements – by understanding underlying costs and their approach (staffing and work process) to the work.
  • Many have found that effective communication with clients and prospective clients is a key to success.  That enables the firm to provide the predictability (or other objectives) the client is pursuing.  Further, it reinforces the strength of the relationship – clients appreciate the fact that their law firm is listening and responding.  Finally, it ensures that when risks are being shared (such as in a contingency arrangement), both the firm and the client are prepared for changing conditions.
  • Many also noted that effective AFAs are not easy to construct.  They take time to get it right – for the client and the firm.  They require attorneys to approach both the client relationship and the legal work differently.  And, they end up simply being a margin reduction if time and intellect are not invested in their creation and execution.
  • A few people noted that one key to success is doing effective post-mortem reviews of AFAs.  As one managing partner noted, “the most difficult part is circling back to see if the arrangement worked…”

Note that firms who have a higher proportion of their fees earned via AFAs were more likely to be experiencing a slow-down in the growth of alternative fee arrangements.  Certainly, the move toward non-hourly billing is not a passing phase.  Knowing your own cost structure, being able to manage the work consistent with the AFA (either via project management or via staffing models), and being able to learn from each experience are critical to success.

We thank the many law firm leaders who continue to share their insights and experiences via these questions of the month.

ALTERNATIVE FEE ARRANGEMENTS – MAY 2012 STRATEGY QUESTION OF THE MONTH

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Our March 2012 strategy question of the month focused on profit improvement strategies.  One of most important strategies for profit improvement among firms is improving realization.  In framing that question about realization, we explicitly included consideration of alternative fee arrangements – so, AFAs appear to be part of that profit improvement strategy.

Since publishing those findings, our friends at Altman Weil have published their latest findings on the annual “Law Firms in Transition” survey.  Interestingly enough, they found that law firm leaders’ expectations for increased price competition (49%), increased commoditization of legal work (58%), and increased non-hourly billing (52%) were all up dramatically.

Given those findings, we thought it would be valuable for our readers to get a sense of what their peers are doing in the realm of AFAs.  The quick, two-minute survey below takes a look at AFAs through a couple of lenses – do they continue to grow as a percentage of fees earned and what tactical approaches appear to be most prevalent?

Deadline for completing the survey is midnight, Tuesday, May 29, 2012 (the day after Memorial Day).  As always, individual responses will remain confidential and anonymous.   Thank you!

If your browser does not support the embedded survey (i.e., you do not see the survey in the box below), click this link to jump to a hosted version of the survey.