Alternative fee arrangements and the marketing budget: an overview of integration and implementation.

• Author: Shaft, Donna L.G.

Alternative Fee Arrangements (AFAs) have become a permanent part of the legal services dynamic. However, both marketers and lawyers have misconceptions as to what AFAs are exactly and how to figure out plausible, practical options for their firms and practices. Properly understood, AFAs are tools that drive law firm profitability, and marketing hones and directs the use of those tools. This paper provides a general framework for such understanding. It offers a basic analysis of how AFAs are structured and applied, and shows how marketing budgets can be an integrated tool to provide and communicate AFA benefits. As such, this conceptual framework is not intended to be a primer for law firm marketers on how to structure an AFA fee package or develop an accounting matrix of AFA arrangements and marketing budget line items. Each firm is different, and each marketer's approach must be tailored to the firm's needs. Our goal is to help you develop your own approach to resolving this issue in your firm.

Part I. AFAs as the New Marketing Model in Delivering Value

Clients regard billing for legal services as a reflection of the value of legal counsel and the representation they receive. Ideally, the totally efficient, client-value-driven lawyer first markets and then delivers services that coincide with what the client needs and wants. We have come to understand that clients do not believe that time billing is the best indicator of their valuation of services they receive, and the pressure is on law firms to change their business model in response.

The time billing methods that clients once demanded to make the historical "for services rendered" on billing statements less obscure, are now suspect because they view hours x fee computation as rewarding the attorney for expending unrestrained amounts of time on a case or transaction. Being external to the legal service delivery process, most clients cannot know if the attorney is working efficiently, avoiding duplicitous and unnecessary effort or wastefully exploring tangential and irrelevant issues. Another question arises where the attorney is retained because of extensive experience with a particular type of matter. Clients wonder if it is equitable to bill each and every client for the full amount of time it took the lawyer to initially develop the process or procedure applicable to this transaction? Or should lawyers only bill each client for the time required to adapt the optimal resolution to the matter at hand? How can law firms devise equitable billing plans that serve their clients' best interests, retain key relationships and return a reasonable profit to the stakeholders?

This new client objective fundamentally impacts the marketing process as well; moving the pricing of legal services from a conversation that generally takes place later in the engagement process to one of the primary client hiring decision points. To be an effective element in that process, the firm must communicate its alternative fee arrangements consistently throughout all the descriptive materials prospective clients use in choosing legal counsel.

The current response to these concerns is an array of alternative fee arrangements (AFAs) that appear to be how successful and profitable law firms will, in the future, both market and bill for services. Exhaustive studies and surveys have demonstrated that clients, especially business clients, fundamentally reject traditional time-billing formulas. Clients have articulated that this rejection involves eight key concerns.

Perceived abuse in terms of overbilling Lack of legal cost predictability

* Lack of transparency in determining the amount billed

* Discouragement of efficiency in doing the work

* Discouragement of providing value-added services

* Disconnect with technological efficiencies

* Inequality in hours spent delivering repetitive or recurring services

* Lack of shared risks and benefits

Recognizing the need for alternatives to time billing is a far cry from knowing how to replace it with a better billing process. Clients and attorneys alike want change, but both groups seem unsure about how to create the appropriate new solutions. Most commercial clients utilize the request for proposal (RFP) competition to introduce change, including a list of specific service provisions and credentials they evaluate on a weighted basis. Clearly, law firm marketers should be ensuring that the firm's alternative fee arrangement, as they determine for each client or type of matter, is prominently disclosed and discussed in all RFP responses and statement of qualifications (SOQ) offerings--but there are many other opportunities to convey the firm's alternative value billing strategies before the RFP or SOQ arises.

We also struggle with the fact that even boutique firms will need a variety of alternative fee arrangements to adequately address the service and delivery process for the legal products and services they provide. Each firm will determine which among the current array of blended rates, fixed or flat fees, contingency fees, premium pricing for exceptional outcomes, retainers and various definitions of "value billing" most appropriately fits each of its practice areas. Those that do it well will consistently win client loyalty, referrals and continuing business.

Defining Value: The Client's Perspective, and the Firm's

The client arrives at its definition of value fairly easily. Respondents to a highly representative client survey identified five factors as defining value in any law firm with which they work.

* High...