Client Speak: Is the Burden of AFA Here to Stay?

Consider the following across-the-board evidence:

In the June 2, 2009 issue of The Washington Post, under the title of “Some Doctors Help with Bills As Well As Ills,” Sandra G. Boodman wrote, “From Baltimore to Boise, doctors are encountering more patients struggling to pay for care.” She went on to say that some doctors have responded by selectively cutting their fees or devising novel payment arrangements because, she says, they feel a responsibility to help such patients, particularly those with whom they have long-standing relationships. The doctors feel that this loyalty to long-time patients will pay off in the long run when the economy improves.

From Rocky Mount, NC, Kevin Sack of The New York Times reported on June 4, 2009, under the headline “Slump Pushing Cost of Drugs Out of Reach.” He wrote that these days the questions posed to local pharmacists are “almost always” about cost: “Can I get this as a generic?” “Is the co-pay really that high?” “Will you match Wal-Mart's $4 price?”

And, being in tune with the times, the June 2009 issue of the Journal of Accountancy featured an article by Ronald J. Baker, entitled “Pricing on Purpose: How to Implement Value Pricing in Your Firm.” Here, the author claims that “pricing by the hour is the wrong way to measure the value created for the client.”

While many of the professional groups referred to above may have previously experienced the ups and downs of the economy, the recent dramatic downturn has created something relatively unknown to law firms. I refer to it as an “insistent buyers' market” (or “ibm”), wherein all the pent-up frustrations of the past have suddenly found a voice and now have to be confronted and no longer ignored.

A Proper Sensitivity

So whether you're a doctor, a pharmacist, an accountant or even a lawyer, times are tough. And your approach to fees and billing must evidence a proper sensitivity. With that in mind, this month's column focuses on the fee issue and what clients have said to support or criticize their service providers' approach to fees and billing. From these findings ' i.e., clients' actual remarks, perceptions and observations ' you will hopefully be able to derive a sense of what comprises a satisfactory financial arrangement, almost regardless of the economy.

Following this inside look at clients' positive and negative reactions are some conclusions that can be drawn, as well as a sampling of recommended actions related to the area of fees and billing.

Findings ' In the Words of the Clients

In conducting phone or in-person interviews (I strongly prefer the latter, particularly where senior executives of key clients are involved), the interviewer should almost never initiate the discussion of fees as the interviewee will invariably raise the issue. That this issue is normally top-of-mind is practically a given; but the point in the interview when it is first mentioned is often a clue to its importance. For example, if immediately after the introductory formalities the first words mentioned have to do with fees, that's a pretty good indication of a high level of concern to the interviewee and, most likely, to the client as well.

What have clients actually said and why? Following are several brief positive and critical anecdotes including a few comments to provide context to certain of the remarks:

1. There was little question that it was the law firm of preference. However, the principal and persistent concern expressed by all of those interviewed pertained to fees. As the CFO noted, “It's the only downside to what they're doing.” When asked to assess the firm's performance on a scale of 1 to 5, where 5 is high, the General Counsel said, “It's a 4.0 and not a 5.0 due to fees.” The CEO's penalty was even greater, providing a rating of “2.0 or maybe less.” And asked if he would recommend the firm to others, the CEO's response was, “I would absolutely recommend, but with the following caveat: 'Bring your wallet.'” As a remedy, the General Counsel remarked, “They've provided a great team and we really value their advice, but they must be able to control costs better for a long-term relationship with us. We would be receptive to a blended rate structure or a discount up front with a performance bonus at the end.” The CEO concluded with an interesting observation and admission: “Even if 100 hours were good enough, they would do 110 hours if they had the people and the time available for it, and then bill me for the higher amount. And, if I were in their position, I would do the same.”

2. Commenting on some extensive litigation efforts over a period of years, the General Counsel at another company praised the firm: “By any account, they provide a lot of value. Their rates are reasonable compared to the high value received. And their people are good and work well together.” But he was critical of the billing arrangement, which he felt resulted in the firm being paid less than its services were worth. “Their billing process is a mediocre way to value their services. The firm would have been better off with some form of alternative fee arrangement.” In fact, he claimed, “I would have willingly paid them more than under their hourly scheme.”

3. “Even though they are a top-tier firm and have high rates, their efficiency is remarkable and their pricing is excellent. They are sensitive to fees and the relationship of fees to the work being done.” Another added, “Dollar for dollar, the value of what I receive from them is much higher than from any other firm. I've been in the trenches with them so I know what we mean to them. They have our interests at heart. They go the extra mile for us. For those reasons, they have my trust and respect.”

4. Another GC explained that she provided a 4.0 rating (out of a possible 5.0) because of “price.” She mentioned, “There could be a reduction in fees if the firm would be more concise in its responses and opinions regarding the various matters with which it is involved.” In addition, she asked, “Why do we need so many of their people at meetings? They should just send the one who's most relevant. On the other hand, some of the partners are spread so thin that, in their place, meetings are attended by associates who can't make decisions.”

5. “It's important to comply with our rules regarding budgeting and billing. I expect not only budgeting accuracy, but also budgeting stability ' i.e., how the fees will run.” Additional remarks about the budgeting process included: “Because we're publicly held, there is a need for each month's bills to be as accurate as possible, particularly at the end of the fiscal quarter. And even though there's room for improvement, the firm does better in this area than most other firms I've dealt with.” And, related to that comment, “All firms initially provide a very detailed estimate, but normally veer from it, and then don't update it. And nobody likes surprises!”

6. “We haven't gotten the 'A' team and there has been no billing transparency. For that and other reasons, we wanted to know the basis for the fee and why, where and by whom hours were being spent. But it seemed we were putting a burden on the firm to provide this information. With them, it's been take it or leave it when it comes to fees. So I recently told the Relationship Partner to do something about rationalizing the fee or I'll ask for bids from other firms.”

7. “Because of the lack of partner attention and responsiveness, we have the impression that we're not an important enough client and that the relationship is being taken for granted. Furthermore, if the value the firm provided were more evident, the fee issue would never have been raised.”

8. In the words of the VP in charge of litigation, “Just how high can hourly billing rates go? At a certain point, those at the top end of the range will appear to be completely unreasonable and hard to justify.” Similarly, another remarked, “Law firm rates are ridiculous and not sustainable. More than $500 an hour seems to be the breaking point in the eyes of those above me. How can I justify these rates to them?” And those from multinational firms have observed that “legal fees in the U.S. are generally too high.”

9. On the other hand, many interviewees have indicated little or no concern about partners' or subject-matter experts' billing rates, commenting, “They provide value. But what really irks us is having to pay those exorbitant fees to train firms' young and inexperienced people.”

Conclusions and Recommendations

So what are we to conclude from the foregoing with regard to AFAs? Simply this (but it's not something you'll find in every professional/client relationship): Where there is quality work, candor, evident value provided, effective engagement management and relationship management, and ' most importantly ' trust, then fees will never be a problem. And AFAs will either be unnecessary or will be easily arrived at. Why? Because whatever issues arise will be resolved to each party's benefit and satisfaction as a result of the mutual respect and understanding that has been developed. In such situations, the key recommendation would be: “Keep up the good work and the good relationships.”

Unfortunately, we have encountered many situations that are not so satisfactory. And these often require a greater remedy than just proposing an AFA. While the necessary actions dictated above by some of the not-so-positive client comments may be self-evident, here are a few examples of actual recommendations related to fees and billing that have been passed on to the partners and the firms involved:

1. Because many clients feel law firm billing rates are expensive ' although generally not more expensive than the competition ' be confident in the value you provide and prove it to your client every day.

2. Many clients are facing severe cost constraints, so be sensitive to this in proposing for new work by: a) providing rates and/or fee arrangements that are competitive; b) clarifying the firm's policy regarding fees and discounts; c) making realistic estimates of the amount and timing of any benefits the clients will realize; d) investing in the relationship as clients react very favorably to free service; and e) indicating a willingness to “partner” with the client by sharing the risk, i.e., have “skin in the game.”

3. Anticipate that there will be greater competition for new work and fewer sole-source engagements, as clients do not want to rely too heavily on any one firm and wish to obtain various points of view.

4. With regard to litigation, make effective arguments and do it efficiently. As one client executive remarked, “We need assurance that the firm is providing good service and managing the case well, as a lot of product has to be sold to cover the litigation costs.” In the same vein, another commented, “Make more effective use of technology, specifically as pertains to electronic discovery, collection and review.”

5. Staffing with the right people is often of greater importance to a client than the fee, as clients normally resent being used as a “training ground” for inexperienced personnel. Accordingly, be certain that the client's impression is that the firm is providing the “A” team by: a) matching your team to the client and the engagement in terms of experience, knowledge and skills; b) calling upon firm experts when necessary ' clients appreciate the benefits they receive from the firm's depth of resources; c) being appropriately flexible in increasing or decreasing staffing levels as the client's needs and circumstances change ' and keeping the client informed; and d) changing out marginal performers promptly.

6. Attempt to cultivate relationships with key members of Strategic Sourcing groups of clients and prospective clients where these groups are involved with new business opportunities and the potential for work is high.

7. Assure the client that all work performed by other offices ' particularly those outside the U.S. ' is appropriately staffed and properly controlled and coordinated.

8. Protect the client from making mistakes ' clearly advise if and why something material is at risk, and what it will cost in terms of resources, time and money to remedy.

9. Continually focus on and communicate the following key elements of a successful engagement: on time, on budget, no surprises, benefits optimized (and apparent), pain minimized.

Coda

Is there light at the end of the tunnel? Will we be able to go back to the good old days? Will this “ibm” ever go away? Quite possibly ' if you agree with the outlook of another group of professionals. According to Lynn Zinser's June 6, 2009 article in The New York Times, the National Hockey League's New York Rangers recently informed their season ticket holders that there will be price increases for the 2009-2010 season that will range from 7% to 10%, although adding that the increase will be smaller than in prior seasons.

Donald E. Aronson, a member of this newsletter's Board of Editors, is the President of D. E Aronson Associates LLC. His firm conducts market research by interviewing executives of professional services firms' key clients with a primary focus on client feedback. Copyright ' 2009 by D. E. Aronson Associates LLC.

Editor's Note: We welcome Don Aronson to our Board of Editors and as a regular columnist. Based in New York City, Don is a marketing and business consultant to professional services firms. His primary focus is on market research, involving interviews with senior executives of those firms' clients. Don was a pioneer in the use of client feedback interviews and surveys, having initiated them with his clients over 25 years ago when he was an Office Managing Partner with one of the Big Four accounting firms. Subsequently, he served as that firm's Chief Marketing Officer, during which time he formed and directed a fully integrated and professionally staffed marketing group located throughout the U.S. Don brings to professional services clients his long experience not only with the professional/client relationship, but also with a broad spectrum of marketing issues, including firm image, competitive positioning, marketing strategy and marketing programs

The Current Situation

There's a hue and cry out there about the relatively recent and anxiety provoking push for AFAs (Alternative Fee Arrangements). “Why is everyone picking on us?” wail the lawyers. Of course they understand that “it's the economy, ________.” And there have been a plethora of articles about how bad it is, highlighting layoffs and deferred hiring, among other issues. But lawyers are not alone in being confronted with concerns about fees and/or billing and what to do about it.

Consider the following across-the-board evidence:

In the June 2, 2009 issue of The Washington Post, under the title of “Some Doctors Help with Bills As Well As Ills,” Sandra G. Boodman wrote, “From Baltimore to Boise, doctors are encountering more patients struggling to pay for care.” She went on to say that some doctors have responded by selectively cutting their fees or devising novel payment arrangements because, she says, they feel a responsibility to help such patients, particularly those with whom they have long-standing relationships. The doctors feel that this loyalty to long-time patients will pay off in the long run when the economy improves.

From Rocky Mount, NC, Kevin Sack of The New York Times reported on June 4, 2009, under the headline “Slump Pushing Cost of Drugs Out of Reach.” He wrote that these days the questions posed to local pharmacists are “almost always” about cost: “Can I get this as a generic?” “Is the co-pay really that high?” “Will you match Wal-Mart's $4 price?”

And, being in tune with the times, the June 2009 issue of the Journal of Accountancy featured an article by Ronald J. Baker, entitled “Pricing on Purpose: How to Implement Value Pricing in Your Firm.” Here, the author claims that “pricing by the hour is the wrong way to measure the value created for the client.”

While many of the professional groups referred to above may have previously experienced the ups and downs of the economy, the recent dramatic downturn has created something relatively unknown to law firms. I refer to it as an “insistent buyers' market” (or “ibm”), wherein all the pent-up frustrations of the past have suddenly found a voice and now have to be confronted and no longer ignored.

A Proper Sensitivity

So whether you're a doctor, a pharmacist, an accountant or even a lawyer, times are tough. And your approach to fees and billing must evidence a proper sensitivity. With that in mind, this month's column focuses on the fee issue and what clients have said to support or criticize their service providers' approach to fees and billing. From these findings ' i.e., clients' actual remarks, perceptions and observations ' you will hopefully be able to derive a sense of what comprises a satisfactory financial arrangement, almost regardless of the economy.

Following this inside look at clients' positive and negative reactions are some conclusions that can be drawn, as well as a sampling of recommended actions related to the area of fees and billing.

Findings ' In the Words of the Clients

In conducting phone or in-person interviews (I strongly prefer the latter, particularly where senior executives of key clients are involved), the interviewer should almost never initiate the discussion of fees as the interviewee will invariably raise the issue. That this issue is normally top-of-mind is practically a given; but the point in the interview when it is first mentioned is often a clue to its importance. For example, if immediately after the introductory formalities the first words mentioned have to do with fees, that's a pretty good indication of a high level of concern to the interviewee and, most likely, to the client as well.

What have clients actually said and why? Following are several brief positive and critical anecdotes including a few comments to provide context to certain of the remarks:

1. There was little question that it was the law firm of preference. However, the principal and persistent concern expressed by all of those interviewed pertained to fees. As the CFO noted, “It's the only downside to what they're doing.” When asked to assess the firm's performance on a scale of 1 to 5, where 5 is high, the General Counsel said, “It's a 4.0 and not a 5.0 due to fees.” The CEO's penalty was even greater, providing a rating of “2.0 or maybe less.” And asked if he would recommend the firm to others, the CEO's response was, “I would absolutely recommend, but with the following caveat: 'Bring your wallet.'” As a remedy, the General Counsel remarked, “They've provided a great team and we really value their advice, but they must be able to control costs better for a long-term relationship with us. We would be receptive to a blended rate structure or a discount up front with a performance bonus at the end.” The CEO concluded with an interesting observation and admission: “Even if 100 hours were good enough, they would do 110 hours if they had the people and the time available for it, and then bill me for the higher amount. And, if I were in their position, I would do the same.”

2. Commenting on some extensive litigation efforts over a period of years, the General Counsel at another company praised the firm: “By any account, they provide a lot of value. Their rates are reasonable compared to the high value received. And their people are good and work well together.” But he was critical of the billing arrangement, which he felt resulted in the firm being paid less than its services were worth. “Their billing process is a mediocre way to value their services. The firm would have been better off with some form of alternative fee arrangement.” In fact, he claimed, “I would have willingly paid them more than under their hourly scheme.”

3. “Even though they are a top-tier firm and have high rates, their efficiency is remarkable and their pricing is excellent. They are sensitive to fees and the relationship of fees to the work being done.” Another added, “Dollar for dollar, the value of what I receive from them is much higher than from any other firm. I've been in the trenches with them so I know what we mean to them. They have our interests at heart. They go the extra mile for us. For those reasons, they have my trust and respect.”

4. Another GC explained that she provided a 4.0 rating (out of a possible 5.0) because of “price.” She mentioned, “There could be a reduction in fees if the firm would be more concise in its responses and opinions regarding the various matters with which it is involved.” In addition, she asked, “Why do we need so many of their people at meetings? They should just send the one who's most relevant. On the other hand, some of the partners are spread so thin that, in their place, meetings are attended by associates who can't make decisions.”

5. “It's important to comply with our rules regarding budgeting and billing. I expect not only budgeting accuracy, but also budgeting stability ' i.e., how the fees will run.” Additional remarks about the budgeting process included: “Because we're publicly held, there is a need for each month's bills to be as accurate as possible, particularly at the end of the fiscal quarter. And even though there's room for improvement, the firm does better in this area than most other firms I've dealt with.” And, related to that comment, “All firms initially provide a very detailed estimate, but normally veer from it, and then don't update it. And nobody likes surprises!”

6. “We haven't gotten the 'A' team and there has been no billing transparency. For that and other reasons, we wanted to know the basis for the fee and why, where and by whom hours were being spent. But it seemed we were putting a burden on the firm to provide this information. With them, it's been take it or leave it when it comes to fees. So I recently told the Relationship Partner to do something about rationalizing the fee or I'll ask for bids from other firms.”

7. “Because of the lack of partner attention and responsiveness, we have the impression that we're not an important enough client and that the relationship is being taken for granted. Furthermore, if the value the firm provided were more evident, the fee issue would never have been raised.”

8. In the words of the VP in charge of litigation, “Just how high can hourly billing rates go? At a certain point, those at the top end of the range will appear to be completely unreasonable and hard to justify.” Similarly, another remarked, “Law firm rates are ridiculous and not sustainable. More than $500 an hour seems to be the breaking point in the eyes of those above me. How can I justify these rates to them?” And those from multinational firms have observed that “legal fees in the U.S. are generally too high.”

9. On the other hand, many interviewees have indicated little or no concern about partners' or subject-matter experts' billing rates, commenting, “They provide value. But what really irks us is having to pay those exorbitant fees to train firms' young and inexperienced people.”

Conclusions and Recommendations

So what are we to conclude from the foregoing with regard to AFAs? Simply this (but it's not something you'll find in every professional/client relationship): Where there is quality work, candor, evident value provided, effective engagement management and relationship management, and ' most importantly ' trust, then fees will never be a problem. And AFAs will either be unnecessary or will be easily arrived at. Why? Because whatever issues arise will be resolved to each party's benefit and satisfaction as a result of the mutual respect and understanding that has been developed. In such situations, the key recommendation would be: “Keep up the good work and the good relationships.”

Unfortunately, we have encountered many situations that are not so satisfactory. And these often require a greater remedy than just proposing an AFA. While the necessary actions dictated above by some of the not-so-positive client comments may be self-evident, here are a few examples of actual recommendations related to fees and billing that have been passed on to the partners and the firms involved:

1. Because many clients feel law firm billing rates are expensive ' although generally not more expensive than the competition ' be confident in the value you provide and prove it to your client every day.

2. Many clients are facing severe cost constraints, so be sensitive to this in proposing for new work by: a) providing rates and/or fee arrangements that are competitive; b) clarifying the firm's policy regarding fees and discounts; c) making realistic estimates of the amount and timing of any benefits the clients will realize; d) investing in the relationship as clients react very favorably to free service; and e) indicating a willingness to “partner” with the client by sharing the risk, i.e., have “skin in the game.”

3. Anticipate that there will be greater competition for new work and fewer sole-source engagements, as clients do not want to rely too heavily on any one firm and wish to obtain various points of view.

4. With regard to litigation, make effective arguments and do it efficiently. As one client executive remarked, “We need assurance that the firm is providing good service and managing the case well, as a lot of product has to be sold to cover the litigation costs.” In the same vein, another commented, “Make more effective use of technology, specifically as pertains to electronic discovery, collection and review.”

5. Staffing with the right people is often of greater importance to a client than the fee, as clients normally resent being used as a “training ground” for inexperienced personnel. Accordingly, be certain that the client's impression is that the firm is providing the “A” team by: a) matching your team to the client and the engagement in terms of experience, knowledge and skills; b) calling upon firm experts when necessary ' clients appreciate the benefits they receive from the firm's depth of resources; c) being appropriately flexible in increasing or decreasing staffing levels as the client's needs and circumstances change ' and keeping the client informed; and d) changing out marginal performers promptly.

6. Attempt to cultivate relationships with key members of Strategic Sourcing groups of clients and prospective clients where these groups are involved with new business opportunities and the potential for work is high.

7. Assure the client that all work performed by other offices ' particularly those outside the U.S. ' is appropriately staffed and properly controlled and coordinated.

8. Protect the client from making mistakes ' clearly advise if and why something material is at risk, and what it will cost in terms of resources, time and money to remedy.

9. Continually focus on and communicate the following key elements of a successful engagement: on time, on budget, no surprises, benefits optimized (and apparent), pain minimized.

Coda

Is there light at the end of the tunnel? Will we be able to go back to the good old days? Will this “ibm” ever go away? Quite possibly ' if you agree with the outlook of another group of professionals. According to Lynn Zinser's June 6, 2009 article in The New York Times, the National Hockey League's New York Rangers recently informed their season ticket holders that there will be price increases for the 2009-2010 season that will range from 7% to 10%, although adding that the increase will be smaller than in prior seasons.

Donald E. Aronson, a member of this newsletter's Board of Editors, is the President of D. E Aronson Associates LLC. His firm conducts market research by interviewing executives of professional services firms' key clients with a primary focus on client feedback. Copyright ' 2009 by D. E. Aronson Associates LLC.