Marketing's Role in the Legal Industry's Pricing Revolution

Educating Lawyers on AFA Structures, Terms and Formulas

Despite the fact that AFAs are expected to comprise 13.4% of all fees billed in 2012, according to a Citi Private Bank managing partner survey, many lawyers are still standing at the starting line when it comes to understanding these new pricing structures. Much of this confusion is due to the seemingly endless number of ways certain types of work can be managed, and how the shifting of risk can create value in the eyes of clients.

Marketing can alleviate this paralysis by helping define and aggregate details on common types of AFAs, and sharing this information at the outset of preparing a tailored fee agreement. These kinds of details might include:

• A glossary of current AFA structures undertaken by your firm. This will allow lawyers to select from a base menu of different billing methods already in use and determine which method may best suit a particular client's goals.
• Sample formulas for how the billing format works for each structure.
• Budgeting templates to help lawyers draft and calculate an AFA.
• An overview of your firm's process for reviewing and approving AFAs if different from the normal file opening process.
• A list of “go-to” resources for additional follow-up, including members of the finance or accounting teams who specialize in AFA matters or partners who can be contacted for questions in specific legal areas.

Creating AFAs for New Business Pursuits

Many current and prospective clients are asking outside counsel to suggest innovative fees and provide different billing options for them to consider, whether through a formal RFP or an informal bid process. Occasionally, clients may have a particular arrangement in mind, but will often ask firms to make suggestions.

Lawyers who have spent their entire careers billing by the hour often need guidance as to what structure may work best for the opportunity at hand. This is a perfect opportunity for marketing professionals to assume a coaching role by suggesting possible AFA structures that fit the prospective matter and offer the best scenario for a mutually beneficial outcome.

For example, a lawyer may be struggling to provide a fixed fee for a prospective piece of legal work due to the work's uncertainty. Marketing might suggest the lawyer consider creating a hybrid AFA that would include a fixed fee for certain defined portions of a project and a blended rate for matters that fall outside the scope of work. Marketing should have knowledge of the different AFAs being offered across the firm and be able to provide guidance as to which models have been used most effectively in similar situations.

Selling Your Firm's Approach to AFAs

In today's economy, nearly all law firms are open to discussing AFAs with clients or prospects. But simply stating that your firm is “open” to discussing AFAs is no longer going to separate you from your peer firms, or provide you with a competitive advantage in the marketplace. Marketing should be working with firm leadership to devise a strategy to best leverage your firm's approach to AFAs.

Picture yourself in the role of a general counsel making a decision about which firm to choose for an engagement. Assuming the quality of legal work provided is roughly equal, what is it about the firm's approach and execution of AFAs that makes your firm the best choice? Is it because your lawyers have undergone rigorous legal project management training? Does your firm employ specialized budgeting or project management software? Is your firm using technology in a unique way to provide clients with regular project and budget updates? Does your firm manage a significant portion of its work through AFAs, which allows you a greater depth of resources for best practices? Your partners need to be able to sell your firm's approach to AFAs as a step above peer firms.

Identifying and Measuring AFA Performance

Once your firm has been selected to provide legal services under an AFA model, marketing's role in the process is far from over. Many firms have or are in the process of implementing systems to track the performance of AFAs to ensure that the costs of legal services provided are in alignment with the prescribed fee. For example, if your firm was selected to handle an M&A matter for a fixed fee of $1 million, tracking the actual realization cost to the firm during the engagement is imperative. This allows the firm to monitor the matter on an ongoing basis, to ensure the matter is being managed in a profitable manner and to make adjustments in real time.

Often working in collaboration with finance and/or IT, marketing can help define and create different types of profitability reports for firm leadership. The data produced should be arranged by practice or industry group, by office and by matter and AFA type. This allows for quick analysis as to which kinds of AFAs work best for different types of work, and which should be avoided, further improving the ability to advise lawyers early in the AFA development process. Summary reports by practice and office also provide practice and office leaders with broad intelligence on the progress of active AFAs under their jurisdiction, helping them identify matters that may be in jeopardy of profitability and to better manage their practices. This also allows management additional intelligence as to which partners are doing a better job of managing AFAs. Practice or office leadership is then able to consider this historical data when approving future AFA requests from individual partners.

Sharing Best Practices in AFA Project Management

The firms that are able to collect data from past experiences and use that intelligence to create more precise pricing structures for future projects will experience the most success with AFA pricing models. While a firm's billing system can collect information on profitability, additional details should be gathered by debriefing matter managers for an understanding of how work was allocated and performed.

Using the kinds of reports in the previous section, marketing can help identify the lawyers involved in leading successful AFAs and coordinate debrief sessions to collect and document any best practices that might be helpful for other lawyers undertaking similar work. Were special timelines created to ensure deadlines were met? Did finance provide regular reports on hours logged to lead lawyers? Did a project team meet on a frequent basis to decide the most efficient way to handle a particular piece of work? Marketing can also create opportunities for these lawyers to present case studies on their work to peers in the firm, further extending the sharing of best practices.

Time to Pull Up a Chair

The continued shift away from the billable hour by budget-conscious clients is profound, and by all accounts is expected to increase in the years ahead. Those firms that develop the tools and processes to effectively price and manage AFAs will be well positioned to win work from those that do not. This pricing revolution is a truly unique opportunity for marketing professionals to join firm leadership at the strategic decision-making table. There is no better time or place to pull up a chair, so don't wait any longer to get started.

David Bowerman is Director of Client Development and Matthew J. Prinn is an Associate Director for Business Development for K&L Gates, a global law firm with nearly 2,000 lawyers who practice in 41 offices across four continents. David can be reached at 206-370-6726 or [email protected], and Matt can be reached at 617-261-3143 or [email protected].

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It's hard to imagine a more perfect opportunity for legal marketing professionals to earn a seat at the leadership table than the pricing revolution happening today in our industry. No longer a necessity of the latest recessionary period, alternative fee arrangements, or AFAs, are becoming increasingly more routine for businesses seeking to better manage their outside legal spend. The most progressive firms are developing sophisticated tools to help price AFAs, investing in legal project management training for lawyers, and analyzing the profitability of matters managed outside of the traditional billable hour.

While most firms take a collaborative approach in their strategic AFA development process by including members of finance, accounting, IT, and practice and office leadership, let us not forget that price is one of the “four P's of marketing.”

As law firms large and small develop AFA strategies, implement and measure results, it's imperative that the marketing department be an integral part of the process at all stages of the cycle. Done right, AFAs can be both highly profitable as well as a powerful competitive differentiator to the legal buyer. Below are a few areas where marketing can add significant value in the AFA process.

Educating Lawyers on AFA Structures, Terms and Formulas

Despite the fact that AFAs are expected to comprise 13.4% of all fees billed in 2012, according to a Citi Private Bank managing partner survey, many lawyers are still standing at the starting line when it comes to understanding these new pricing structures. Much of this confusion is due to the seemingly endless number of ways certain types of work can be managed, and how the shifting of risk can create value in the eyes of clients.

Marketing can alleviate this paralysis by helping define and aggregate details on common types of AFAs, and sharing this information at the outset of preparing a tailored fee agreement. These kinds of details might include:

• A glossary of current AFA structures undertaken by your firm. This will allow lawyers to select from a base menu of different billing methods already in use and determine which method may best suit a particular client's goals.
• Sample formulas for how the billing format works for each structure.
• Budgeting templates to help lawyers draft and calculate an AFA.
• An overview of your firm's process for reviewing and approving AFAs if different from the normal file opening process.
• A list of “go-to” resources for additional follow-up, including members of the finance or accounting teams who specialize in AFA matters or partners who can be contacted for questions in specific legal areas.

Creating AFAs for New Business Pursuits

Many current and prospective clients are asking outside counsel to suggest innovative fees and provide different billing options for them to consider, whether through a formal RFP or an informal bid process. Occasionally, clients may have a particular arrangement in mind, but will often ask firms to make suggestions.

Lawyers who have spent their entire careers billing by the hour often need guidance as to what structure may work best for the opportunity at hand. This is a perfect opportunity for marketing professionals to assume a coaching role by suggesting possible AFA structures that fit the prospective matter and offer the best scenario for a mutually beneficial outcome.

For example, a lawyer may be struggling to provide a fixed fee for a prospective piece of legal work due to the work's uncertainty. Marketing might suggest the lawyer consider creating a hybrid AFA that would include a fixed fee for certain defined portions of a project and a blended rate for matters that fall outside the scope of work. Marketing should have knowledge of the different AFAs being offered across the firm and be able to provide guidance as to which models have been used most effectively in similar situations.

Selling Your Firm's Approach to AFAs

In today's economy, nearly all law firms are open to discussing AFAs with clients or prospects. But simply stating that your firm is “open” to discussing AFAs is no longer going to separate you from your peer firms, or provide you with a competitive advantage in the marketplace. Marketing should be working with firm leadership to devise a strategy to best leverage your firm's approach to AFAs.

Picture yourself in the role of a general counsel making a decision about which firm to choose for an engagement. Assuming the quality of legal work provided is roughly equal, what is it about the firm's approach and execution of AFAs that makes your firm the best choice? Is it because your lawyers have undergone rigorous legal project management training? Does your firm employ specialized budgeting or project management software? Is your firm using technology in a unique way to provide clients with regular project and budget updates? Does your firm manage a significant portion of its work through AFAs, which allows you a greater depth of resources for best practices? Your partners need to be able to sell your firm's approach to AFAs as a step above peer firms.

Identifying and Measuring AFA Performance

Once your firm has been selected to provide legal services under an AFA model, marketing's role in the process is far from over. Many firms have or are in the process of implementing systems to track the performance of AFAs to ensure that the costs of legal services provided are in alignment with the prescribed fee. For example, if your firm was selected to handle an M&A matter for a fixed fee of $1 million, tracking the actual realization cost to the firm during the engagement is imperative. This allows the firm to monitor the matter on an ongoing basis, to ensure the matter is being managed in a profitable manner and to make adjustments in real time.

Often working in collaboration with finance and/or IT, marketing can help define and create different types of profitability reports for firm leadership. The data produced should be arranged by practice or industry group, by office and by matter and AFA type. This allows for quick analysis as to which kinds of AFAs work best for different types of work, and which should be avoided, further improving the ability to advise lawyers early in the AFA development process. Summary reports by practice and office also provide practice and office leaders with broad intelligence on the progress of active AFAs under their jurisdiction, helping them identify matters that may be in jeopardy of profitability and to better manage their practices. This also allows management additional intelligence as to which partners are doing a better job of managing AFAs. Practice or office leadership is then able to consider this historical data when approving future AFA requests from individual partners.

Sharing Best Practices in AFA Project Management

The firms that are able to collect data from past experiences and use that intelligence to create more precise pricing structures for future projects will experience the most success with AFA pricing models. While a firm's billing system can collect information on profitability, additional details should be gathered by debriefing matter managers for an understanding of how work was allocated and performed.

Using the kinds of reports in the previous section, marketing can help identify the lawyers involved in leading successful AFAs and coordinate debrief sessions to collect and document any best practices that might be helpful for other lawyers undertaking similar work. Were special timelines created to ensure deadlines were met? Did finance provide regular reports on hours logged to lead lawyers? Did a project team meet on a frequent basis to decide the most efficient way to handle a particular piece of work? Marketing can also create opportunities for these lawyers to present case studies on their work to peers in the firm, further extending the sharing of best practices.

Time to Pull Up a Chair

The continued shift away from the billable hour by budget-conscious clients is profound, and by all accounts is expected to increase in the years ahead. Those firms that develop the tools and processes to effectively price and manage AFAs will be well positioned to win work from those that do not. This pricing revolution is a truly unique opportunity for marketing professionals to join firm leadership at the strategic decision-making table. There is no better time or place to pull up a chair, so don't wait any longer to get started.

David Bowerman is Director of Client Development and Matthew J. Prinn is an Associate Director for Business Development for K&L Gates, a global law firm with nearly 2,000 lawyers who practice in 41 offices across four continents. David can be reached at 206-370-6726 or [email protected], and Matt can be reached at 617-261-3143 or [email protected].

For Twitter, LinkedIn, Facebook and Google+ followers, click here to subscribe to Internet Law & Strategy at a special introductory rate of $329. This offer is valid for new subscribers only.