Wednesday, August 26, 2009

Alternative Fee Arrangements Work Best When Both Sides Benefit

Companies are investigating ways to control costs and to link law firm billing to value received. This movement away from the billable hour can be seen as a 'fight' (as characterized by a recent Wall Street Journal article that framed the discussion as the 'Billable Hour' Under Attack), which may be unnecessarily adversarial.

Bill Sowinski heads the CT TyMetrix decision support services group, and has worked extensively with alternative fee arrangements:

"Alternative fee arrangements work best when both sides benefit. Ideally, an arrangement should benefit clients by reducing cost and more quickly resolving matters without compromising quality.

Law firms benefit in one of several ways. One way is to yield to the client’s leverage and reduce income but retain business.

A preferred model is to secure reduced cost, but to allow the law firm to manage matters cost effectively by allowing the firm to assign the appropriate resources to required tasks (this is the Sidney method described in the article.) Gross receipts might decline, but the law firm’s net will increase.

A variation on the preferred model is to reward a firm that will reduce cost with more business which it is allowed to cost effectively manage. In that scenario, both the firm’s gross and net increase while the client reduces cost.

Of course, poorer performing firms will lose business to the selected firm but that is a good result.

The difficulty in establishing healthy alternative fee arrangements is largely due to a lack of understanding by the client and the firm as to the costs associated with individual matters and groups of matters. That weakness can be overcome with careful analysis of the costs and resources deployed in past matters. That analysis should be shared with the law firm so the firm can determine if it can manage its allocation of resources to make an alternative fee arrangement profitable.

Finally, the client must make its matter management philosophy and objectives absolutely clear to the law firm so that the firm fully understands what is required and can support the matters accordingly."

CT TyMetrix continues to be interested in realizing advances in value-based billing, including providing in-house law departments with a set of fixed-fee and alternative fee arrangement tools to manage a range of billing arrangements, as discussed previously on this blog:

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