How to Make Alternative Billing Part of Your Marketing Strategy

10/01/2009
Reprinted from:

Published 10/09

Satisfied clients are clients who will bring you more work. The best way to satisfy clients with alternative billing is to make it an interactive process.
The ongoing debate about whether the billable hour is dying illustrates how the commoditization of legal services has become a major concern for law firms. The trend among large corporate clients to pare down their hundreds of law firms to a few dozen or less means that the survivors must often provide work with steady volume (such as patent filings) at fixed rates, turning these matters into the legal equivalent of a commodity. Technology also makes commoditization an issue for solos and small firms, as software programs and law firm Web sites offer individual legal services such as wills, bankruptcy filings or divorces at low fixed prices. Fixed-price commodity work, however, is not the best path to profitable growth.

Consequently, law practices of all sizes are exploring a range of other options for billing their services.

The Starting Point for Choosing Alternatives

Recognizing the need to reject hourly rates is not the same as knowing how to replace them with a better billing method. Clients want change but most are unable to truly initiate it themselves. The Association of Corporate Counsel's “Value Challenge” is still developing, and the closest most clients come internally is the request for proposals (RFP) “beauty contest,” which often has a checklist of specific items that supposedly will be evaluated on a weighted basis. The deciding point, however, frequently still comes down to which firm has the lowest hourly rate. A firm may push back by asserting the uniqueness of its practice and services, but often firms believe too much of their own rhetoric—all lawyers can't be the best at their practices, now can they?

The skills of a lawyer and the way in which services are marketed and delivered must coincide with what the client wants and needs to have. The most effective effort is a billing approach that provides more while reducing inefficiencies, duplications and unnecessary effort. It is also the most effective weapon against commoditization. That is the starting point for identifying alternatives to the billable hour that involve neither commodity services nor off-the-top price cutting.

Making Alternatives Work

A law firm's full-scale commitment to the use of alternative billing as a marketing differentiator requires commitment to three basic premises for success:

  • Communication is essential. Surveys uniformly show that clients are unhappier with surprises and unexplained costs in their bills than they are with high bills themselves. Firms should not fall into the trap of simply cutting fees, because it sends a message that they were overcharging in the first place. An up-front general statement about fees and alternatives, estimates and budgets, with flow charts to explain who in the firm does what, are all crucial communication tools. It is important to tailor this communication, and the fees themselves, to individual clients' preferences—which, after all, define their perceptions of value.
  • Clients are still not particularly knowledgeable about billing. Even corporate counsel typically do not have a substantial understanding of what equitable arrangements may exist. Law firms, therefore, have to seize the initiative by working with clients to develop specific pricing alternatives based on each client's preferences. Being proactive avoids having the client fixate on fee alternatives that may be unworkable, or impose such alternatives through an unrealistic RFP process.
  • There is no universal best billing alternative. Client preferences and each firm's operations differ, and likewise each project or case has a multitude of factors that could accommodate various billing options.

    Choosing Alternatives

    The question then becomes which billing alternatives to use. There is nothing magical about hourly rate alternatives—they all seek to achieve the same thing. Rather than setting price by a standard unit or result, billing alternatives focus on actions taken to benefit the client, beyond the time of how that value is applied. Choosing the right alternative is ultimately a business matter for both the firm and the client. Alternative approaches can include the following:

    • Blended hourly rates. The client is charged one fee per hour regardless of who in the firm works on the matter, whether it's a senior partner with a high rate or a junior lawyer with a lower one. The right balance gives clients a better price and gives firms the financial incentive to delegate work.
    • Fixed or flat fee. The fee is determined and stipulated in the engagement letter, before the assignment even begins. It will not vary regardless of how much time the lawyer expends or what the result is. Flat fees are especially useful for routine legal services and encourage the use of technology to streamline the provision of those services.
    • Contingent or percentage fee. Frequently used in personal injury and collection matters, this fee is a percentage of the value recovered for the client. It is particularly useful for the lawyer skilled at analyzing cases and accepting those with a high likelihood of success.
    • Premium pricing. An hourly rate or some other billing method is used as the base, and the lawyer is able to add on an additional premium if the result exceeds client expectations. There is no premium if the outcome is not successful. Premium pricing gives the lawyer a stake in the outcome and the assurance of a minimum fee even for a “bad” result.
    • Retainer. This method sets up a fixed fee for a fixed time cycle (often monthly) during a designated period (often one year). It is sometimes used as a one-time payment to guarantee the availability of the lawyer or firm at a future date.
    • Value billing. Rather than setting price by a standard unit or result, value billing lists actions taken to benefit the client beyond the time of how that value is applied. Personalized service and unexpectedly good results are examples of value-added actions that the lawyer can demonstrate and charge for.
    Maintaining Control

    These billing alternatives reflect a highly interactive process: The lawyer takes a direct financial stake in achieving the desired results, and the client plays an active role in deciding whether those results have been met. No lawyer wants to lose control over the direction of an assignment, but absorbing a degree of risk and accepting informed client judgment can be essential elements in growing a strong lawyer-client relationship.

    The best way to balance the interests of both sides is by developing a budget at the start of an engagement. Some lawyers resist budgeting a matter because they believe it's merely an attempt to reduce the fees they receive by constraining their actions beforehand, when actually preparing a budget at the start ensures greater productivity and cost-effectiveness for both sides. However, the key here is not just preparing the budget, but involving the client in its preparation. Without client buy-in, the process is meaningless.

    Ultimately then, alternative billing is a matter of trust and agreement between lawyer and client, such that they act as a team and create a budget for future services. The parties generally find that each one will assume certain risks and that the costs will go down. A general counsel told me some time ago that the mere fact of budgeting caused everyone to focus on the goal line and how to get there most efficiently. The result is a happier client, and happy clients tend to bring a firm more work.

    Service versus Price

    Opinions will vary regarding which alternative provides the best measure of value to the client in a particular type of legal matter, of course. However, any alternative billing system can only work with precise knowledge of the scope of services to be provided and a reasonable up-front estimate of the cost of those services (not necessarily equated to the price charged).

    So in the end, your ability to incorporate new billing strategies into your marketing message comes down to the nature of the lawyer-client relationship. Service is the one factor that clients want from lawyers more than anything else, including more than lower fees. No matter what alternatives are used, you should always work with clients to measure the value desired and provide legal services accordingly. That way, “value” becomes the marketing message, not “lower price.”

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