Client Billing Models: Hourly Fees or Alternative Arrangements?

One of the biggest challenges in legal practice management is securing revenue. The basis on which firms seek fees from clients is a fundamental calculation, so it is worth considering what’s at stake when choosing between traditional and alternative models.

Is your firm considering making the switch to alternative fee arrangements? Some considerations before you make the leap

The ability for clients to exercise greater purchaser power than ever before has had a dramatic impact on how many industries conduct their business, and the legal industry is no exception. The increased demand from clients to provide greater value and cost transparency has forced many firms to reassess their traditional practice of hourly billing, and instead seek alternative fee arrangements. Firms have had to accept that there’s been a discernible shift in consumer behaviour. So how can your practice take advantage of this new business landscape, whilst avoiding some of the alternative fee arrangement pitfalls?

Clients can’t get no satisfaction (with traditional hourly billing model)

Well… rather than no satisfaction, clients would be more satisfied with some cost certainty says Rob Knowsley of Knowsley Management Services when discussing fixed fees with Thomson Reuters.

“Fixed fees are expanding their application in the marketplace,” he says. “There is a growing trend away from time recorded as one of the principal methods of setting fees.”

The demand for greater cost transparency isn’t just coming from the consumer, the recent 2015 In-house Report: Benchmarks and Leading Practices produced by the Australian Corporate Lawyers Association (ACLA) and Corporate Lawyers Association of New Zealand (CLANZ), also suggests in-house legal departments in Australia and New Zealand are looking to reduce their spend. The report found that only 51 per cent of organisations felt that their main external firm provided advice at a reasonable price, and furthermore, only 60 per cent of respondents said their quotes were realistic.

“It should be a wake-up call for law firms that as many as one in ten in-house lawyers are unhappy with their main firm. In the current environment, it’s no longer acceptable simply to coast on the historic strength of a relationship. Law firms need to always be focussed on what their clients want, innovate where necessary, and constantly validate why they deserve the business,” says ACLA chief executive, Trish Hyde.

You can’t always get what you want (if you get the billing model wrong)

There’s no mistaking clients’ desire for better value, but it’s essential that firms get their billing model right from the get-go. As the ACLA and CLANZ report highlights, of the two-thirds of organisations that have utilised alternative fee arrangements which incorporate blended rates, volume billing, value-based billing, fixed pricing or risk-reward billing, 29 per cent of respondents rated the experience as a failure, and only half rated their alternative fee arrangements as a success. Therefore, it’s essential that firms recognise who their clients are, understand their needs and budget constraints.

Sympathy for the devil (sorry lawyers, that was coming)

Any firm that doesn’t conduct adequate research but rather, derives its pricing models from the competition may be setting itself up for failure. When attempting to get the billing model right, the overarching consideration that firms should keep in mind is that providing fair value and cost transparency rates highly amongst clients.

“The drivers are varied but the need for firms to be perceived as client focused and to increase the chances of keeping or getting more desirable clients in the face of proactive and adaptive competitors has to be front and centre,” says Mr Knowsley.

The biggest takeaway for firms moving away from the hourly billing model is that they can still be profitable if they conduct the necessary due diligence as to which billing model best suits their practice and clientele, all the while offering greater value when compared to the competition.

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