{"id":198,"date":"2017-04-18T00:00:00","date_gmt":"2017-04-17T14:00:00","guid":{"rendered":"https:\/\/hub.findingsimple.com\/au\/alternative-fee-arrangements\/"},"modified":"2022-08-03T16:04:15","modified_gmt":"2022-08-03T05:04:15","slug":"alternative-fee-arrangements","status":"publish","type":"post","link":"https:\/\/insight.thomsonreuters.com.au\/legal\/posts\/alternative-fee-arrangements","title":{"rendered":"Achieving Profitability with Alternative Fee Arrangements"},"content":{"rendered":"

With the increasing prevalence of alternative fee arrangements (AFAs) \u2013 such as fixed, blended and capped fees and retainers \u2013 firms have the ability to increase the client\u2019s perception of value, improve employee satisfaction and provide a competitive advantage all at once.<\/p>\n

But not all AFAs produce profitable results. How can law firms be proactive when it comes to legal pricing and maintain good client relationships at the same time?<\/p>\n

The importance of having a pricing strategy<\/strong><\/span><\/p>\n

Worldwide, pricing pressures are increasingly being experienced by the legal industry.<\/p>\n

In Australia, increasing price pressure and customer demands for better value has the greatest negative effect on law firms, according to the 2016 ALPMA\/InfoTrack “Adapting to the Changing Legal Landscape” Survey Report<\/a>. The survey also found that 65 per cent of respondents suggested the legal industry here is reactive, only changing when necessary and not quickly enough.<\/p>\n

Overseas, Altman Weil\u2019s 2016 Law Firms in Transition survey<\/em><\/a> found 95 per cent of law firm leaders in the USA see price competition as a permanent trend moving forwards. What\u2019s more important however, is that the survey also sees firms that take a proactive approach to alternative fee arrangements enjoy a \u201cseven-year trend of compelling success\u201d.<\/p>\n

When it comes to pricing pressures, the importance of being proactive is threefold:<\/p>\n

    \n
  1. AFAs must be capable of generating profit:<\/strong> Applying a strategic pricing model will ensure a viable costing arrangement.<\/li>\n
  2. Value equals an assessment of the benefits and the price.<\/strong> AFAs assist in the process of determining \u2018value\u2019.<\/li>\n
  3. AFAs shift pricing control back to the firm:<\/strong> The demand for more value and lower prices from clients is often seen as a market problem<\/a>. Firms that proactively approach this challenge as \u201cthe inability to justify our fee\u201d instead of \u201ca loss of pricing power\u201d shift the focus to one of capability and differentiation.<\/li>\n<\/ol>\n

    The changing legal landscape: What do clients want?<\/strong><\/span><\/p>\n

    According to a recent US whitepaper produced by the Thomson Reuters Legal Executive Institute, The Alphabet Soup of Law Firm Pricing<\/em><\/a>, clients want predictability, efficiency, transparency, targeted legal advice, more access to AFAs and, above all, value for money.<\/p>\n

    The paper also reports that clients prefer a mix of standard hourly rates and AFAs, depending on their individual varying goals and cases.<\/p>\n

    While AFAs appear to make clients happier, law firms are struggling to achieve profitability with AFAs. So before embarking on AFAs as a matter of course because clients demand it, law firms need to ask these key questions:<\/p>\n