With increasing pressure from clients to provide greater value and transparency, many firms are offering alternative fee arrangements. But how can you determine which alternative billing structure is best for your firm and your clients?
While 92 per cent of firms have implemented some form of non-hourly billing, only 16 per cent have managed to make it more profitable than hourly billed work and 30 per cent are finding it less profitable, according to one US survey.
Make no mistake – getting your firm’s billing model right from the start is central to profitability and growth, and it’s more than simply copying the fixed-fee rates advertised by your competition. Successful implementation of an alternative billing arrangement requires careful planning and tailoring to fit your firm’s unique needs.
Here are four key considerations you need to make when deciding on an alternative billing model:
1. Your work
In general, non-contentious, systematic precedent-based work such as conveyancing, leasing and will drafting lends itself to flat-fee arrangements. On the other hand, highly customised services, litigation and research-intensive jobs are generally more suited to value-based or blended hourly structures. If the work can be divided into several discrete stages or units of work, task-based billing may also be an option.
2. Your clients
Who are they? What do they need? And what is their ability to pay?
Most clients appreciate the predictability of fixed or capped fees. However, such models are usually only practical for clients of high-volume services who require minimal client management.
Clients requiring highly customised work also require a higher level of contact and may be better served with a customised value-based fee arrangement involving a combination of task-based and blended hourly billing. For corporate clients who have a constant stream of work of varied month-to-month volume, an annual retainer may be an appropriate option.
3. Your fee earners
Blended hourly rates are often used successfully by firms whose talent spans a range of expertise levels, especially in litigation matters. It can simplify negotiations with clients and enable the use of low-cost fee earners to increase the profit margin on work.Inexperienced practitioners tend to be poor billers in terms of time estimation and composing billing narrations. Incorporating some fixed-fee or task-based billing can alleviate these issues as well as encourage work efficiency.
4. Your data
A pricing model will be unprofitable from the outset if it’s derived from guesswork, unreliable anecdotal evidence, flawed data or no data at all. Successful pricing requires a thorough analysis of costing data through a powerful practice management or internal modelling tool to precisely gauge profitability.
Good analytical tools can:
- Rip data from billing systems to construct future projections.
- Compare alternative pricing options.
- Determine impacts on pricing by changed variables.
- Identify areas for potential savings and improved efficiency.
- Evaluate the progress of a new fee plan.
The optimal billing model for each firm will be as unique as its (figurative) fingerprint. Therefore, firms that are committed to offering transparent and predictable fee options for their clients must be willing to put in the effort to formulate innovative pricing solutions based on their own unique operations and sound analytical data.