The legal industry continues to undergo transformational shifts that began in earnest with the economic downturn of 2008. These shifts have made Alternative Fee Arrangements (AFAs) a permanent and core fixture of legal services provision.
Although I realize these shifts have left law firms reeling in many ways, I am also THRILLED by the opportunity it has created for them to truly differentiate themselves with their clients and new prospects.
Think about it...the potential for differentiated competitive advantage for law firms providing value-based AFAs to clients is exponentially better than trying to do the same with that old beloved billable hour!
Billable Hour = Billable Hour. The key differentiator perceived and focused on by the client? The RATE. You have a slew of other differentiating factors, sure, but clients don't hear them very well when clear and easily comparable dollar signs are staring them right in the face.
Juxtapose that with an AFA-based competitive scenario. Presenting a potential client a well-reasoned, experience-based value pricing model shifts the conversation immediately. This presentation is no longer just about price and rates, instead, it showcases your firm's sensitivity and knowledge around the particular challenges being faced by that prospect and the unique and differentiated approach your firm has developed to address them!
You have a chance to stand out from the crowd.
So, if AFAs provide opportunities to have deeper and more fruitful discussions with clients, why don't more firms initiate these discussions proactively?
Well, certainly, FEAR of lower profitability is one key reason.
Fear of lost profitability halts many firms in their tracks.
So, the question becomes, how can firms become comfortable with AFAs and their impact on profitability?
I could write forever on this topic, and probably will be over the next several years, but in this blog I'd like to focus on just three (3) critical strategies for success around AFAs.
1. Financial Analysis & Modeling
Understanding how service delivery is being done and what the most profitable approach is for various types of matters or services helps move a firm towards developing AFA financial models that can be re-leveraged for future work. Many firms have this part well on its way. Some haven't even started.
Those firms that have already exerted a lot of effort to get this part going often scratch their heads trying to figure out why they continue to struggle with success around AFAs. If you are one of these firms...read on...!
Those firms that feel behind in this area...don't despair, you don't necessarily have to have this one nailed down right away to begin learning how to best leverage AFAs in your firm. One option is to perform rolling analyses of delivery and fee models as opposed to a big up-front effort analysis, and learn as you go!
2. Proactive Model Application and Monitoring
Having financial models for AFAs is a great first step, but getting those models effectively and continuously communicated, applied and adjusted throughout your firm is essential.
Making sure the right people are involved in determining the AFA model to be applied to each matter, and ensuring proactive monitoring and oversight throughout the life of the matter is a critical strategy for ensuring protected profitability.
3. New and Enhanced Loss Prevention
Obviously, minimizing monies removed from a firm's profits is key to recognizing as much profit at the end of the year as possible. So increasing effective risk management is always a key element of law firm profitability.
AFAs, however, bring new challenges for loss prevention and risk management in law firms. New types of teams are required and must be applied in new ways.
Executives, marketing, finance, project managers and other enterprise resources within and outside the firm must work hand-in-hand throughout the lifespan of each AFA-governed initiative in a more integrated fashion. Outsourced resources must be effectively coordinated and managed in synergy with internal resources to ensure quality and profitable delivery.
The bottom-line is, AFAs are not just about fees...they are about a whole new way of conducting and managing the business of law firms. And, despite the challenges they bring, or more factually, because of those challenges, they offer new and exciting ways for law firms to increase competitive advantage and achieve greater revenue and profitability as a result.
In upcoming blogs, we'll explore how business process management tactics can be leveraged to effectively implement each of the discussed strategies for AFAs.
Have comments, thoughts or any lessons learned you'd like to share? We'd love to hear from you!