Connections for Success

 

09.24.15

Portfolio Pricing: A Win-Win for Both Clients and Firms

During the recession, clients became more cost-conscious about their legal fees, and as the economy recovers, clients maintain that expectation. Clients are more attentive and cognizant about what they spend on fees. They do not want surprises and are insisting on greater cost-effectiveness from their legal service providers. The hourly-billing model is less desirable to clients, and law firms that respond to this change by offering alternative fee structures to meet client needs have a great opportunity to set themselves apart to attract clients and better predict firm cash flow.

Bundled Pricing

In portfolio pricing, related legal work is bundled and priced as a single unit and it could be structured in a variety of ways. A “portfolio” could include all of the client’s work in a specific practice area for a set period of time, such as quarterly or annually. It could also be structured to include legal work involved for a specific transaction, such as drafting a trust document, health care powers of attorney and other related ancillary documents, while also assisting with re-titling assets to fund the client’s trust.

Portfolio pricing arrangement might also be based on contingencies, work volume or duration of the legal engagement. With standard legal services, it can be easier to estimate the costs to complete work for the client. For riskier or complicated legal matters, the pricing could incorporate penalties or bonuses in addition to the fixed fee.

A drawback of this fee arrangement is that the firm shoulders some risk. If an engagement requirement calls for more hours than originally estimated, it could cost your firm significant billings. In order for the portfolio to best succeed, good project management is essential. It is also to ensure that the client understands the scope of the engagement and the services to be performed, which can be accomplished with a thorough and complete engagement letter that assists in managing client expectations by detailing what services are included and excluded from the legal engagement.

How Your Firm Benefits

The obvious advantage of portfolio pricing for clients is the predictability of fees. Firms also benefit from this fee structure. Handling a large portfolio of similar transactions or related services can produce economies of scale not available with individual matters.

Portfolio pricing also encourages leaner and more efficient staffing. By establishing teams that have focused practice areas to deal with particular portfolios, your firm will likely improve efficiencies. Team members will become more familiar about the client’s needs, business and legal issues, allowing your associates and staff to build continued relationships. The more conversant and knowledgeable your team is with the client’s issues, and how different matters are interrelated, the more effective they will be in serving the client. It will lead to greater client satisfaction, which results in more business associates and referrals from the client.

Measuring Progress With an Advisor

Because this is in an alternative fee arrangement, and is more subjective than hourly billing, you will need to monitor a number of metrics that affect the firm’s profitability and success of the portfolio pricing arrangements. You may want to consider working with a financial advisor to determine portfolio prices. Your advisor can help:

  • Identify the factors the price is based on, such as time and complexity;
  • Determine the scope of the portfolio and legal services;
  • Set budgets and necessary profit margins and
  • Ensure the portfolio prices are sufficient to cover administrative costs, overhead, partner compensation and built-in allowance for projects that become more involved than initially thought.

Your advisor can monitor how the portfolio arrangement is working for your firm and flag potential areas of concern, such as engagements that require more time than anticipated. The advisor can let you know if the portfolio price is insufficient so you can address them with your client and possibly discuss a more suitable arrangement.

Choose Clients Wisely

Portfolio pricing may not be appropriate for every client. Research your client’s industry and its regulatory environment to consider factors that might affect portfolio pricing. Be sure to also consider the client’s legal work, including volume, types of matters, litigation and your firm’s margins for the work. Setting yourself apart from the competition may also be another incentive to consider an alternative fee arrangement.

Focus On Efficiency

Alternative fee arrangements are an excellent opportunity to attract clients in a tight buyer’s market and can also serve the firm by focusing on efficiency. This can lower overhead costs, increase productivity and make changes in your office necessary to better compete in the crowded legal market and more importantly, provide quality legal service to your clients.

For any questions regarding portfolio pricing, contact us at [email protected] or 312.670.7444. Visit orba.com to learn more about our Law Firms and Lawyers Group.

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