Value-Based Pricing Comes to Law Firms
Joel A. Herman
The concept of value-based pricing (VBP) is already common in the consulting world and has received a big boost in the health care industry thanks to various initiatives launched in conjunction with the Affordable Care Act. Will this transfer over to the legal industry? Law firms could soon see a similar demand for change in how they charge from clients trying to get the most bang for their buck.
Benefits of Value-Based Pricing
VBP is a successor to alternative fee arrangements (AFAs), but instead of billing based on the services provided, it charges clients based on what they value. Some firms consider this the supply and demand theory of basic economics. Others consider it a more customized approach to fees that rejects a one-size-fits-all model. VBP recognizes that different clients place different values on different factors. For example, one client might be primarily concerned with winning at trial to deter other potential lawsuits, while another may focus more on ending a case as soon as possible.
Used properly, VBP allocates risks between attorneys and clients, aligning attorneys’ incentives with clients’ goals so the firm has more skin in the game. It shifts the focus from hours billed to specific projects or desired outcomes. The result, ideally, is a stronger partnership with clear benefits for both parties.
One benefit to using VBP is that your firm and individual attorneys will not have to devote valuable resources to tracking time and compiling detailed invoices. By sidestepping lengthy client invoice and approval processes, you may improve your firm’s efficiency and cash flow, not to mention avoid unpleasant invoice disputes. VBP also allows you to learn more about your client’s business, plans and objectives, all while being rewarded for achieving positive results.
At the same time, VBP also benefits clients. It provides greater transparency and more certainty than hourly billing, which in turn improves the client experience. VBP further frees clients from unexpected surprises, the tedious process of scrutinizing invoices and the worry over runaway costs.
Tips for getting started
Implementing a VBP billing model requires careful planning and preparation, as well as some close collaboration with your clients. Transitioning should include the following steps:
- Establish the Client’s Value Points
Discuss with the client how it values the various types of work you perform for it and determine each project’s scope. If the client has a portfolio of continuing work, it may prove wise to assess value provided based on the total return on the client’s investment, rather than matter by matter.
- Assess Your Capabilities
Using historical data, determine whether you can efficiently provide the necessary services at the amount the client is willing to pay. You may well need to develop or refine processes, procedures and systems to accurately estimate and manage costs.
- Offer Several Tiers of Value
Present different prices based on the amount of value expected. This can be an effective way to demonstrate to the client what it might sacrifice to save money and to get a handle on the client’s price sensitivity, which can be useful information going forward.
- Prioritize Project Management and Communication
You must determine early on who will do what work and according to what timetable. Regular monitoring will play a crucial role, ensuring that everyone involved is adhering to the plan.
- Monitor Work for Scope Creep
The dreaded scope creep can easily eat into your profits. Be sure to alert the client to such creep as early as possible. Provide alternatives on how you can proceed and issue a change order if the client approves extra work or work that was not contemplated in the original fee agreement.
A common hurdle law firms have with adopting VBP is the reluctance that attorneys often feel when it comes to talking to clients about billing and collecting. Managing client’s expectations is imperative. Those who can get over the those discussions will likely find that clients welcome the opportunity to explore ways to build a more aligned and mutually beneficial relationship, whether for a single matter or several engagements.
Sidebar: Value-based fee structures to consider
After receiving input from clients, let’s say that your firm has decided to give value-based billing a try. Now what? You have several options for structuring your fees, including:
- Success Fees
You and the client define the specific results or milestones — for example, winning a summary judgment motion — that will trigger a bonus payment over and above the regular fee. Firms generally reduce their regular fee in exchange for a share of the potential upside. Your arrangement also might include a broken deal or similar discount if you do not achieve the desired outcome.
- Performance-Based Holdbacks
Part of the client’s fee is held back and paid out over time based on metrics evaluations of your firm’s performance. Metrics might be service-related or outcome-related.
- Reverse Contingent Fees
This might be an option if your client is the defendant. Reverse contingent fees are based on a percentage of the difference between the client’s actual costs (including damages or settlement amounts and legal costs) and the previously estimated value of the client’s exposure in the matter.
Remember, you may use different options for different clients.
For more information, contact Joel Herman at firstname.lastname@example.org 312.670.7444. Visit ORBA.com to learn more about our Law Firm Group.