9/25/09

The Evolution of AFAs: Law Firm Side

Having spent considerable time working with Alternative Fee Arrangements (AFAs), I am starting to see a more defined path for how AFAs might evolve within law firms. So based on my experience and all I have read about AFAs, I predict the following evolution for law firms: 1) Setting Price. Lawyers and firms are currently struggling with setting fees based on work (and value) and not hours. These prices are ultimately guesses (like all prices are), with some being more educated guesses and some just coming from the ‘gut.’ At this stage lawyers are learning that even with a wild guess, they are not risking the entire fee, but only the margin of error. The knowledge systems involved at this stage of evolution include time and billing, as that is the primary source of information on which to base good guesses. 2) Tracking Profitability. Once a firm has a number of AFAs in place – time will pass. And with the passage of time they will begin to see how good their guesses were. As expected, some engagements will be more profitable than others. As this knowledge source grows, patterns will emerge as to which types of matters and fees are more profitable than others. As previously noted on 3 Geeks, there is an emerging market for systems that address the question of profit tracking. These knowledge systems, as advertised, will allow firms to create, model and monitor matter budgets. As their use becomes more wide-spread, it will become apparent that firms can actually impact the profitability of engagements through-out the life of the matter. Red flags will come up during an engagement that will signal the need for altering behavior - which brings us to our third stage of evolution. 3) Project Management (PM). Once a firm sets a price and can carefully monitor performance-to-budget (a.k.a. price or fee), they will want to improve that performance. Here is where PM will come into play. Good lawyers have skills at case management, which involves managing to legal outcomes. In contrast PM is managing to a defined scope of work with known resources within a given time frame. This approach allows for changes in any of those aspects, but fees are then typically revisited. Currently PM resources within a law firm (if they exist) are either in IT or in some form of practice support. The challenge with utilizing these PM resources is they lack the technical/legal knowledge related to case management. What is needed are project managers with the technical expertise to manage legal matters (both litigation and transactional). This begs the question: Where will this PM resource come from? This is yet to be seen. However, I predict that when this resource comes into play, we will be witnessing the actual transformation of law firms that everyone likes to talk about. PM in play will be a recognition that law firms need to function like a business, to both their benefit and their clients’. At least that’s the way I see it.

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4 comments:

John C said...

I absolutely agree.

In my law firm we are already seeing the demand/requirement for this from business leaders. Not just to deliver a defined scope within a defined time and to a budget, but also for client reporting and satisfaction reasons - to have a better handle on what is happening, report on status and capture those things going wrong before they derail a transaction/project.

QLex Consulting said...

Yes, yes and Yes!
Defining the scope is a major undertaking. Developing a means of acknowledging and addressing change in scope is even more difficult. But these are necessary in order to successfully manage a project - or relationships between lawyer and client.
Lawyers need to have a means of discussing the "baseline" expectations and the "current" state as part of the conversation about legal issues. Changes don't mean malpractice or inadequate lawyering. They acknowledge the dynamic nature of law practice.

Sharmil McKee said...

This article is cutting edge. I am passing the link around to every attorney I know. I think you are 100% correct, based on my personal experience with my firm.

I am currently working on step 3. Actually, project management has forced me back to step 2. I have finally found an online system that will allow us to accurately record our time, so that I can assess whether a project/matter is profitable. (For example, I realized that we are undercharging for simple litigation like arbitration cases and unemployment hearings).

This same system also allows me to control project management. In fact, now, when I assign a task, I include a time limit and a due date. I consider myself a techie junkie, and I am constantly looking for better programs, software, and processing to help us improve efficiency.

Until I read your article, I didn’t realize that there was a method to the madness. Thanks.

FYI, the system I use right now is http://www.worketc.com . I found that program on http://feedmyapp.com.

Sharmil McKee
Business Lawyer
McKee Law Office
Philadelphia, Pennsylvania
www.mckeeoffice.com

QLex Consulting said...

Sharmil is right on point. I advise lawyers how to structure alternate fee arrangements to maximize profitability (yes, you can be even more profitable with some fixed fees than with the hourly rate -- if you keep good data on your performance...). I usually suggest that we start with project management so we understanding how the sources of the work and how it translates into revenue.
The reaction is usually - "Why do I need to do something like that? I'm efficient and what you are describing is too complicated. I want to practice law - not think about HOW I practice."
So I back off for a while and reverse engineer the project management as part of the profitability analysis.
The point is that steps 2 and 3 are integral to each othere - and you can start in either place.

PS I used to be a practice leader of a consulting practice at one of the Big 4 accounting firms. I quoted all my work at fixed fees and was highly profitable. Now I try to help others learn some of the secrets. I'd be eager to hear your stories about what works, and where you see the barriers.

 

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