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.