Law Practice Management

Alternative Fee Agreements and Value Pricing are Here to Stay

March 6, 2012

Alternative Fee Agreements Can Boost Profits

If you’re billing by the hour and have never considered value pricing or offering your clients alternative fee agreements (AFAs), here’s some research that might get you thinking.  Altman Weil’s study, “2011 Law Firms in Transition,” found that: “Firms that are proactive in their pursuit of non-hourly business were more than twice as likely to report higher profitability on non-hourly projects compared to firms that are reactive.”  Moreover, 95% of the law firms surveyed use AFAs and “75% of respondents believe there will be more non-hourly billing in the future.” Download the full survey here.

Value Pricing Can Improve Your Cash Flow

“Cash flow is the barometer of business health.”
From The Game of Work: How to Enjoy Work as Much as Play, by Charles A Coonradt

“The firm is doing fine. We just have a bit of a cash flow problem right now.” Have you ever said those words or thought them to yourself?  Most business owners have.  Unfortunately, as noted by Charles Coonradt in The Game of Work, “Saying everything is fine except for cash flow is like saying the patient is fine except for a 105-degree temperature.”

Cash flow problems are symptoms of deeper problems.  The problems can range from excessive overhead to over-staffing to ineffective systems.  But all too often cash flow problems stem from too many clients owing too much money.  The dreaded accounts receivable.  Collections. But there is one way to end your collections problems forever.  Value pricing.

In his book, Implementing Value Pricing: A Radical Business Model for Professional Firms, Ron Baker outlines Eight Steps to Implementing Value Pricing.  The book is a must-read for any attorney considering value pricing.  All steps are integral to the process, but Step Five focuses on the creation of a Fixed Price Agreement.  Why is this relevant to cash flow?  Because you control the payment terms of the fixed price agreement.  And the price is paid up front before you begin the work.  In fact, the very definition of value pricing is, “the maximum amount a given customer is willing to pay for a particular service, before the work begins.”

If you want to eliminate “cash flow problems,” consider value pricing.  Here are a couple of firms that are doing it right.

Shepherd Law Group – They use the term “Up-Front Pricing”
Valorem Law Group – Valorem proclaims the billable hour is dead on its home page.  They also have a nifty iPhone app.

If you want to learn more about AFAs and value pricing, check out these books:
Winning Alternatives to the Billable Hour: Strategies That Work
Implementing Value Pricing: A Radical Business Model for Professional Firms

2 Comments

  1. Mark Chinn says:

    I can’t believe you didn’t mention Chinn & Associates and my article “Dumping the Billable Hour” and my web site discussion of value pricing :). You also missed Ron Baker and the Verasage Institute.

  2. Nora Riva Bergman says:

    Hi Mark. I’ve mentioned the Verasage Institute in other posts. But you’re right, should have mentioned it here as well. And I can’t believe I missed your site either. Now you’ve gone an ensured that you’ll be the subject of an upcoming post. I truly do believe that value pricing is the future of law and the billable hour will be history in our lifetime.

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