6 Common Options for AFAs
Budget conscious clients now have an endless array of options - fixed fee, phased fee, collared fee, value fee, holdback, contingent fee, blended rate - for just about any legal service.
The majority of firms I work with are small to mid-sized firms. Many have been early adopters of AFAs because consumers today know what they can afford and will not tolerate an open spigot. Today's legal services market, with all its options, demands transparency
in pricing and this is one genie that is not going back in the bottle.
In fact, some of these early adopters have turned AFAs into a competitive advantage, hinging their legal marketing efforts on their fee flexibility. Here are six common options for AFAs:1. Flat /fixed fees.
To be successful with fixed fee billing, firms need to conduct research into their case files going back at least a year or two in order to arrive at pricing that will protect profitability. North Carolina divorce attorney
Lee Rosen is a strong believer in fixed fees and provides good advice for making the switch at his Divorce Discourse blog (DivorceDiscourse.com).
He transitioned his firm to fixed fee billing a few years ago, when the idea was truly a radical one (it still is in family law), and his revenues and profitability soared ... after overcoming some major internal obstacles. Fixed fees can be staged according
to specific phases of a case using a limited scope agreement or encompass an entire legal matter. This type of AFA works best when the case has a clearly defined beginning, middle and end.2. Contingent fees.
Prevalent in personal injury law, the firm's fee is contingent on the results obtained for the client. It's attractive to clients because it is shared risk and reward. However, since predicting successful outcomes in other
fields tends to be problematic, it is not used much in other areas of practice.
Morgan & Morgan, who markets themselves as "the largest contingency-fee law firm in the country," offers full service business litigation on a contingency basis. According to their website, this includes all forms of commercial litigation, real estate litigation,
construction, employment law, IP litigation, and many others. Certainly, this will put pressure on competitors.3. Reverse contingent fees.
A reverse contingent fee ties firm compensation to the avoidance of liability exposure. It can be effective for experienced attorneys who can accurately gauge case value and potential damage awards in their jurisdiction.4. Percentage fees.
A percentage fee is based on the transaction amount, and can be graduated or constant, depending on the case type. The percentage fee is commonly used for estate administration or probate, and is generally capped by the
court.5. Capped or collar fees.
This common alternative to the billable hour involves a client paying a set hourly rate with a capped amount. The client and the firm then agree on a percentage to be reimbursed if the firm exceeds or falls below the
capped amount. 6. Blended rate.
A blended rate is a blend of the hourly rates for associates and partners working on a case and typically works best for cases that are complex and time-consuming. However, since it is still technically a billable hour -- albeit
at a more predictable rate -- it does not help clients achieve predictability in legal expenses.
In the end, the successful implementation of AFAs depends on mutual trust between a firm and its clients. One of the often overlooked benefits of AFAs is the creation of trust and goodwill -- the client understands that the firm is incentivized by results instead
of spending more hours and the firm understands it will be fairly compensated for achieving those results. It's a win-win for both sides, and can be a key component in client retention and referrals.Know Your Numbers Before You Set Your Price
Key Performance Indicators - KPIs - are quantifiable measurements that help you gauge the progress you are making toward realizing the critical success factors for your law firm to flourish. Some examples of typical KPIs for law firms include:
- The amount of money you need every month to make payroll and keep your doors open.
- The number of new clients you need to bring in every month to be profitable.
- Your average profit margin per client.
- The types of cases that produce the highest profit margin.
- The percentage of people who visit your website and end up calling your office.
- The percentage of prospects that call your office and then come in for a free consultation.
- The percentage of prospects that come in for a free consultation and become clients.
To be useful to you, your KPIs must reflect the goals of your organization and they must be measurable. Done correctly, KPIs will help you determine what you need to charge to achieve and maintain profitability. Your KPIs provide the critical data you need
to drive good decision-making.Having the Pricing Conversation with Clients
Rosen says - and I agree - that talking to clients about money should be like breathing. It's something you need to do all the time. Most attorneys shy away from the money conversation, but most clients are not experienced in legal matters and are unsure how
to value your services.
You must educate them. You need to become comfortable with having pricing discussions at the initial consultation as well as other areas as necessary. You want them to feel informed about what they are spending. Transparency here is the goal. This helps eliminate
surprises on both sides and gives your clients better insight into the value they are truly receiving for your services.
Don't save the money talk for after your bill goes unpaid! By then, it is almost too late to establish value in the client's mind. Instead, make it your practice to understand each client's needs and tailor a pricing strategy to meet those needs. Done right,
a tailored pricing strategy can become a competitive advantage for your firm and differentiate your brand in the legal services marketplace.
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