The Continuum of Fee Arrangements™ is a Law Firm Pricing reference that is simple in its presentation and comprehensive in its content. Inspired by the ingenuity of Stuart Dodds, CPP, author of Smarter Pricing, Smarter Profit, the Continuum™ is a handy guide for understanding the many fee arrangements used within the legal industry.
In addition to being a straight-forward graphic, the Continuum™ incorporates a few important principles. First, as you move from left to right, the client-firm relationship evolves from a one-way conversation to a two-way conversation. For example, time-based pricing requires no dialogue once an engagement letter is signed; firms simply send bills each month. By contrast, value-based pricing cannot work without significant, on-going communication before and after the engagement letter. Second, as you move from left to right, the financial risk of each arrangement shifts from the client to the firm. Whereas clients have the burden of risk under Hourly engagements (extreme left), firms have the most exposure under Contingency (far right).
As the original time-based option, Hourly measures how much time a lawyer works on a matter, as reported on individual lawyers’ timesheets. Law firms use timesheets to create client invoices, based on a simple formula: hours recorded multiplied by hourly rate. Hourly does have a place within a law firm’s pricing strategy, but firms must be aware of its downsides, including rewarding inefficiencies, not aligning cost to benefits, and not matching price with value. Although AmLaw 200 firms are embracing non-hourly arrangements, the majority of the work billed by the majority of law firms remains Hourly.
As one of the time-based options, Volume is a well-known strategy, which often is driven by a client seeking to capitalize on its ‘loyalty’ to an individual firm. Law firms easily understand—and quickly adopt—volume discounts on a regular basis. The amount of work promised by a client can result in a discount. Often this requires a strong relationship and long-term investment. Two shortcomings include trying to predict future need and not knowing fees until post-matter. Many firms employ a tiered discount (5%, 10%, 15%, 20%): the more hours billed, the higher the discount.
As one of the time-based options, Blended relies on hourly rate, with a twist: the client is charged a single rate (i.e., price) for all timekeepers or groupings of timekeepers. Clients object when work is pushed down to more junior timekeepers, which is a shortcoming of Blended. Firms should be cautious, as blended rates tend to penalize a firm’s revenue during times of high demand: high demand should yield higher pricing, but blended rates create an artificial cap.
Although known as a pre-payment, Retainer can be a monthly (periodic) payment for professional services. As a combination between time-based and budget-based options, Retainer provides flexibility for a variety of matter types and creates a foundation for long-term relationships. One caution is workload: clients overpay in months with too little work.
As one of the budget-based options, Capped creates an upper limit on the amount the client will pay. General Counsel like this strategy because it helps provide predictability for an engagement. Inefficient firms might struggle to complete the work under the cap, which can lead to questionable quality. In general, law firms assume the risk of cost overruns; clients assume the risk of bad results. Attentive monitoring (can minimize overruns.
As one of the budget-based options, Task identifies discrete tasks and sets a price for each. It is most often used for litigation. General Counsel like this strategy because it helps provide predictability for an engagement and encourages efficiency. Generally, Task is employed as a fixed-type agreement; however, a capped-type agreement can work, too. Task also allows clients to ‘unbundle’ services: law firms can be hired for individual tasks, rather than an entire engagement. Task often is based on the Uniform Task-Based Management System.
As one of the budget-based options, Flat provides clients with an exact cost for recurring transactions (e.g., patent applications, mortgage closing). Under a Flat structure, the law firm agrees to charge the client the same fee for a transaction, regardless of volume or anomaly. General Counsel appreciate the certainly of knowing in advance the cost of the work. Firms assume the risk of cost overruns, but are rewarded for efficiency. Can be called an “Event Fee.”
As one of the budget-based options, Phase divides an engagement into discrete parts, identified by milestones. For those matters that can be broken down, Phase often is the preferred option; it provides both predictability and certainty, and it promotes communication. It also matches clients’ payments to attorneys’ work product. For law firms with little-to-no experience, Phase may be difficult. Phase also allows clients to ‘unbundle’ services: firms can be hired for individual tasks, rather than an entire engagement. A highly popular option for complex litigation.
As one of the budget-based options, Fixed is one of the most popular alternatives to the Hourly rate. Under a Fixed structure, both parties (client and law firm) agree on a single price for a single engagement. Firms assume the risk of cost overruns, but are rewarded for efficiency.
As one of the performance-based options, Contingency is the best-known—and riskiest—arrangement based on a firm’s performance. Cash-strapped clients typically request a contingent arrangement, asking firms to finance the engagement. Firms assume the risk of cost overruns and the risk of bad results. But good results often lead to generous payment. To minimize risk, an option is Partial Contingency: both parties (client and law firm) establish some payment during the engagement (e.g., 30-50% of anticipated win, divided into monthly payments).
As one of the budget-based options, Portfolio combines Volume and Fixed. Both parties (client and law firm) agree on a single, aggregate price for all matters of a single type. General Counsel and law firms appreciate the predictability and certainty of portfolio arrangement. In general, clients assume the risk of paying more if the anticipated workload is minimal, and firms assume the risk of cost overruns, but are rewarded for efficiency.
As a combination between budget-based and performance-based options, Hybrid seeks to balance the predictability of a budget option with the risk/reward of a performance option. Designed to maximize each party’s investment, Hybrid often require sophisticated time-and-billing systems and personnel to create and monitor the agreements. More than 100 combinations are possible.
As one of the performance-based options, Holdback gives clients the ability to reward or penalize a law firm. Under a Holdback agreement, both parties (client and law firm) agree on the fee, then set an agreed-upon amount or percentage of the total fee that will be withheld until a milestone or result is achieved. Firms have incentive to perform.
As one of the performance-based options, Risk Collar is designed for both parties (client and law firm) to share the risk of the engagement. The burden falls to the law firm to create an accurate estimate of the matter, which becomes the basis of the collar. The client must first agree to the estimate; then it must agree on the size of the collar: 5%, 10%, 20%? If properly developed, risk to both parties is limited.
As one of the performance-based options, Success is an upward adjustment on a firm’s final payment. This is the simplest, most straight-forward options. Once a firm has submitted its final invoice—often based on Fixed or Hourly—the client decides if the firm has met and/or exceeded certain criteria, which would justify a bonus. General Counsel have complete control over success fee arrangements. A highly popular option, with growing popularity.
Value offers a true partnership between buyer and seller. The law firm understands what the client wants and what the client will pay for, and the client understands what the law firm can contribute and why its services are valuable. Value is the antithesis of Cost-Plus: there is no connection between the law firm’s costs and its fee arrangements. Value aligns client and law firm objectives and promotes an open relationship.
The Continuum of Fee Arrangements™ was introduced at the 2014 Marketing Partner Forum.