Hi there,
This newsletter is for those of you on the law firm side — written from the perspective of a former Big Law partner (me!).
Last week, I talked about the layoffs happening right now with in-house legal teams — and how layoffs are not the only way for companies to reduce costs.
Alternative fee arrangements — I wrote — could be a way to reduce costs by hundreds of thousands of dollars (or more!), a move that could save jobs for an in-house teams.
I know how that sounds to many of you working in firms.
Like (maybe a bit of) an attack. Like a way to save money at the expense of your profitability.
I’ll be honest: I was not a fan of AFAs when I was running my practice.
I thought AFAs hurt my ability to do a good job for my clients — and limited my ability to make money.
What I’ve seen since starting PERSUIT is that my thinking led me to miss an opportunity to be more effective and more profitable — not less.
An AFA means you’re getting paid for producing a result — not for how many hours you and your team spend working on a matter.
If you get really good at creating an outcome, should it matter how many hours you worked to create it?
As a Big Law partner friend of mine told me:
“I used to do two hours of work and create $2 million of value for a client. Even at $2,000 an hour, that didn’t seem like a fair arrangement.”
My personal experience was the same.
I would often be brought into an ongoing case, provide independent advice on the strategic direction that should be taken, which resulted in a much more favorable award — often tens of millions of dollars more.
But because I charged by the hour, there was a complete mismatch between the value of my advice and what I was able to charge.
What I see now that I didn’t see then is this:
There is a tremendous profit opportunity for firms willing to embrace alternative fee arrangements and value-based billing.
An hour of my time brought with it 20+ years of experience.
Yet my hourly rate as an experienced senior partner may have been (only) say two or three times the hourly rate of a brand new associate — with effectively no experience whatsoever.
How could that be right?
Do you know how many in-house legal teams would pay you more if you could create the same result for them — only faster?
Outside of legal, I keep coming across examples of professionals in other industries who’ve figured out how to capture more of the value they create for clients.
For example, traditionally, most advertising and marketing agencies used the same billable hours model that still dominates legal.
Many ad agencies, however, have ditched billable hours and moved exclusively to value-based pricing.
By doing so, they’ve become more profitable, not less.
Here’s a perspective I came across a couple of months ago that brilliantly illustrates this idea:
I think firms could learn a lot from this kind of thinking.
It is not by chance that the most profitable law firm in the world — Wachtell, Lipton, Rosen & Katz — does not bill by the hour… ;-)
