Context determines value: evolving to value-based pricing structures.
Legal services have been priced based on hourly billing at “standard rates.” Although actively debated, alternative fee arrangements (AFAs)
are gaining traction. Alternative fee structures bring together two core concepts that require a different way of thinking about legal work:
Alternative fee arrangements should be a fair economic exchange between the buyer and seller. They must optimize both the utilization of resources and the value received in return.
Whether the ultimate fee arrangement is based on hourly rates, a fixed fee or – more aggressively – on performance targets or risk-sharing,
the keys to a successful model are:
- Sufficient relevant data (including comparables)
- Adequate data-mining and analysis
- Understanding the levels of risk and uncertainty
- Clear defining of metrics and benchmarks to be used
- Effective communication and motivation
Ultimately, pricing decisions must reflect a core principle: legal work is undertaken to achieve a client’s and their stakeholders’ business goals.
Cost matters, but the client’s measure of value matters more. How the work is done — as well as results — will impact the client’s perception of value.