Legal Business

Is It “Alternative Fee Arrangements” or “Value-Based Billing?”


There has been discussion over the past months as to whether the better term for non-hourly billing is "alternative fee arrangements" or "value-based billing." The answer is yes, and yes.

The first "yes" is an increasing number of firms and clients - not a majority, not a tidal wave, but an increasing number - saying "yes" to non-hourly billing. Even more are seriously exploring the idea, perhaps not ready to jump yet but trying to prepare in case it becomes necessary or prudent for to offer such billing.

It's not yet clear to me that there will be a sizeable shift to non-hourly billing in the next few years, but it is clear as someone schooled in business that conditions are ripe to support such a shift. I also believe, as a businessperson working with law practices on their quest for efficiency, that they can be profitable in such a world... but that some assumptions that are today taken for granted will shift. And I know that Legal Project Management can make a difference in profitability in that world.

The second "yes" is a semantic assertion that there are times when calling non-hourly billing "alternative fee arrangements" (AFAs) makes sense, and there are also times when calling it "value-based billing" (VBB) is more appropriate.

AFA describes the mechanics of the relationship. It says to a firm, "you used to be profitable via billing by the hour; now your profits will stem from a different billing system." It carries a suggestion that the change isn't "that bad," that it's at heart an accounting change. It is, of course, more than that... but it does highlight that a key change is occurring to the mechanics of how the firm manages its work.

VBB describes a paradigm shift that some on the firm side don't accept. "We have always delivered and billed for value," they claim, and it can be a very defensible claim. However, an increasing number of clients feel that while they're being billed for high-value work, they're also being billed equivalently for low-value work. They're still paying full boat even as the marginal value of delivered work diminishes. (I cover marginal value in my book Legal Project Management and in the "Legalnomics" section of my Master Class, but it's a term familiar to anyone with a business or economics background.) A client paying the same for decreased value may not view the firm in the same "value" light at that point as the firm itself does.

It's not that the client is right or the firm is right; they're talking about somewhat different things. Thus the term VBB is like AFA - it's a euphemism, a shorthand that maps only part of the complexity of a changing economic relationship. I think in the long run it says more about the relationship than AFAs, and there's something to be said for discussing "value" rather than "fees." Still, it's not one size fits all.

I haven't used VBB very much in my writing or speaking, but I'll let it share the stage with AFAs a bit more in coming months. It's still, however, a duet and not a solo, with a role for both terms. And perhaps in Act II, there'll be a new character, a different term entirely.

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