While hourly billing has been the mainstay of legal billing, it is not the only option. In the wake of an economic downturn, clients are looking for alternative fee arrangements from all their business providers, including legal services. One alternative to charging clients at an hourly rate is portfolio pricing. What is it and why should your firm consider it?
What is portfolio pricing?
Portfolio pricing generally involves charging a fixed fee for a series of matters. In a portfolio pricing arrangement, legal work is bundled and priced as a single unit. A "portfolio" might encompass all of a client's work in a specific practice area for a set period of time (i.e., monthly or quarterly). Alternatively, it could be structured to include all of the legal work completed for a specific transaction, such as drafting a power of attorney.
Portfolio pricing arrangements might also base compensation on the outcomes, volume of work or duration of the engagement. For example, riskier matters may incorporate penalties or bonuses in addition to the fixed fee.
The downside to fixed-fee arrangements is that your firm assumes some of the risks. If an engagement requires more hours than originally estimated, you may lose money. Good project management, therefore, is essential. You also need a thorough engagement letter that covers all the services that will be included — and excluded.
What are the benefits?
Predictability of fees makes portfolio pricing advantageous for clients. But portfolio pricing offers some benefits to firms, too. For example, handling a large portfolio of transactions or legal services can produce cost advantages not available with individual matters.
Portfolio pricing also facilitates leaner, more efficient staffing — an important goal for any law firm. By establishing dedicated teams to deal with particular portfolios, your firm will likely improve efficiencies. As team members gain in-depth knowledge of the client and its people, this can lead to greater client satisfaction, build enduring relationships and increase your client referrals.
How do you create it?
As with any alternative fee arrangement, you will need to keep a close eye on a variety of metrics that will contribute to, or undercut, your firm's profitability on portfolio pricing arrangements. At least initially, consider working with a financial advisor to set portfolio prices. Your advisor can help you identify the fundamental assumptions on which the price is based, as well as determine the scope of the portfolio. In addition, the advisor will help set budgets that reflect required profit margins and ensure that the price covers all of the relevant components. These include attorneys' fees, administrative costs, overhead, anticipated risk and partner compensation.
During the portfolio arrangement's lifespan, your advisor can monitor profitability and flag potential areas of concern, such as transactions that are not completed according to schedule. Your advisor can also alert you if the original assumptions for a portfolio are not bearing out so you can address them with the client and, possibly, negotiate a revised price.
Is it for all clients?
Portfolio pricing is not appropriate for every client. Do some research before pursuing portfolio pricing opportunities and take into consideration such factors as a client's industry and regulatory environment.
Your relationship with the client is another important factor. Be sure to consider a client's legal work, including volume, types of matters and past and pending litigation, as well as your profit margins for the work. Competition from other firms for a client's business might also motivate you to offer an alternative fee arrangement such as portfolio pricing.
What are you waiting for?
As the country makes its way through the COVID-19 pandemic, billing and fee structures of law firms may need to be adjusted. Portfolio pricing can be one of the best ways to draw and retain price-sensitive clients. It can also help your firm achieve greater profitability and a more predictable cash flow by lowering overhead costs and increasing productivity. In the end, your firm will be better able to attract a diverse blend of clients.
Originally published by Ostrow, July 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
