Professional Services Accounting ARTICLE -

Portfolio Pricing: Should It Be Your Next Alternative Fee Arrangement?

Target Audience: Legal Professionals, Professional Service Firms, Law Firm Partners, Law Firm Accounting

Alternative fee arrangements have been around for some time now, but their popularity has surged in recent years as cash-strapped clients look for ways to minimize their legal costs. With law firms increasingly operating in a buyer’s market, arrangements such as portfolio pricing can provide a competitive advantage that pays off for both law firms and their clients.

What is portfolio pricing

In a portfolio pricing arrangement, your firm would charge a fixed fee for a series of matters. The “portfolio” could encompass, for example, all of the client’s work in a specific practice area for a set period of time. Or it could include all of the work involved in a specific transaction. Portfolio pricing arrangements might also base compensation on the outcomes, volume of work or duration of the engagement. Riskier matters could incorporate penalties or bonuses in addition to the fixed fee.

The downside of such fee arrangements is that your firm shoulders some of the risk, along with the client. If an engagement requires more hours than originally estimated, you could lose money. It’s up to you to mitigate this risk through appropriate project management. As with other engagements, to avoid possible issues going forward, create an engagement letter that covers all of the services that will be included — as well as excluded.

the advantages of portfolio pricing

The advantage of portfolio pricing for clients is obvious: the predictability of fees.

But portfolio pricing offers several benefits to law firms, too. For example, handling a large portfolio of transactions or product liability claims can produce economies of scale not available with individual matters. This makes it more profitable than handling the same number of transactions or claims on an individual basis.

Portfolio pricing also facilitates leaner, meaner staffing — an important goal for any law firm in the current economy. By establishing dedicated teams to deal with particular portfolios, your firm will likely improve efficiencies. And team members will gain an in-depth knowledge of the client and its people and build enduring relationships. This can lead to greater client satisfaction as well as more business and referrals from the client.

Don’t go it alone

As with any alternative fee arrangement, you’ll 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. Bringing in a qualified tax or financial advisor is a must. In the initial stages, he or she can provide critical input on setting a proper price, help your firm identify the fundamental assumptions on which the price is based, determine the scope of the portfolio and set budgets that reflect required profit margins.

Your advisor’s participation will help ensure that the price covers all of the relevant components, including attorneys’ fees, administrative costs (including portfolio management and communications with the client), overhead, anticipated risk and partner compensation.

During the lifespan of the portfolio arrangement, your financial advisor can monitor profitability and flag potential areas of concern, such as transactions that aren’t completed according to schedule or the draining of resources. He or she will also be well positioned to notice on a timely basis if any of the original assumptions aren’t bearing out, so you can address them with the client as soon as possible and, if necessary, negotiate a revised price.

Finally, your financial advisor can calculate the profitability of the arrangement, accounting for all applicable factors, including any that might not have been contemplated upfront, such as unexpected costs.

Worth considering

Portfolio pricing arrangements can allow you to provide enhanced value at a lower cost to your clients. They also can pave the way to greater profitability, more predictable cash flow and better planning.

Picking the right portfolio pricing clients

Law firms shouldn’t offer portfolio pricing to every client. Do some research before pursuing portfolio pricing opportunities with specific clients. In particular, your firm should be thoroughly familiar with:

• The client’s industry and its regulatory environment,
• The client’s position in the marketplace and its competitors,
• The client’s key staff,
• The client’s legal work, including volume, types of matters, and past and pending litigation,
• The profit margins for the client’s legal work,
• Existing relationships with the client and its key staff,
• The firm’s competition for the client’s business, and
• The firm’s capabilities in relation to servicing the client’s needs.

Find out how our expertise in professional services accounting can add value to your business. Email us or call us at 1 (888) 875-9770.

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