Attorneys that know their cost structures and understand how to leverage the right people, process and technologies are in a position to give clients more realistic, and justifiable, cost estimates. That expertise will likely win them more business, and maybe even more profitable business.
Many clients are asking for alternative fee arrangements (AFAs), but most firms are still reluctant to offer them. In a poll of Fortune 1000 corporate law departments by ALM Legal Intelligence1 last year, 70 percent of clients said they had to initiate AFAs in most cases. Just seven percent said that law firms initiated a discussion of AFAs.
Law firms that are proactive on this front will likely surprise and impress their clients. What’s more, an understanding of their cost structure may enable firms to both offer a fixed fee and increase profits. The key is understanding the costs in document review, which constitutes the largest expense in most legal matters.
While each case is different, firms can usually estimate costs of routine cases — such as insurance claims litigation — based on experience with similar matters. With that knowledge, a firm can fine-tune its cost estimate for a given matter, based on the sources and scope of the discovery and the expected volume of data to be collected and how technology can be used to cull data. Ultimately, this can increase processing speed and improve the accuracy of review.
I recently worked with a firm that has perfected this technique to the point that the AFAs quoted for a routine matter results in a higher profit margin for the firm than the traditional billable hour. With traditional document review methods and hourly rates, the firm attains profit margins in the 20 percent range. But in cases where the firm can strategically leverage technology, process and people for document review, it is able to reliably estimate the cost of performing the work and thus can quote a fixed fee for the client. In those cases, the firm’s profit margins are in the mid to high 30-percent range.