Is It “Alternative Fee Arrangements” or “Value-Based Billing?”
Yes.
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.
You’re on the money – but here’s my two cents: we use the term “value-based billing” (or VBB, to compete with AFA, eh?) in the ACC Value Challenge for a couple of reasons. First off, to talk about “alternatives” suggests the crazy aunt who lives in the attic: if it’s an alternative fee, it must be something a bit wacky or off the norm that we use on occasion when the default or presumed way to bill – hourly fees – can’t step in. I’d never suggest that hourly fees are going to die or should be killed, but in today’s shifting service paradigm, value is a concept that requires definition and treatment with a flexible toolkit of options: and that means that all fee structures should be considered alternatives. Second, we like the term VBB since it focused on what’s behind the fee, as well as the terms hammered out in the retention letter for billing alone. So much of what’s involved in setting a fee that’s based on value isn’t about whether it’s hourly or fixed or contingent, etc.: it’s about the staffing decisions behind the fee, or the knowledge management that allows the firm to charge less, or the process management or disaggregation of the work that creates an opportunity to structure a relationship that includes predictability and efficiency, as well as lower costs.
Thanks for a great piece and cast my vote for Value Based Billing. After all, that’s what the movement is about – reconnecting cost to value.
-Susan Hackett, General Counsel, ACC
VBB is to AFA what “appropriate dispute resolution” is to alternative dispute resolution: a euphemism that will fail to catch on because of network effects. At least appropriate dispute resolution shares the same initials as its better-known sister term. I agree with the logic behind using VBB just as I do appropriate dispute resolution, but I forcing myself into using the new terms has been as effective has my early attempts to switch to the Dvorak keyboard layout. It just doesn’t come naturally.
I think that VBB (which has actually been around under other names/acronyms or even without a name/acronym in other industries) and AFAs are just the tip of the iceberg as law firms continue to migrate to a more traditional business model to align with their corporate clients.
People have been talking for years about how law firms need to operate more like corporate busineses and these economic models are very much in line with that restructuring.
The future will likely hold a blended approach for clients where some projects will be hourly, some AFA and some VBB (tied to incentives to the law firm for it’s performance and return to the client).