Portfolio billing is an arrangement where a law firm takes on all the legal work – or a specific subset of legal work, like all employment litigation, for example – for a client at a flat fee, explained Larry Bodine, a business development advisor at Chicago-based Larry Bodine Marketing and owner of the site www.LawMarketing.com.
The arrangement offers benefits for clients – pre-determined legal costs – as well as law firms – predictable income.
The trend began with larger firms, like Shook, Hardy & Bacon, which agreed to handle all of Tyco, Inc.’s product liability litigation, and Orrick Herrington & Sutcliffe, which represents Levi Strauss & Co. in all non-intellectual property issues.
But this form of alternative billing is also a viable option for smaller firms and even sole practitioners.
Portfolio billing provides “steadier cash flow and a steadier flow of work,” and offers lawyers “an opportunity to distinguish themselves” to clients, said Allison Shields, president of Legal Ease Consulting in Port Jefferson, N.Y.
“It shows that you are willing to go the extra mile for the client and approach work differently,” she said.
Instead of doing more work to increase the number of billable hours on a case, portfolio billing encourages lawyers to resolve matters more efficiently, said Shields, something clients can appreciate.
Patrick Lamb, a partner at the nine-member Valorem Law Firm in Chicago, agreed.
Lamb and his partners started Valorem in January 2008 with an alternative billing philosophy, and he estimated that roughly 30 percent of the firm’s work is done as part of a portfolio billing agreement.
“Portfolio billing is a great thing for small firms and solos,” he said. “It smoothes out bumps and provides predictable revenue flow, so you can meet payroll, pay rent, etc. And it allows you to offer value to clients.”
What to consider
While lawyers may be hesitant to break from the traditional hourly billing model, the time is right.
Because of the economy, clients are trying to cut their legal costs and are shopping around, said Bodine. “Now is a great time to be a smaller law firm and offer expertise at a much more reasonable rate.”
The following are some of the issues to consider when crafting a portfolio billing agreement:
• Define the scope.
The most important aspect of a portfolio billing agreement: defining the scope of the work, Lamb said.
“Make sure you are careful with respect to what exactly you are taking on,” he cautioned. Lamb suggested that the agreement include a provision that the workload be “substantially similar to prior experience.”
For example, if a client typically has 10 cases per year, but instead has eight, nine, 11 or 12, that would be similar under the agreement. But if there were an aberrational year – like the litigation year Toyota is having, Lamb said – the law firm would have some protection.
• Consider resources.
When evaluating the scope of the work to be performed, lawyers need to determine whether they have the resources to handle the agreement, Shields said.
Even though it might be a great source of business, ask yourself: “Do I have enough resources to handle this work effectively – and handle another client?” she advised.
Especially in the current economy, lawyers don’t want to rely upon a single client as the only source of revenue, said Shields.
“Be sure to consider: how am I going to staff this? How much time will I need to devote to client communication? Am I prepared for this?” she suggested.
• Historical costs.
When trying to arrive at a dollar amount, the client’s historical legal costs are essential, Bodine said.
“If the client spent $50,000 one year and $70,000 the next year, then a safe average would be $60,000,” he said.
To arrive at an estimate for a new client, getting access to prior billing records is beneficial, Lamb suggested.
Lawyers should analyze the size of the former firm, the work it was doing and when in the course of the case it was resolving matters – and then look for opportunities to shorten the cycle.
For clients who do not have prior data, the task becomes more challenging.
“If you are starting from scratch, you have to do a very detailed project management outline of how you would manage the cases, find the synergies between cases – where work in one case would be applicable to another – and then come up with some estimate,” Lamb said.
• Time period.
A portfolio billing agreement can last for any time period, but the typical length is one year.
Particularly in new arrangements, it might be beneficial for both sides to limit the agreement to one year with the option to review and adjust, Shields suggested.
And it may be more beneficial to a client to use something other than the calendar year, like the company’s fiscal year or some other time period, especially if the client operates a seasonal business, she said.
Most lawyers also structure the arrangement to provide predictable revenue flow over the life the agreement, Lamb noted.
• Trust and communication.
“Ideally, a lawyer would want to have some kind of pre-existing relationship with the client,” said Shields, who blogs at Legal Ease Blog about law firm marketing and practice management.
Not only would that help with pricing the agreement, but it would presumably bring with it the higher level of trust and communication that comes with an established working relationship, she added.
“There will always be unanticipated events, and it will help in this type of fee agreement to have a good relationship with the client,” said Shields.
Testing the water
Portfolio billing by its nature involves continuing work, so lawyers should look for local businesses or franchises and closely held corporations to make their sales pitch, Bodine said.
But while corporate clients are most typical in portfolio billing arrangements, Lamb said it can work in every practice area.
“Real estate transactions, different types of litigation, basic contract work – as long as the work is relatively consistent, it can work,” he said. (For more details on another form of alternative billing – the flat fee model – see, “Flat fee billing another alternative for solos, small firms.”)
Lamb said that lawyers often hesitate to try portfolio billing because of concerns that one of the cases or issues in the portfolio might become extremely complicated, making the deal unprofitable.
“While you may have an unusual case, there will be other cases that require a much smaller amount of work,” he said, allowing an attorney to balance out the work flow over a period of time.
Lawyers should remember that part of handling portfolio fee arrangements is “accepting the risk to create efficiencies so that the profit margin is … acceptable,” said Lamb, author of Alternative Fee Arrangements: Value Fees and the Changing Legal Market. “The risks are spread over many cases.”
Shields recommended that lawyers interested in testing the waters of alternative billing take on a small fixed fee arrangement for a client, handling three cases for a set amount, for example.
“That will help price out individual matters and provide information about where potential problems can arise,” she said.
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