The Importance of Time Tracking in Alternative Fee Agreements

Is timekeeping important when alternative fee agreements are in place? In my experience working with law firms, I have found that smaller practices without much leverage benefit less from time accounting. These practices tend to deduct overhead from the fees collected, and if the yield is reasonable, they leave it there. Alternatively, time metrics are more useful in larger practices where incentives are necessary for rewarding the efforts of team members. In one example, the rewards system is set up to compensate for accomplishing certain definable tasks within target time frames.

Other fields can teach the legal industry lessons on fee arrangements. For example, it is common in the IT services industry to charge a monthly fee per user. Astute companies realize that there is a value proposition with clients. If, for example, the effective hourly rate is materially higher than competitive hourly pricing in the market, a vulnerability exists.The alternative is also true. In situations where the effort expended on a client account is materially more than the alternative fee agreement (AFA - fixed, flat etc.) allows, an adjustment is in order. In both of these situations, it is important to understand what the potential financial risk of losing an account might really mean.

In a situation where the effort expended is materially less than the AFA pays, any decision should include consideration of the real profitability at risk. The market is efficient over time, and unless a unique competitive advantage exists (skill, relationship, process, etc.), pressure on price will come. Understanding this reality before a client "attacks" allows for more control of the long term outcome of the relationship.
 

In a situation where the effort expended is materially more than the AFA pays, more confidence in asking for an adjustment is warranted. In a sense, this negotiation may be approached with the benefit of knowing that there may just not be that much to lose.

Neglecting to track the effort put into AFA accounts can lead to erroneous pricing decisions. Drawing from my personal experience of utilizing AFAs for over a decade, I have seen both approaches used: disregarding time tracking and implementing comprehensive time accounting, the latter being my current practice. One advantage of meticulous timekeeping is that it guarantees the fairness of the value delivered to clients.

If I had to choose whether to account for time on alternative fee agreements, I would choose to account for it.