Digital White Papers

9 WWW.ILTANET.ORG | ILTA WHITE PAPER FINANCIAL MANAGEMENT Creating and Renewing Client Relationships and Fee Arrangements Delays in processing bills have joined rate levels and staffing limitations as the biggest challenges in working with in-house counsel. The Arrangement Process An arrangement comprises the combination of fee type, payment terms, outside counsel guidelines and any other aspects that control the delivery of legal work. The process of creating and renewing an arrangement is circular since building a repeatable process is critical to forming a healthy client relationship that brings value to both the firm and the client. Law firm partners have oen been uncomfortable discussing arrangements because they perceive a conflict between rate negotiations and delivering good client service. Building a systematized process that provides transparency can alleviate this conflict. A properly managed relationship should follow these six steps: » Modeling » Presentation and negotiation » Formation » Monitoring » Notice of renewal (whether led by firm or client) » Repeat! Modeling: Is it Profitable? One of the most critical aspects to consider when forming a relationship is whether it will be profitable. Discounted fees and alternative fees combine under the general term "non-standard fees," and firms oen require computational analysis for them. Not so with traditional hourly fee arrangements, although these can quickly become unprofitable with discounting. A 10 percent discount in rates can translate to a 25 percent reduction in profit. Because of this, many firms have recently instituted approval processes to make sure work being undertaken is profitable. Such processes typically require modeling at the client or maer level. A highly discounted client rate can require a model for each individual maer to ensure it can be delivered profitably. While firms might not share maer costing models with their partners, most finance teams will typically create them. The models determine the cost per hour to perform work and provide a simple mechanism for computing profit margin. There are numerous approaches to calculating cost models. The only other mechanisms for measuring profitability outside of cost models are combinations of realization/recovery and leverage/gearing. For new work, the modeling of a potential maer or client relationship can be based on: » Hours and resources (person or class/level) » An amount, with a ratio of staffing » Leveraging a priori maers as the starting point For an existing relationship, it is oen easiest to leverage the prior year's work for modeling the upcoming year; many clients will look at the same information in evaluating the firm. It is critical to take both an inward and an outward view in reviewing prior years. The inward view requires determining the financial health of the relationship. Some internal questions include: » Is the firm making money? » Are realization and leverage (ratio of partners to non-partners) acceptable?

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