Alternative Fee Agreements: Is time keeping important?

Is time keeping important when alternative fee agreements are in place? My experience has shown 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 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.

Without paying attention to the effort expended on AFA accounts, there is risk of making an incorrect pricing decision. I have personally used AFA's for over 10 years in my practice and have tried it both ways: not worrying about time accounting, and using full time accounting, which is what I use now. One benefit to time accounting is that it ensures the value being provided to clients is fair.

If I had to make the choice to account for time on alternative fee agreements or not, I would choose to account for it.