At its most basic, the pricing of legal services might not seem to be all that different from the pricing of any other good or service. Buyers want to receive value for what they are purchasing and defining value will be different for each buyer in each circumstance. For some buyers, value is measured by paying as little as possible, for acceptable levels of quality while for others value may be measured by certainty of cost for a particular type of matter, or a combination of effectiveness, efficiency and client experience. Sellers want to charge as much as possible, consistent with the realities of competition and the desire to maximize overall revenue and profit for as long as possible. Just as those characterizations tend to oversimplify the considerations that are important to most buyers and sellers, they hardly begin to do justice to the concerns of clients and law firms in pricing legal services. Many of the factors that increasingly drive inside and outside counsel to strive for alternatives to fees billed at hourly rates find parallels in the global trend toward strategic alliances and partnering arrangements of all types.
Law firms share many of the objectives of their clients in selecting an appropriate compensation arrangement for their services. Both seek an arrangement that aligns their interests as nearly as possible and minimizes the potential for conflicts between their respective interests. Both strive for a long-term relationship characterized by trust, mutual respect, collaboration and loyalty. Both value predictability and the avoidance of surprise or embarrassment. Both wish to motivate and reward efficiency, quality and results. Both hope to achieve the optimum mix of thoroughness and cost-effectiveness. Both want to profit from the use of modern technology to reduce costs and improve results. Both have a shared need to advance the diversity, career development, training and technological capabilities of their respective staffs, i.e., to maximize the quality of service each is able to provide.
Cutting across all of the above concerns is the shared incentive between clients and law firms to invest intellectual capital in understanding the client's business, strategies, goals and values. Once obtained, such a shared understanding creates a predicate for good lawyering. It saves costs for both client and law firm, provides opportunities for enhanced satisfaction for both inside and outside counsel and promotes the efficient allocation of resources. Greater sensitivity to business considerations also helps both client and law firm identify and address prospective conflicts of interest that could otherwise preclude representation in matters of strategic importance.
At the center of convergence between the client's and law firm's objectives is the recognition that both have an interest in driving total legal costs lower and quality higher in a manner that improves the law firm's profit margins through enhanced efficiency while affording the law firm an opportunity to secure a larger share of the legal services required by the company, i.e., to become a preferred vendor across different practice areas. Status as a preferred vendor, through familiarity with the client, in turn enables the law firm to reduce its marginal cost of delivering each “unit” of legal services to the company. A key facet of alternative fee arrangements is the opportunity to share such productivity gains between law firm and client.
Perhaps the most important way clients may see their interests as diverging from those of outside law firms is their perception that law firms charging hourly rates can earn more by working more hours and charging greater fees without necessarily adding more value. A common analogy inhouse lawyers use is “you wouldn't build a house by the hour…” In addition, clients often must decide whether to perform a particular project in-house or to send it to outside counsel—also known as the “make or buy” decision. Where the decision to keep responsibility for a project inhouse is wisely made, the use of in-house talent is undoubtedly more cost-effective. Since the effectiveness of inside law departments in a given industry is typically assessed by comparing total legal expense to total company revenues, the relative cost of alternate sources of supply will almost always be a key component of the sourcing decision. The fact that outside lawyers face potential competition not only from other law firms but sometimes from their inside colleagues as well is a key parameter in the pricing of their services.
Closely related to the “make or buy” question for clients is their countervailing interest in making sure that law firms are available to meet those needs that the company cannot or does not wish to fulfill internally, e.g., obtaining specialized expertise that a law firm can afford to develop because it can be sold to many clients; or obtaining highly qualified lawyers trained at the law firms' expense for occasional advice on specialized matters. Clients may also press for large discounts from fees billed at hourly rates, particularly where the needed service is a relatively fungible commodity. Discounts achieve savings that are clear and measurable, assuming, of course, that outside counsel and the client are operating in good faith and not undertaking strategic behavior, such as would be the case were outside counsel simply to raise hourly rates or spend an inordinate amount of time on a matter.
At a deeper level of complexity, it could be argued that the interests described above as unique to inside or outside counsel are in fact shared interests after all. Both inside counsel and law firms want to reduce inefficiencies, increase productivity, and improve the way legal services are purchased and delivered. In-house counsel focus on the results and outcomes that add value for the corporate client and law firms want to ensure that they continue to be the legal resource inhouse counsel trust and rely upon for advice. Sensitivities to the needs of the other side are the essence of successful partnering between in-house and outside counsel.