There is no question that the COVID-19 pandemic has been a game-changer for 2020, but in this context, it has accelerated trends that have been there for quite some time. As we enter 2021, we see many variables at play. We see an uncertain economy with law firms self-examining their business models, regrouping and adapting to change at an accelerated rate, and the continuous reflex of expense control. While these are all symptomatic of change management, the legal profession has been experiencing a paradigm shift. We need to take a collective look and see how all these variables can be used to enhance critical areas such as business development and revenue building in 2021. Also, we need to take advantage of the opportunity presented for law firms to exercise more innovative and efficient approaches to pricing legal services.
Do Clients Only Care About Price?
Clients continue to push back more on fees, and the consensus is there is a continuing need for more creative and innovative pricing strategies beyond the billable hour. Clients have become as conservative as law firms, which has been fueling the pricing evolution for quite some time, but there seems to be a communication gap and varying perceptions on how alternative fee arrangements (AFAs) are perceived. Clients view AFAs as reduced legal spend, while law firms view them as potential for premium. The challenge is the reconciliation of balancing the interest and needs of both clients and law firms. However, no matter how we look at it, clients continue to have concerns, and the reality is clients are influencing pricing, but pricing is not the only concern.
1. Lack of Predictability
There continues to be a widespread problem of weaknesses in communicating with clients, or to manage fee expectations. Many clients experience the surprise factor when legal fees exceed estimates. This is an area that is critically important to clients in highly budget-dominant corporate environments. If legal spend is going to exceed expectations, law firms need to communicate with the client and discuss the reasons and what the firm can do to partner with the client to remedy the issue going forward. A considerable amount of aggravation for both the client and the law firm could be alleviated by law firms improving their communications.
2. Overall Price
Clients, particularly institutional clients, are looking to manage overall legal spend; small changes in legal spend could translate into a win-win with clients as well as provide the law firm with meaningful improvements in overall profitability. Law firms should be taking a careful look at their economics and how they are pricing repetitive, predictable, high-volume work or client deals with major, long-running litigation/transactions. These are opportunities for law firms to provide customized AFAs that reduce legal spend for the client while improving profitability. Clients are taking deep dives into legal spend, and law firms that are looking to partner with clients to reduce that spend will differentiate themselves from other law firms. Keep in mind, pricing strategies are about the cost of producing legal work, not billing rates, so law firms that have a good handle on their economics, and can determine their break-even metrics, have opportunities to offer competitive pricing alternatives to their clients.
3. Perceived Value
Perception of poor value—exacerbated by rapidly increasing billing rates—and leveraging over the last several years has created a widening gap between rates charged and the value of the service provided, or outcomes achieved. Law firms have historically believed that hourly rates are often the only visible means of measuring complex legal work. But the benefits/value are not always obvious to the clients, which has led to a widespread segmentation in the profession. Value assessments, performance evaluations, panel counsel and other models have been introduced to reconcile this value. Law firms see this firsthand when submitting electronic billing to a third party and find their bills are being reduced, which in turn creates the burdensome task of attorneys appealing the reductions. These appeals waste a considerable amount of time to retrieve in most cases, less than 50 percent on the dollar. Imagine the lost billable time in pursuing third-party billing appeals. Law firms need to assist in reconciling the value proposition by carefully following client billing guidelines or approach institutional clients about an alternative fee arrangement. General counsel have often indicated that law firms make concerted efforts to comply with billing guidelines but are not always proactive about asking general counsel what they need. General counsel want AFAs.
Law firms will work to develop AFAs that meet the client’s needs as well as produce profit, but will often create pricing strategies that become highly complex to administer and negotiate, prompting clients to lose interest. Proposed AFAs should be customized to the client’s needs, but the key to success is to keep the AFAs simple and to communicate and illustrate the benefit to the client.
Innovative Pricing Strategies: How Are Law Firms Doing?
According to the Altman Weil 2020 Law Firms in Transition Survey, when firms were asked to characterize the progress on their business models as they pertain to pricing strategies, approximately 35 percent of participating firms indicated they were in the early stages, and 40 percent indicated they were at an intermediate level. Roughly 15 percent of participating law firms have taken no action, and only 9 percent have been successful. The median participating law firm reported 21 to 30 percent of their fee revenues were from discounted hourly rates, and 6 to 10 percent of fee revenues were from non-hourly based pricing.
What is interesting is the survey also suggests that 53 percent of participating law firms were linking alternative/discounted fees to changes in how the legal services were staffed and delivered, which indicates there are process improvements and project management initiatives in play. The question is: To what degree are these process efficiencies being utilized?
New Year's Resolution
As we move into 2021, it will be interesting to see the impact process efficiencies will contribute to the increased use of AFAs and other pricing strategies. In an uncertain economy, here are two important things to remember: Have a thorough understanding of your law firm’s economics, and keep communicating and partnering with your clients on efficiencies and pricing. In future columns, we will discuss the different alternative pricing strategies available, as well as how process improvement can further assist law firms with their strategic pricing objectives.