The pricing (and value) of legal servicesPosted on: February 27, 2012
Despite its crucial importance in driving profitability and competitiveness, and its centrality in the marketing mix, it’s surprising that there is not a lot of published material about how law firms (and other professions) price their services.
The hourly rate
Until recently, the hourly rate (and it’s best friend the time sheet) dominated and clients had to face the uncertainty over how long a lawyer would take to complete his or her work and the fear that a slow, incompetent lawyer was going to be more expensive than a good, efficient one. It’s no wonder that law firms have been reluctant to invest in technology to make their service faster.
But it’s more than a bit lazy isn’t it? It suggests that lawyers can’t be bothered to think through the case, anticipate what may or may not happen in order to provide a realistic estimate. And, of course, all the risk is client side.
Surprisingly, this cost plus system of pricing has managed to generate eye-watering profits within the legal sector whereas in other sectors it is less successful. Value billing has always been held up as the key to major profits – and I remember the lessons learned working with treasury management consultants three decades ago only too well.
When you look at the client feedback (some of which is described in other blogs) it is surprising to see that many large corporations are as wedded to the hourly rate as their BigLaw counterparts and this has contributed to the continued popularity of the approach.
But it really isn’t really so surprising when you consider that the majority of the 11,000 in-house counsel started their careers in large private practice firms and have had this method ingrained into them. Their mainstream management colleagues have done little to guide them in the consideration of sensible pricing alternatives. Maybe the risk averse culture of lawyers steers them away from taking a risk by experimenting with different pricing plans. But even the procurement professionals seem resigned to the hourly or daily rate model.
Anyway, for confidentiality reasons I can’t share my client work in this area but I thought it was worth reviewing some of the major pricing stories that have captured the media’s attention in this important area.
Not strictly a pricing example, but I remember in 2003 being a judge in the Managing Partner Forum (MPF) Annual awards where Pinsents won the best marketing campaign for developing an innovative product (“Reaching solutions”). It used a risk and reward methodology based on decision trees, project management software, forensic accounting and economists to produce at-a-glance reports to show clients whether or not to pursue litigation in terms of the costs of pursuing or settling. With £3 billion of disputes under management at that time, they had only two trials and a lot of very happy clients. So they clearly had developed an ability to anticipate the likely costs of even the most complex large commercial disputes as their client list read like the Times Top 100.
In January 2010 Lord Justice Jackson’s reforms paved the way for US style contingency fees. His key recommendations included:
- Success fees and ATE (after the event) insurance no longer being recovered in CFAs (Conditional Fee Arrangements)
- Success fees in CFAs capped at 25% of damages and awards of general damages raised by 10%
- A ban on the use of referral fees
- A regulated contingency fee model with an independent lawyer to advise
- Judges, litigators and barristers trained in cost budgeting
- Standard costs management procedures
- Increased judicial responsibility for controlling costs
Those proposals set the cats amongst the pigeons and struck fear into the heart of many consumer based litigators such as those dealing with personal injury. We’re still waiting to see what happens.
CMS Cameron McKenna – Innovation or Communication?
Just over a year ago, CMS Cameron McKenna took a bold leap with the publication of its report titled “The future of fees: your route map to value”. Whilst the contents weren’t particularly innovative, the fact that a law firm was trying to grapple with and bring transparency to this taboo subject was applauded.
With a foreword by the senior partner drawing on his experience of working on pitches for many years to show that this wasn’t some mutinous maverick group and quotes from clients and external research organisations such as Nisus it set out the pricing issues (certainty, reduced cost, the definition of “value for money”).
The guide offers some analysis tools (e.g. scorecard for scoping the best price for your organisation) to help clients identify their legal priorities but you can’t help feeling that they are designed on the dominant system rather than a radical rethink. And it doesn’t address the issues created by outsourcing, collaborative working or automation.
CMS talks about tailoring its solutions to the needs of its clients and provides a number of interesting examples, namely:
- Matching fee proposals to oil prices with a cap and collar to limit risk and weight fees to client success
- Offsetting fees through a “services in kind” (barter) model with an IT provider
- A one year “no questions asked” fixed price for a power client
- “Pay us what you think the work was worth” with an experienced purchaser of legal services
- A fixed fee based on rent saved in relation to tenants’ rights on leases for a consumer products group
There’s a variety of other approaches mentioned including: value maps, matchmaker fees, volume discounts, retainers, membership rights, case appraisal, secondees at cost, off-the-clock advice, performance based reward (PBR) and fixed rate with cash back.
What I did like in the report was the acknowledgement of the use of professional project managers, pricing specialists and business schools (IMD). As the daughter of a quantity surveyor (effectively a cost accountant in the construction industry) I had always admired the fantastic information systems within the property sector which enables costs to be calculated to within a hair’s breadth – absolutely necessary when profit margins are so thin. I also liked the attempt to bring infographics to fee reporting – with, for example, a map showing legal spend across jurisdictions.
Legal Apps – Free knowledge and low commodity prices
There has been surprisingly little coverage of the plethora of law firm Apps which will continue to have a downward impact on pricing at the bottom end of the market (a detailed article is on the way!). The Squire Saunders Employment Law Cloud provides a huge amount of information, helpful checklists, pay calculators, automatic alerts and the ability to sign up to short (paid for) seminars and is one of my favourites – and it’s free.
For just £9.99 you can obtain a divorce App – acclaimed by a Sunday newspaper – that guides you through the litigation process as if you were on a SatNav system, pointing out Court fees along the route. So the concept of micropayments entered the legal services fray – requiring a complete rethink of the business model – more along the lines of publishing and information services.
Raconteur – Legal Efficiency and Richard Susskind
In January 2012, in amongst articles about value sourcing, litigation funding and ABS was a short article called “The strategy game”. Richard Susskind mentions the shift from the sellers’ to a buyers’ market and proposes the following priorities – a. work sourcing b. winning new work and c. strategic plans.
He also advocates “task based pricing” – dividing deals and disputes into component parts and pricing each part separately. And, shock horror – differential pricing – charging higher rates for complex work and lower rates for routine, outsourced and systemised work.
The Lawyer – Quinn Emanuel
Also in January 2012 there was an important article in The Lawyer about US firm Quinn Emanuel Urquhart & Sullivan. It reviews a number of examples of innovative pricing:
- An insurance company plaintiff with damages in excess of $150m (£97m) where it estimated the cost of litigation to between $12 and $15m. So it charged a flat fee of $750,000 to take it on and then a $150,000 fee each month up to a cap of $4.2m with fees in excess of £5m being absorbed by the firm. It was also in line to receive 20% if any recovery (i.e. $30m).
- A hedge fund plaintiff with a flat fee of $20,000 a month through trial and 20% of any recovery.
- A high tech company where it filed a motion to dismiss an antitrust complaint with nothing if the motion was lost and a flat fee of $750,000 if the motion prevailed (which it did).
The firm’s founder is quoted as saying that they always do better on contingent rather than hourly billing and indicates that a third of its US work has a contingent fee aspect. The firm’s web site shows it tried 1,460 cases and won 1,326 (91%). The article also mentions that Reed Smith indicates that 40% of its US litigation matters are handled on an Alternative Fee Arrangement (AFA).
In last week’s The Lawyer magazine there was a feature on the DLA Piper investment in ABS LawVest (Riverview Law) which combines solicitors and direct access to barristers. It is aimed at the business client seeking employment, environmental, health and safety, compliance, family and IP law and key to the proposition is its fixed fee package. In a similar model to Penisula (employment services) it charges £200 per month for businesses with up to five employees and £500 for those with up to 50 which covers all advice and document preparation up to proceedings.
Disintermediation in the commercial legal market
When I opened a new business bank account recently, I was amazed that within my £17 a month subscription I received a software bundle that not only offered accounting software, business and marketing software but also two suites of legal documents provided by Epoq (Legal Manager £1,770 and Legal Essentials £1,130). So new businesses in the future won’t feel obliged to visit a solicitor – especially not when your accountant can set up the company for you.
Long, long ago when value billing ruled
I remember fondly the times when I started working in the legal profession over 20 years ago. When I asked a corporate partner at a major national firm how he calculated the price he would pick up the file to see how big/heavy it was, ask around his assistants to determine how much time they had spent and put in a call to the client to “bounce” his preliminary thoughts regarding the value of the work to the client’s business.
I wonder whether we lost of the “art of value” as “the science of cost recording” took over and hope that we will return to a consideration of value from the client’s perspective in future pricing models. Remember the Chinese curse “May you live in interesting times”? Well, I’m fascinated to see how pricing strategies in the legal market evolve.