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The first two segments on this topic involved the recognition that the supply of lawyers now outnumbers the demand for them, and how this results in legal services becoming a commodity. This third entry addresses what I believe is a permanent transformation in the industry that requires a new pricing model resulting in greater value to clients, in order for law firms to be competitive in the future.
A colleague recently summarized law firm pricing trends very succinctly: when determining current pricing models, some law firms focus on the financial needs of their clients, while others focus on the financial needs of their firm. If you subscribe to the underlying premise that the legal industry is evolving, it is inevitable that the historic method of hourly billing will come under severe attack. Clients simply will not continue to tolerate the speculative surprise of an exorbitant month-end invoice that exceeds both budget and expectations. Rather, clients are starting to demand two fundamental changes in law firm billing practices. First, clients want to see fixed legal budgets, rather than variable. More certainty in the legal spend allows clients to better account for their own expenses and ultimate profitability. Second, clients want to see law firms share the risk in the legal undertaking. Just as nobody wants to pay a professional baseball player $30 million per year to hit 220, so do clients want to avoid skyrocketing fees in an unsuccessful legal venture.
A win-win solution can be sought through “alternative fee arrangements,” or AFA’s. Flat fees or task-based billing can provide the certainty clients need in their legal budgets, while contingency arrangements or performance-based bonuses can provide incentives for firms to perform at peak efficiency and achieve the optimum results. With these relatively novel concepts, two important points must be kept in mind. First, there is no formula for deriving the appropriate AFA for a given matter. A keen understanding of the client’s culture and business practices must be taken into account, and the law firm’s success rate in performing under the AFA being considered should be examined. In addition, a successful AFA requires transparency and a true “partnership” between the attorney and client. If one side is seeking the deal of the century in a legal undertaking, the system usually breaks down. Competition will not permit law firms to price their agreements too high, and simple microeconomics will not permit firms to price matters too low. As a result, the goals and expectations of the client must be taken into account, and the client and law firm must openly discuss the terms of the AFA and how it was derived, including the calculation of the law firm’s profit margin.
Open discussions between attorneys and clients on billing practices can be easier than anticipated after the initial ice is broken. Clients do not want to be overcome by excessive legal fees, but they also do not want to see their preferred law firms fail. Candid discussions about billing options can provide both parties an opportunity to improve their relationship, thereby finding something positive in an otherwise negative economy.
Welcome to our new website & to our legal blawg Poetic Justis! Formerly known as Peoria Legal Blawg, we have re-launched our website to better focus on our new blawg and the artwork of Mr. VanFleet’s children, which will be featured and periodically rotated as the background theme of our entire website. Please join us each month to follow our legal based blawg posts and a special poem written by Mr. VanFleet himself!