The global legal service market will grow to more than $1 trillion after 2020. That is quite impressive — however, to the corporate clients who pay for these services, this increasing amount will generally be regarded as additional costs. And since most companies are under pressure to reduce their overall costs due to increasing competition and digital transformation journeys, they are also looking more critically at their legal spend than before.
This raises several key questions for general counsel: Do we pay too much to our legal service providers? And given the lack of transparency in current pricing techniques, how can we make sure we’re getting good value?
Over the last decade, there has been a lot of discussion on the billable hour that most traditional law firms still offer. The usual complaint from general counsel is that what they’ve asked for isn’t portrayed in the final bill. GCs want more pricing transparency and value from their service providers and would rather have an invoice that is based on the value of the work provided and on outcomes and results instead of on input, activities and time.
Next to competition on quality, speed and service, the competition on price will become crucial. The price should be clear, obvious, comparable and predictable; GCs want the simplicity, convenience, reliability, comparability and cost efficiency of transparent pricing. Indeed, concepts like phased fees, milestone fees, success fees, portfolio-based fees and retainers will become important tools to keep current clients, attract new customers and keep customer satisfaction high.
At the moment, there is little incentive for the traditional law firms to change the situation to that desired by general counsel. On the contrary, for legal service providers it’s very advantageous to stay with the current open-ended hourly fee system which shifts all risk of exceeding budgets to the clients. Therefore, any changes to the current pricing system must be driven by GCs and by the competition of alternative legal service providers (ALSPs). The more sellers and the greater the diversity of sellers of legal services, the sooner a buyer-driven transparent pricing system will become a more wide- spread reality.
Pressure by GCs on Traditional Legal Providers
Today, GCs are pushing harder for cost efficiency, becoming more informed purchasers who describe and require starting points, scope of work, timeline and results themselves; they’re also using metric pricing technology along with the internal procurement and finance departments’ knowledge to better understand the value of the legal services they purchase.
Across the table, law firms are putting more efforts into pricing their work effectively and improving their pricing competence. Most law firms have proactive conversations with their clients around pricing and budgets, and almost 70% collaborate with their clients on creative alternative and fixed-pricing options. These conversations are vital to ensure that expectations of price, scope of work and timeline are established and met between GCs and their legal service providers.
Next steps on the transparent pricing pathway for law firms should include hiring skilled cost estimators and creating a formal pricing role within their firm in order to make their pricing more transparent and reliable.
Their prices are more transparent, clear and predictable. GCs are resourcing part of their workload to these ALSPs, forcing law firms to rethink their long-term pricing strategy.
Law firms should also prepare for some uncertainty. Re-examinations of the scope of a matter should become a regular practice. Through this constant evaluation, cost estimates can arrive at increasing levels of certainty, even in the most complex of matters. And the more times a firm engages in meaningful examinations of scope, the more experience it will have to draw from in setting initial scope estimates in the future.
A Multi-Provider Legal Services Market
During the last decade, new types of legal service providers have risen and matured their business models and offerings. Their prices are more transparent, clear and predictable. GCs are resourcing part of their workload to these ALSPs, forcing law firms to rethink their long-term pricing strategy. Indeed, law firms are realizing they need to get complete control over their costs and increase their productivity and speed in order to enhance their competitive advantage.
Both client pressure and the entrance of these new technology-savvy competitors have forced traditional law firms to remodel their organizational structure, such as adding functions like operations management, project management, cost estimation, etc. It’s also made them change their business and mindset models to allow for investing in technology and employing people with nonlegal backgrounds and strong business skills, so that they can meet customer expectations and remain competitive.
How Fast Should You Move?
Perhaps the biggest question for how law firms will adapt to this environment is: How fast should law firms adapt their pricing models to keep up with the pressures from GCs and new competitors?
Eddie Hartman, pricing strategist and partner at Simon- Kucher & Partners, said this is a key question that unfortunately often gets sidelined in the pricing model debate. “Many of us have been subjected to poorly informed debates on the merits, or purported drawbacks, of overhauling a firm’s fee structure,” Hartman says. “Considerably less attention has been given to the nuts-and-bolts questions that by rights should inform any such conversation: How quickly must we move, and how long will this take? After all, time is money — and timing is everything.”
Acknowledging the complexity of the issue, Hartman explains that a well-informed law firm will employ a balanced framework to analyze its specific situation. Firsthand experience has revealed several key considerations to think through when discussing a timeline of change, he says.
- Internal benefits — This topic has two “hemispheres,” Hartman says. The first is direct and financial, meaning the ability to exert upward pricing pressure on aggregate billing or to capture additional business; and the second, equally important, is indirect or avoided costs. For example, moving away from hourly fees may eliminate the need for timekeeping, bill audit and tracking systems.
- Organizational readiness — This concerns the suitability or availability of staff to specify and re t systems. In the long term, Hartman notes, this may turn into a net positive in terms of staff availability due to simplification of systems and shortened work flows.
- Model complexity and suitability to practice area — There is no “one size fits all” when it comes to changing fee models, he adds. Fixed-fee engagements are common for IP prosecution, but not for IP litigation. Whether a firm progresses by switching over a single practice area or multiple areas at once, these decisions will significantly change the timeline.
Finally, he says, it is vital to remember that in an industry as conservative as legal services, fee model change is typically seasonal and often requires a period of signaling. For example, many firms create standard annual rates with key clients during the first quarter, and these are difficult to alter later in the year.
While all of these factors should influence when and how a law firm migrates its pricing strategy, wise law firms will also be cautious not to treat any factors as a sufficient reason to avoid migration altogether. For example, consider the difficulty of rate-setting alterations: The fact that it is difficult to change rate structures within a given rate period is not evidence that the larger pricing model cannot or should not be addressed strategically over time.
Clients are demanding changes, competitors are offering alternatives and law firms would do well to look for ways to introduce meaningful change in appropriate ways, rather than reasons to avoid change at all costs.