A low hourly rate is not the cheapest solution
We want to pay less. This is what resonates in the literature and studies on new developments in the legal market. The core theme in this discussion is based on the variable or the hourly rate. But does it help the client and the firm to reach their desired goal? In this article, Hans Schuurman explains on a napkin that this is not always the case.
Altman Weil recently published their annual survey, the 2016 Chief Legal Officer Survey. The key message of the report is: Clients are looking for cheaper solutions under pressure of declining budgets. Insourcing or doing the work themselves and working smarter (better managing of cases) is one part of the solution (saving). The other part of the solution is found in the decline of total spend at third-party legal service providers.
Especially the last part is reflected when law firm rates are negotiated. Alternative fee arrangements (AFAs) still are hardly used, and in most of the cases the hourly rate remains the subject of the negotiation. E.g. in pitches, clients ask for hourly rates "per category of lawyer".
The choice for the firm with the lowest rates is not always the smartest choice. The presentation of Paul de Jonge at the congress of Reinvent Law 2015 showed that in a lot of cases a pitch is not successful due to the (lowest) hourly rate. The hourly rate is but one of the variables that determines the total price. The number of hours spend is the second variable.
So, the total price depends on the hourly rate, as well as the number of billable hours.
Lowest hourly rate is bad for firm and client
When the hourly rate is the main subject of the negotiation, the outcome will have a negative effect on the service provider. In most of the cases there the final result is: Less or no impulse to reduce the number of hours in the case that is billed against a lower hourly rate. Thus, the firm will see decrease profitability. But also the client can suffer from an agreement that is bases on the lowest hourly rate. When in a pitch the hourly rate is the main criteria, not necessarily the party that is the most efficient service provider may win. The result may be a lower hourly rate, but an inefficient and more time consuming process to achieve
the desired results. In these cases the client will not save money with a lower hourly rate.
Besides the lower hourly rate, an ineffective party will also demand more from the client itself and therefore have a negative effect on the capacity of the internal organization on the client side. In cost comparisons this component is often forgotten. A top specialist in a specific area of law may charge a higher fee, but will be less depended on the internal organization at the client side and usually is much more efficient (and faster) in finding answers. So for a good assessment we should also look at the ‘surcharge’ of low or less quality work and results.
Shifting the price discussion to efficiency
If the goal is to lower the costs, then not only the hourly rate is an important variable in the assessment of the total cost of a case, but also the number of hours spent. So let's explore the options on the side of ‘hours spent’ and who provides the most efficient solution? For the solutions we have to look at: Experience and knowledge management Distribution of workload Efficient processes/LEAN Proper case management Legal tech Value
There are offices with a particular specialization. These offices have lawyers that know the tricks of the trade and thrive on the knowledge of similar cases. For example, you do not need to explain to a federal lawyer what the dynamics are within the government, an IP Lawyer who’s also Professor and teaches IP law knows the ins- and outs on Intellectual Property Law. They may not work for the lowest hourly rate, but you probably pay less for preparatory work as they are experts in there practice and know a lot by heart. Also the number of billable hours will be significantly lower than that of an office that is still learning and working for a lower rate. By far the easiest savings are made by not paying for what a lawyer no longer needs to do, as mentioned by Stephen Ledder: ‘the power of doing anything is sometimes not doing nothing’
Work distribution and "unbundling"
According to the study by Altman Weil, an important saving for clients is "insourcing". In the financial sector, law departments are becoming in-house law firms. They invest in sector driven legal professionals, so the work can be done by themselves. But in relation to other services, 'insourcing", from a business perspective, is rather odd. Anything that is not a core competence of a company, such as catering, maintenance, advertising campaigns, etc. is outsourced to specialized businesses. But in legal work, the trend leans more towards do-it-yourself. Clients make an informed strategic decision. On the topic of "unbundling", these companies make a clear split in type of legal work. Where previously the main service provider was given the workload of all of the legal services, nowadays a distinction is made between "commodity", regular work and high quality or specialist work. The high quality work naturally goes to the top lawyers or top firms. The more regular work is analyzed in a more commercial manner: Can and should we do it ourselves? Is a third party more cost efficient? Etc. Management literature speaks about "make or buy decision". There are more parties that are able to do ‘The Job’, because the work does not demand unique knowledge. It will be clear that the price will be one of the most important make or buy decisions. Due to professional procurement we will see declining price levels and the need for a high degree of efficiency.
At the bottom of the spectrum, there is a tendency to look more at alternatives like automation and Legal Tech solutions (see Legal Tech).
Is a highly specialized service provider like a law firm not able to perform better? In many cases, certainly!
How nice would it be that a Law Firm could demonstrate they have been working increasingly efficient or LEAN for a long time. And by LEAN I mean: delivering exactly what the client asked for and omit what the client did NOT ask for. That is the first win.
The mindset of LEAN is about avoiding waste. A good firm has all means to avoid waste, but they are not recognized as such.
A good firm - and allow me to freely translate the wastage to be avoided - can custom provide the right and experienced people, has an effective and efficient knowledge base, has dealt with certain problems a number of times and therefore is able to act as repeat player with in-depth knowledge and guards quality and prevents the client from making mistakes. It’s good to see that firms increasingly look at LEAN and acquire more knowledge about organizational efficiency.
Proper case management
Efficiency, among others, is not doing what the client didn't ask for. This is assisted by the development of Legal Project Management (LPM). LPM offers the tools to achieve consensus with the client about the desired quality, money and time. Assumptions that have not been discussed may lead to misunderstandings. Previously implicit cases were made explicit by planning, pricing and order confirmation. The order confirmation clearly states what will be done and what will not be done within the given order. For a small case, a checklist will suffice with the questions: why, what, when, who and how? The order will be executed within the agreed limits of quality, money and time. At the end, the client and contractor will evaluate and learn from the executed order.
For a big case Legal Project Management is much more complex and Firms (should) normally use a specialized Legal Project Manager. The added value of a Legal Project Manager is a guaranteed component for the client as the project is more transparent for the firm and its client.
In other cases the Legal Project Manager facilitates the practice and develops for example planning tools and reporting to support the firm to gain more insight in their business that results in a higher degree of transparency.
As mentioned before more routine work is automated or processes will be supported by technology. Not only the simple, but also the more advanced contracts will migrate to ‘automated’ models to be used by client himself. A good example of a service provider in this field is the Dutch Legal Lloyd.
Predictions are that at least 25% of this work will be automated and offered in online suites or software. And with these Legal Tech solutions not only the firm that use these solutions wins (efficiency) but also the client (less costs). Another benefit for a firm is that the cost of a tech solution is more predictable and therefore it’s easier to implement new pricing model such as a fixed price per case. And to conclude: ‘Tech makes reuse of information and preprocessing of documents easier’.
The previously mentioned experience, efficient processes and good case management offer besides avoiding unnecessary efforts an important advantage. A good intake followed by understanding what really matters results in added value from a client perspective. And this goes beyond just solving a legal problem.
If a client perceives lower value, price is of great importance. If the perceived value is high, price becomes less importance. A very interesting article is on Value is “Clients And Law Firms Rate "Value" Differently” by James Bliwas. (see http://www.legalbusinessworld.com/single-post/2016/12/19/Clients-And-Law-Firms-Rate-Value-Differently)
In a pitching process were a firm is only rated on the billable hour the firm with the best quality-price ratio is often missed out. And the additional costs due to inefficiency or less quality is often not included in the total price as calculated during the pitch.
Without further considerations and only conducting negotiations on the rate, in the worst case, leads to two very unhappy parties. A Legal Service Provider with a decreasing profit margin and a client (buyer) who does not get the best value for his money or in the end pays more than budgeted.
One should stop the debate on pricing and start discussing the required output resulting in the best solution. And don’t bother to step out of your comfort zone. Talk with other professionals and read about it. A lot of information can be found online and learn from other industries. The legal market is business wise not that different from other markets. And last but not least, ‘Tech makes more things possible’.
Furthermore, keep in mind that the highest hourly rate results by no means always the highest total spend. Learn to look and valuate the difference in the bottom line spend. Efficiency and a high degree in expertise most of the time concludes in less time spend on a case. And a high degree in efficient workflows, knowledge and expertise means an opportunity for less billable hours and therefore the first discount from a client perspective.
May the best man win (the next pitch)!
About the author
Hans Schuurman is consultant and CFO and is specialized in process and profit improvement of law firms. Hans is experienced in leading large improvement projects. He regularly speaks and publishes about the profit model of law firms and the new developments in the legal sector. As founder of Law4ce.com, Hans and his partners improve the commercial, administrative and management processes of law firms.