When I began to advise small- and medium-sized enterprises as a young lawyer in the mid-1980s, it was perfectly customary for a client to retain me without asking any questions about the price of my services. I simply billed the hours I spent on the job, and as a rule, invoices were paid uncomplainingly.
Tempi passati! Today, a client wants to know precisely how lawyers bill their work. Even large law firms are now being confronted with the demand to grant reductions on their “standard hourly rates”. With increasing frequency, clients ask about fixed prices for legal services or would like to agree on a fee cap for a job. Success fees are no longer exceptional, either – at least for part of the remuneration invoiced by lawyers. Many clients even refuse to pay anything for work done by first year associates. Furthermore, permanent clients also expect their regular law firm to provide free services such as training sessions for employees, or to make a young lawyer available to them at purely salary costs by way of a so-called secondment.
What has happened? Us as lawyers have until recently still been textbook examples of the famous principal-agent theory. With an information asymmetry in place, the market power rests with the agent, i.e. the lawyer who has a clear edge over his principal, i.e. the client and is therefore able to dictate the price. And now, how do we cope with this? All of the sudden, the client determines the conditions under which the order is placed, and the law firm is confronted with the demand to provide legal services by adding pro-bono elements, at even lower prices.
Many of us have been completely taken by surprise by this development – although we shouldn’t be surprised at all. Who among us would commission a housepainter to paint the walls in the house and agree that he would simply invoice his actual work at hourly rates? Quite: no one! We, however, have traditionally regarded as no less than a matter of course the fact that our clients would bear the cost risk involved in legal mandates alone. This worked as long as legal costs were negligible in companies. In an increasingly “juridified” corporate world, however, the costs of dealing with the legal aspects of entrepreneurial action are playing an increasingly significant part. To the extent to which these costs are increasing and becoming a burden on corporate clients, these clients are trying to pass this cost pressure on to their service providers.
In discussions with clients, we defend ourselves as well as we can: “Legal advice, and representation in litigation even more so, are activities where the effort required cannot be predicted!” Many clients are unmoved by this. They want us to predict the costs resulting from our work in a reliable manner. And they are no longer prepared to run the cost risks connected with the uncertainty of the mandate management all by themselves.
For lawyers this means that we have to learn to calculate the cost of managing matters. What are our salary and office expenses divided by the number of billable hours per year? What proportion is fixed costs, and what are the variable costs? What are the overhead expenses in managing the law firm, including marketing, accounting, IT and human resources costs? If we don’t know these figures, then we won’t be in a position to work efficiently, to establish lean structures and to produce our services in a cost-effective manner. And we won’t succeed in providing our clients with reliable quotations while still making some money under competitive pressure, even with fixed prices or a fee cap.
This blog was originally published on 11 June 2018 in Vista, the online magazine of the Executive School, University of St.Gallen, Switzerland.
About the Author
Prof. Dr. Leo Staub is a Titular Professor of Business Law and Legal Management at the University of St. Gallen. He also is one of the Directors of the Executive School of Management, Technology and Law of St. Gallen University where he chairs the division “Law & Management”.
Leo can be reached at email@example.com