Imagined Value

The following article was originally published by Lawyers Weekly on 18th September 2012. Click here to view the original.

Imagined Value

Client relationship management is a top priority for any legal services firm. Stephanie Quine looks at the role of alternative fee arrangements and asks why they continue to be overlooked in favour of billable hours.

A large part of keeping clients happy and loyal is earning their trust and respect when it comes to billing.

Most in-house lawyers grew up on a diet of billable hours in private practice; it’s what they’re familiar and comfortable with and it remains the most common method they use for charging for legal services.

But according to a survey of 350 Australian corporate counsels, representing more than 220 organisations, they don’t particularly like it.

The King & Wood Mallesons Compass survey, released at the end of August, showed 60 per cent of in-house lawyers are either only “accepting of” or “unhappy” with their current fee arrangements; proof that, despite years of debate, there is still a high level of frustration and dissatisfaction with billing models.

Why then does it continue to be billables as usual?

Michael Bradley points out that some clients, particularly in-house lawyers, aren’t thinking about alternative fee arrangements in terms of value, they’re comparing them to a time cost. “They worry about if they fix the price whether they are going to do themselves out of a bargain,” he says.

Bradley is the managing partner of Marque Lawyers, a firm that, outside of litigation, prices 100 per cent of its work on fixed fees or retainers.

While clients worry about their punting abilities, Bradley says that’s not the way his firm does business. “We don’t price on the basis of a time-costed comparison, it’s irrelevant to us,” he says, adding that by comparing the two a “completely misleading” risk notion comes into play because time costs are actually notional.

Bradley says his firm strongly advocates against clients using hourly billing at the outset. “That’s the key to success, always having an upfront discussion. That’s the first thing we talk about; how we’re going to charge for our services.”

Educating clients

Steve Sampson, the general manager of mid-tier firm Hunt & Hunt, believes the profession is two years into educating major clients on alternative fee arrangements (AFAs).

“Clients are sophisticated these days and … when they come into a firm, particularly in the mid-tier space, they know what they’re shopping for, whether it’s for particular services, particular expertise or value.”

There are a myriad of ‘alternative’ pricing structures, whether they’re fixed-fee, event-costed or success-based, but Sampson says clients understand that.

“If we could be a bit more pragmatic and responsive rather than reactive we could be going to clients saying ‘look we’ve done this stuff for a couple of years, we’ve noticed that your average transaction looks like this … we’re happy to lock in on this price’ … I think that’d be a surprise to most clients to have those sort of conversations.”

Commercial operators have managed to pick up the gist. Time-costing instinctively doesn’t make any sense to them, says Bradley.

Weaning others off billable hours and onto options with more certainty may depend on the nature of the relationship, says Joydeep Hor, the founder and head of People + Culture Strategies (PCS).

Hor wants clients to think of PCS as their strategic mentor in business, rather than just a trouble-shooter when there’s a problem.

He says he openly tells clients what they should do, not only from an ethical or legal perspective, but from an alignment with their overall business strategy, mission and values.

“We want to [be] integrated into their decision making and we don’t want them to be apprehensive about the fact that building those relationships will necessarily translate into time-based charging and all that entails for them because clearly there’s a disconnect between the kind of model that we want and traditional pricing arrangements,” he says.

Retainer models with various inclusions and exclusions are available at firms like Marque Lawyers, PCS and many other law firms. Bradley describes tailored retainers and “all-you-can-eat” pricing options; Hor explains how most packages include access to the firm’s facilities, precedent documentation and education and training services.

“In this market, everybody needs to know that they’re saving money or needs to be alerted to the opportunities to save money,” says Hor.

It’s a fair argument; that fixed-fee arrangements are more digestible and more akin to what a business partnership would be like, but Sampson says general counsels, who have a “real acute understanding of value add”, want to see detailed bills.

“They want to see where the time is spent and have a detailed discussion about it so they’re often the hard ones to get past,” he says.

Eye of the beholder

Hor, like Bradley, believes all work lends itself to AFAs.

“There’s historically been a perceived difficulty around litigation, particularly large-scale commercial disputes, and I accept that but … I think experienced litigators should think about doing that on a fixed-monthly-spend basis over a set period of time, recognising that the ebbs and flows of litigation will see busier months and quieter months,” he says, adding that it just needs to be done “more carefully”.

Bradley would use AFAs on all matters if given the choice.

Marque Lawyers only keep timesheets for litigation matters because the cost assessment process is still based around time-costing; if the firm wins a case and gets a cost order, it needs time records in order to recover the costs for the client.

Bradley believes the profession is fighting the take up of AFAs “tooth and nail” and fighting aggressively in protection of billable hours, and he’s not the only one to say so.

John Chisholm, a legal consultant and outspoken critic of billable hours, says “firms of the future” recognise that value is created outside the firm, not inside it, and that clients do not buy time, they never have and never will.

As all value is subjective, Chisholm asserts that it is the client’s perception of value that is paramount. “If your client perceives they have received value, then they have. Equally, the reverse is true. If your client does not understand the value you have provided to them, whose fault is that?”

Sharing risk

Questions remain over how much clients are preventing the uptake of fixed-fee options as compared to their lawyers.

But it is clear law firms could be much more on the front foot in promoting the client benefits of alternatives billing options.

Advantages include not only greater price certainty and peace of mind, but also improved relationships and communication, and sharing of risk

“We’re not a big fan of estimates here,” says Hor. “Wherever possible we’ll do actual quotes and sometimes you go over that figure and you have to absorb a hit as a service provider.

“Other times you make a better profit margin on it, that’s just business.”

Chisholm also points out that clients who agree to their fees upfront have a tendency to pay quicker, which is win-win for all.

Any upward trend towards widespread alternative pricing still remains unclear. As many mid-tier firms have shown, however, it can be done for the vast majority of legal services.

Upfront and open conversations from early in the piece are key to efficient and effective client relationships, and it’s only from there that the percieved value of timesheets might be superseded by alternative pricing arrangments.