Author: Richard Stock - Lexpert (May 2011, Vol. 12, No. 6)
Over the past year, I have had the opportunity to meet one-on-one with numerous law firms – 75 in all – to discuss alternative fee arrangements (AFAs). I have also spent a great deal of time working with corporate and institutional consumers of legal services, and what they want, invariably, is predictability and cost effectiveness in pricing.
There has been much published about AFAs and their suitability for different types of legal work. And yet, I am intrigued by the aversion many firms have to a form of AFA that I call “team-based pricing.” This fee arrangement is based on the solid data that some clients have at their disposal, which allows them to reliably project the type, volume and complexity of legal work they will need for three years into the future. This data then supports a pricing discussion with their regular law firms and readily lends itself to the calculation of a “team-based” or blended rate for legal work. From there, matter budgeting helps to price each file and a measure of predictability on price is achieved.
Most law firms are inherently risk-averse. Few will voluntarily innovate in pricing, preferring to offer a discounted hourly rate when necessary. In fact, more than 90 per cent of legal work is still billed on an hourly basis, as opposed to a success-fee or fixed-fee basis. Even the biggest firms in the country only receive two to three requests for proposals a month for multi-year streams of legal services. In short, steps toward non-hourly pricing are tentative and infrequent.
Team-based pricing is still an hourly rate at its core — a blend of the rates in proportion to the planned use of partners, associates and paralegals or law clerks in the firm over a period of time. Corporations achieve predictability in using a team-based price (the blended rate), which is then reviewed and adjusted at different intervals should the volumes and complexity of the work be materially different than planned.
For more than eight years, I have seen team-based pricing perform effectively when the company and the firm have several years of history working together. But 20 per cent of the time, law firms will decline to work with this approach, and there are several reasons. Sometimes, the compensation system heavily emphasizes personal fee credits. Firms with “eat what you kill” compensation systems are rarely interested in team-based pricing arrangements that move less complex tasks from partners and from senior associates.
Other times, there is no common ground for team-based pricing. Firms will categorize legal work as significantly more complex than do informed clients. This requires more partner time than less complex work. One emerging complication relates to the difficulty many boutique firms face in recruiting younger lawyers for certain specialties and finding experienced paralegals or law clerks. With such gaps in experience, lawyers find themselves doing work at a level five years below their own. A team-based rate, rather than an individual one, makes such a practice pattern costly for a law firm.
Team-based pricing needs a good volume of work over several years to become predictable — at least 1,000 hours per year for a specialty is required. It helps to conduct an analysis of historical practice patterns – perhaps for two to three years – in order to establish the right price (blended rate). When recommending this approach to a company, it helps to remove several variables from the price. This is achieved by building the cost of office disbursements, annual rate increases, and anticipated volume discounts into the average rate. Then, only material changes in volumes or the complexity mix of files will cause a rate to be changed over a few years. Finally, the rate should include complex work, but unique or extraordinary matters are often removed from the team-based price.
There are many factors to consider. Still, good data analysis, balanced legal teams, legal project management, and multi-year planning are tangible benefits of team-based pricing.