Managing Legal Fees Directly Through Pricing Strategies

The goal of every General Counsel, Chief Legal Officer, Head of Legal Operations or other senior or legal in-house management is to achieve fee predictability. The collective goal of your law firms is to avoid fee predictability at all costs.

Fixed, Capped, or All You Can Eat Fees.For most of the 1800s, the American legal profession had service fees capped by state law and litigation fees were paid by the losing parties. In 1908, the ABA declared contingent fees to be ethical. By the 1930s and 1940s (depending up on the state), state bar associations began to publish minimum fees, and the ABA Model Code (in effect until 1969) declared that it was unethical to "undervalue services." Contingent fees were the dominant fee arrangement for firms during the 1930s and 1940s (per FindLaw). And it makes sense...in most businesses, you get paid for successful production, not effort. By 1975, the Supreme Court outlawed both the capped practice fees from the 1800s and the base system from the 1940s, and by the late 1970s, most lawyers billed purely based upon time incurred times their hourly rates, plus expenses. In other words, lawyers were to be paid based upon their efforts. Yes, it was understood that there were goals, but they billed largely upon effort. Try to achieve a blend of fixed or capped fees, or all-you-can-eat fee arrangements with your law firms. In every other part of the business, your peers have budgets and are expected to live within those budgets. It affects their compensation, and sometimes their employability whether they stay within those budgets or not.

Alternative Fee Arrangements (AFAs). AFAs are much like the weather. Sometimes it seems that everyone talks about it, but no one does anything about it. Still, given the proper motivation, a law firm will conform to the AFA requests of clients and may even proactively offer AFA fee structures. Some years back, I bid on a substantial IP portfolio at a very large company. The client told us that fee predictability was their strongest motivating factor. Our partner chose to interpret that by offering our rate table, in spite of the fact that their relevant IP fees did not vary by more than 10% over the prior five years. Not only did we not get the client, but we also didn’t get invited to the final oral presentation, despite having a substantial experience advantage. Here's a suggestion. Ask your law firm to provide you with multiple AFA options covering various contingencies. Some law firms will do so, many won't. There are law firms with both an inclination and proclivity for risk-sharing and have a strong facility with AFAs.

Better Pricing Assessments. I was aware of a firm that did such a poor job of pricing IP litigation that an in-house counsel pulled their partner aside and said, in short, “you don’t know what you’re doing -- and it shows.” Essentially, they were pricing IP litigation all the way through to verdict in all cases, when IP litigation typically settles in advance of trial. When a case turns out to be less complex or time-consuming than initially anticipated – as they frequently do –the firm may reduce fees as a reflection of the reduced workload. Almost all firms have sophisticated pricing mechanisms, housed within substantial pricing departments, led by pricing experts with multiple degrees and years of experience, trained by a plethora of external pricing experts; all designed to generate maximum law firm profits and maximum legal fees from their clients. Contingent fees. The Firm may want to offer a fee incentive that allows them to participate in the upside. These can include (but are not limited to) contingent fees, success fees, client service incentives and so forth.

Shop for regional rates. If your need is not jurisdiction-specific, there are many excellent lawyers in other parts of the country with more attractive billing rates than in money market centers -- sometimes, they are already working at your law firm in another state!

One of my first law firms had a very successful strategy: they had very few offices in the largest 20 American cities by population. Most of their offices were in the next 250 most populous American cities, and they were able to offer rates more consistent with those regions.

Client questions overbilling and incorrect billing. Yes, overbilling, billing outside of contractual agreements and improper billing occurs on occasion, if not regularly. There are outside firms that specialize in reviewing your legal bills for errors and mistakes and may be well worth the investment.

Quick Pay discounts. Depending upon the law firm, it is not uncommon for clients to stretch their receivables to 90 days or more. Most commercial businesses offer discounts for invoice payment within a brief time period. Does your law firm offer discounts if the invoice is paid within 15 days?

Volume Discounts. If a client brings in a large volume of work or commits to a long-term contract, the firm may offer reduced fees as an incentive for the bulk business.

Clients demand multiple year flat rates. It is very common for large clients to demand that rates remain flat for the length of an engagement period, typically up to five years.

Client demands no billing for first and second year associates. For years, clients refused to pay for first and second-year associates, then it went away. It couldn’t hurt to ask. Perhaps it’s time to work with law firms that will not charge for first and second year associates again.

Relationships with ALSPs. Many law firms have relationships with Alternative Legal Service Providers in lower-cost jurisdictions and may pass the savings along to their clients. Some have even developed their own ALSPs for low-margin legal work.

“Managing Legal Fees Directly Through Pricing Strategies” is adapted from “Sixty-Three Strategies to Reduce Your Legal Fees” by James J. Stapleton.

James J. Stapleton is the Managing Principal of Client Sciences.? Mr. Stapleton spent several decades building multiple AmLaw 100 law firms and large accounting firms including PwC and Arthur Andersen, during which time he managed over 7,500 transitions between law firms on behalf of clients.

?Client Sciences works with clients to reduce legal fees, optimize relationships with your law firms and streamline your internal legal processes. ?Mr. Stapleton can be reached at 408.440.7660 or via e-mail at: ?[email protected].