Legal Pricing

How to Succeed in the Modern Legal Market

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SAN FRANCISCO - January 31, 2018

The recently released Georgetown Law and Thomson Reuters Legal Executive Institute 2018 Report on the State of the Legal Market paints a bleak financial picture for firms that remain wedded to business-as-usual strategies. By contrast, "law firms that proactively address the needs of their clients – e.g., by implementing alternative staffing strategies, pursuing flexible pricing models, adopting work process changes, making better use of innovative technologies, and the like – can achieve significant success."¹

For anyone who has been following legal market trends, these conclusions are not new; the pressure on firms to deliver greater efficiency, predictability and cost effectiveness has been intensifying over the past several years. The question is, what concrete steps should firms take to be successful in this evolving legal market?

The answer to this question lies in the Report’s analysis of static and dynamic firms. Dynamic firms are those that fall into the top quartile of performance based on revenue per lawyer, profit, and profit margin. Static firms fall into the bottom quartile.²

The relative success of dynamic law firms is not a function of size, leverage, rate increases, or expense reductions. Instead, the dynamic firms are succeeding by taking a fresh approach to pricing and investing in technology that will help improve their efficiency, profitability, and data analytics. Below are three key takeaways from these firms’ strategies.

1. Focus on Communication, Not Discounts

Dynamic firms had substantially higher billing realization than static firms, meaning they discounted less and had fewer write offs. They also collected their fees more quickly than Static firms. The reason? Dynamic firms had better up-front communication with clients about costs.³

These results reflect a fact that all lawyers know but are not enough are addressing: clients react poorly to bills they did not expect and do not understand. Firms can help solve this communication gap by presenting pricing proposals that are clearly scoped at the outset.

2. Embrace Alternative Fee Arrangements

The percentage of revenue derived from alternative fee arrangements (AFAs) was comparable for both static and dynamic firms. However, their approach to AFAs was very different. 75% of the dynamic firms actively pursued AFAs with their clients, while 70 percent of static firms only offered AFAs reactively, in response to client request.⁴

Successful AFAs involve planning, project management and profitability analyses (which are hard and take time) as well as clear communication with clients about scope, staffing and risk (which can be uncomfortable). It is no surprise that firms willing to tackle these challenges head-on are thriving, while those that take a less systematic approach to AFAs are not.

3. Invest In Technology

Responding to client needs requires investment, and the dynamic firms’ investment in technology outpaced that of static firms by a rate of almost 3:1. Moreover, the dynamic firms’ technology investments are focused on increasing their workflow efficiency and enhancing their ability to analyze data and assess profitability.⁵

Conclusion

Dynamic firms are rising to the top because they are willing to examine their processes, adopt new technology, and change their ways to better meet the demands of their clients. While this has been true for some time, the 2018 Report indicates that the pace of change is accelerating, and the divide between firms that “get it” and those that do not is widening.


  1. Georgetown Law Center for the Study of the Legal Profession and Thomson Reuters Legal Executive Institute and Peer Monitor, 2018 Report on the State of the Legal Market, Jan. 2018, at 17.

  2. Id. (citing Thomson Reuters Legal Executive Institute, 2017 Dynamic Law Firms Study, Nov. 2017). 

  3. Id.

  4. Id.

  5. Id. at 17-18.

AFAs Have Arrived: Is Your Law Firm Ready?

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Last month I participated in an AboveTheLaw panel discussion that addressed the question, “Should law firms still use the billable hour in 2017?” During that conversation, I urged firms to work on new pricing strategies but answered "yes" to still using billable hours because, in my opinion, "most firms (and clients) aren't where they need to be to make a sweeping change to alternative fees only."

A few weeks later, Microsoft announced its Strategic Partner program for outside counsel. One highlight of this initiative: Microsoft hopes to move 90% of its legal work to alternative fee arrangements (AFAs) within the next two years (to find out more, check out the LinkedIn post by Microsoft's Deputy General Counsel, David Howard, here and a Corporate Counsel article on the Microsoft program here).

The Microsoft Strategic Partner announcement has generated firestorm of press on alternative fees, including an article by Miriam Rozen on the Microsoft firms' "jittery" response. It also has shined a spotlight on GlaxoSmithKlein, another Fortune 500 company that has taken huge strides towards moving off the billable hour. See http://www.law.com/sites/almstaff/2017/08/10/how-pharma-giant-gsk-got-tough-on-fixed-fees/. GSK's groundbreaking work on AFAs has been documented in an excellent Harvard Business Review case study by Heidi K. Gardner and Silva Hodges Silverstein.

The Microsoft and GSK initiatives are powerful examples of big companies and top-tier law firms that are figuring out how to make AFAs work, even in complex cases. Their programs send a strong signal that it can be done, and - in the case of Microsoft - it appears that thirteen mega-firms have very publicly agreed to try. Whatever your stance on hourly billing, this is a big deal and could have a significant ripple-effect in the industry.

In light of these recent events, I would like to modify my answer to the question posed to the AboveTheLaw panel back in July. While I stand behind the bulk of that response, I would add the following advice to my lawyer colleagues: If you aren't actively working on ways to improve efficiency and structure profitable, competitive alternative fee arrangements, START. RIGHT. NOW!

Digitory Legal has built these considerations and more into its easy-to-use litigation budgeting tool. Our detailed reports, average costs-per-task, and easily updated framework is the perfect solution for clients who are tired of hearing “but it’s litigation...“

How to Hire the Right Lawyer at the Right Price

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Cheaper is not always better, particularly when it comes to hiring a trusted advisor. But price is always a factor in legal hiring decisions, and legal bills can spiral out of control quickly if you don’t get a clear handle on costs at the outset. So, how do you hire the right attorneys for your case at the best possible price?

Many companies are tackling this problem by using a competitive Request for Proposal (RFP) process to choose legal providers. According to BTI Consulting, the percentage of corporate counsel that issue RFPs to law firms jumped from 45% in 2014 to 56% in 2015. The use of RFPs for legal work has now reached a 15-year high. (See,www.bticonsulting.com/themadclientist/2016/1/27/client-rfps-hit-15-year-high)

The RFP process is a good first step to achieving value-based pricing. However, the process loses its power if the firms only provide top-line numbers or rates instead of creating a detailed budget. A detailed budget is critical because all lawyers will arrive at their forecasts differently, so it’s important to understand where the numbers came from before you hire the firm.

To get the most out of your RFP, make sure the firms you are evaluating provide all the information you need to assess the true cost of the matter, including:

  • Who is staffed to the case and what is each of their roles?

  • How many interviews/ gigabytes of documents/ depositions/ motions/ court days/ etc. is the firm assuming will be in the case? and

  • What is the average cost of each task?

This level of granularity will reveal who is pricing the case fairly (as opposed to low-balling the initial number to get business), while average costs-per-task will help you – and your lawyers – control costs when the anticipated scope of the case changes.

In addition to giving clients better visibility into costs, the RFP process should reveal each firms’ value proposition. Thus, RFPs should require team bios, relevant experience, the firm’s preliminary thoughts on strategy, and – of course – an interview. The interview is critical because you should trust your legal team completely when you hire them, and that trust cannot be forged on paper.

What’s Missing In Legal Tech Today? “Budgeting Tools that Transcend Excel”

SAN FRANCISCO - June 16, 2017

At yesterday’s LegalTech conference in San Francisco, Neel Chatterjee of Orrick, Herrington & Sutcliffe (Law 360’s IP Group of the year) was asked what he thinks is missing in legal tech. He responded, “Budgeting tools that transcend Excel.” He went on to discuss how it seems like lawyers are still “sticking a finger in the air” to get budgets and need help finding the right number and adhering to it. “We need tools that mine the firm for analytics” and can tell you things like, “how much does a motion cost?”

Neel’s comments launched the group into a larger discussion of the need for better budgeting by legal vendors because lawyers get blamed for vendors’ cost overruns. Given the amount of time the panel dedicated to this topic, it seems clear there remains plenty of room for innovation — and for tech adoption –in the legal budgeting space.

In addition to being a great trial lawyer, Neel is a straight-shooter and one of the first people I approached when I started doing “proof-of-concept” market research for my company, Digitory Legal. His insights taught me that it was important to create a system that includes costs-per-task because these metrics can help law firms manage their teams to budget and reward efficient lawyers.

Budgeting for Excellence

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SAN FRANCISCO - May 20, 2017

With all the pressure to reduce legal spending, it is easy to lose sight of the importance of excellence in legal practice. Excellent legal service takes time and money to achieve; however, it should not require a blank check. Here are three tips to managing legal costs while leaving room for truly superior legal work.

  1. Task-Based Budget Plan.

    Your budget plan must be flexible enough to allow lawyers to prepare throughly and pursue outside-the-box strategies while still maintaining cost accountability. The key to striking that balance is task-based budgeting.

    While is not possible to predict exactly how a complex litigation will go, it IS possible to map out the tasks involved (interviews, depositions, motion to dismiss, summary judgment, etc.) then provide realistic estimates of how much time a given task should take and which team-members will be involved (partner, associate, paralegal, etc.). Ask your lawyer to provide these task-based metrics at the beginning of the case along with their best estimate of the number of tasks the case will require (number of gigabytes, number of motions, etc.) While the number of tasks will change, keeping within the average cost per task should be something the lawyers can live with.

  2. Collaboration.

    To often, only the relationship partner understands the client’s budget expectations. This is a recipe for disaster.

    Legal teams need to collaborate internally on managing to budget. To do this, all the team members should understand (and, hopefully, agree with) the budget, their role in the case, and the expected hours-per-task. With that knowledge, each attorney on the team can be responsible for meeting the client’s expectations or – if that is not possible – flagging cost overruns before the client receives the bill.

  3. Realism.

    It may be a cliche, but generally you get what you pay for.

    Clients looking for excellent legal work should expect a lot of time will be spent on each task and should leave plenty of room in the budget for analysis/strategy. For example, a former partner of mine once told me he will spend twice as long as his colleagues preparing for oral argument. I have seen him argue motions, and clearly that extra prep time was worth every cent.

The Litigation Dilemma: Managing Costs When Circumstances Change

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Businesses need certainty. They rely on budgets to function. And because they have to, lawyers reluctantly will provide clients some form of litigation budget to win the business.

So what’s the problem? The problem is, this is what lawyers really think of those litigation budgets:

  • “Completely f***ing not accurate.”

  • “Total junk.”

  • “May as well be throwing darts at a big board of numbers.”

I will never reveal the sources of those statements, but I assure you they are real.

What happens when (not if) reality ends up being nowhere near budget? Too often, the answer is a blank check for the client and/or a big write-off for the firm. This happens because the budget wasn’t detailed or transparent enough, which means there is no way to manage the lawyers – or the client — to budget when the circumstances change. Once the “we didn’t anticipate X,Y,Z” statements start, the initial budget gets thrown out altogether and the client becomes frustrated with ever-growing bills that they cannot control.

Here’s an example of how this dynamic works. Client asks for a budget. Law firm says “you never know what will happen in litigation” but they expect the case will be $1MM. Lawyers may also give a number for each phase, e.g., $100,000 for initial investigation, $200,000 for pleadings/summary judgment; $400,00 for discovery; $300,000 for trial. However, the budget does not say how many depositions, gigabytes of documents, experts, court conferences, discovery motions, trial days, etc. the lawyer expects or how much each of those individual things is expected to cost. Next thing you know, something unexpected happens (which it always does) and the client receives a bill that is 2-5x their expectations. Hours upon hours will be wasted in back-and-forth over what happened, and the law firm will end up having to write off some percentage of the time.

In other words, everybody loses.

To prevent this downward spiral, start with a clearer, more detailed budget that allows everyone to see what the firm’s assumptions were and how those assumptions affect the budget. This detail creates accountability on all sides. For example, if the lawyer says “we weren’t expecting 50 depositions”, the client can see if that is true and also calculate for herself how much that extra work should cost based on the original budget. And if the client insists on scorching the earth, that additional expense associated with that strategy will be obvious as well.

In other words, everybody wins.

Buyer Beware: “Low Ball” Legal Budgets

SAN FRANCISCO - May 4, 2016

Businesses need certainty. They rely on budgets to function. And because they have to, lawyers reluctantly will provide clients some form of litigation budget to win the business.

Mid-market companies are particularly likely to receive low-ball budgets because, while they often have significant one-off cases, they do not have enough recurring legal work to secure volume-based fixed fee deals from big firms. In addition, their inside counsel may not be familiar with the tasks and costs associated with the specific matter at issue.

Low-ball budgets are bad for clients and hurt the profession as a whole. But there is a straightforward solution: clients should demand – and lawyers should provide –more detail in their budgets.

Lawyers need to provide detailed budgets to demonstrate why their numbers are realistic but the competitions’ are not. For example, a friend of mine recently told me the most experienced M&A lawyer in his office knows that a deal will cost $200-$400k and will tell clients that a budget lower than this isn’t real. Unfortunately, this response is not terribly helpful for a General Counsel who needs to understand and explain to management why the company should hire a lawyer that looks far more expensive than the other contenders.

By contrast, if the lawyer’s budget provides information about the tasks involved, who will be doing them, how long they will take, what the average costs-per-task will be, and the variables/assumptions that affect the budget, then the GC has all the information she needs to make the right decision and justify it.

Here’s the rub: creating a detailed, realistic budget is hard. It takes time to do it right. But giving clients what they need to make an informed decision is the key to winning the business AND keeping a happy, loyal client.