The pricing revolution
No-one seriously doubts the rise of alternative fees, but what may be less clear is just how far they are transforming the legal profession from within.
The demise of the billable hour has long made for good headlines in the legal press – to the point where it’s tempting to view it as little more than typical media spin. But while the hourly rate looks unlikely to disappear altogether – at least not any time soon – the rise in alternative fee arrangements continues apace. And this is having a profound impact on key roles and functions in law firms, as they realise the critical role pricing plays in offering an innovative service to clients.
Some firms have implemented altogether new roles – including those of pricing or project manager – to specifically oversee the complexities arising out of alternative fee arrangements (see ‘Back Office Cranks Up The Gears’). But existing roles are also expanding to help meet the demands of this new pricing landscape. Business development managers, in particular, are finding their roles taking on an additional financial slant as firms realise the importance of alternative fees to both winning pitches and successful long-term client relationship management. Accordingly, they have been putting considerable effort into adapting the pitching process, while both building closer relationships with the finance function and supporting lawyers in pricing negotiation/discussions.
Changing from the inside out Jamie Wallis, Business Development Senior Manager at Addleshaw Goddard, has seen alternative fees significantly impacting the way in which they pitch work to clients. “We are seeing clients continuously wanting alternative fees or ‘innovative’ pricing,” he says. “Drivers are cost reduction but from talking to clients, it’s clear that it’s also about wanting certainty.” Although the firm still gets asked for hourly rates – particularly on panels where such rates may be easier to compare – Wallis agrees that the hourly rate can lead to difficult conversations where ongoing costs seem unclear. “Any way in which we can provide price certainty is going to be seen in a positive light,” he says. Wallis also adds that delivering such cost certainty inevitably means facing up to new challenges both in his role and beyond. “You need an open dialogue in the pitching process,” he says. “This is the third law firm that I’ve worked for and I know that lawyers are not that comfortable with having pricing conversations. We need to promote having that conversation and getting under the skin of the client much earlier on.” Wallis thinks that an added complication is that while many clients now ask for ‘innovation’, they may not be clear on what that means. “They may just be inquisitive about what can be done. They may not know what they want. But we can be more forward thinking and help show clients that there can be a different way. It’s about having more upfront conversations, scoping projects, and understanding different requirements from the outset,” he says.
The changes arising from alternative fees have also led to the business development team moving much closer to finance. The firm, for instance, formed a pricing group two years ago headed up by the CFO and business development director – Wallis is also included in the group.
“The purpose is to look at and analyse market trends and pricing models, and encourage partners to have pricing conversations with clients,” Wallis explains. Pricing decisions that go above a certain level are also referred to the group for recommendation and sign-off. “People in business development need to take more responsibility and have more understanding of finance,” he adds.
The innovation opportunity
At Clifford Chance, the appointment of Owen Williams as Head of Global Proposals was perhaps also indicative of a deep cultural change impacting functions across the legal profession. Alternative fees are no doubt part of that change, but it goes much deeper than price alone. “My background was at Deloitte – where pitch work involved talking about our skills and our ability to support the client but a large part was also talking through the process and delivery of a project,” he says. He agrees that there has traditionally been less of a focus on the delivery aspect in legal work, because pitches would more generally focus on previous work, plus fees. But he has seen that change. “Now there is a larger onus on firms to describe how they are going to deliver based on previous experience but also pulling on resources of the larger firm. Firms that do that, whether through offering cost-efficiencies and/or partnering, will be the firms that succeed,” he says. While Williams has noted an increase in alternative fee arrangements, he agrees with Wallis that the major call from clients has been for ‘innovation’. Deciphering what this means and requires, he thinks, is the key challenge and opportunity for the legal community.
For instance, Williams thinks that on the whole the innovation call translates to discounts and cost certainty – understandable in the face of recent recession. But that relatively simple sounding requirement could open the door to significant levels of innovation for law firms.
Managing a fixed fee, for instance, requires detailed scoping and project management – skills that are relatively new to most law firms. In response, some firms are recruiting specialised project managers to support the shift. And project managers at Clifford Chance have gone a step further to train clients in project management. The firm’s project managers, for instance, recently headed up a workshop for both Royal Bank of Scotland (RBS) and Clifford Chance lawyers on preparing, executing and closing a large legal project. In addition, they left their RBS clients with a toolkit of templates to help them integrate project management structures into their working practices. Williams also points to a couple of other examples in which firms and/or clients are exploiting the opportunity for real innovation – and off the back of what might have seemed relatively simple calls for cost certainty.
Eversheds, for instance, was acclaimed for becoming Tyco’s sole legal provider – but it would unlikely have succeeded if it had not been for its Global Account Management System (Gams), which uniquely gave in-house counsel control over the billing process – that is, cost certainty. The firm has gone on to update the system and win other clients off the back of its success. The Pfizer Legal Alliance has similarly put billing at the heart of a very different relationship with its law firms – which now all work for Pfizer on an annual flat fee. For firms still culturally entrenched in the hourly rate, this may seem little short of revolutionary.
For both Williams and Wallis, it is clear that the call for alternative fees – or innovation – has opened the doors for really proactive firms to deliver an entirely new level of service. To outside industry, offering, say, a fixed fee may not seem terribly innovative. But in the legal profession, it requires a whole new outlook, involving project management and much closer collaboration with clients. It is expanding the roles of business development professionals and pushing them closer to finance, while requiring them to keep an ever closer eye on market trends; it calls upon lawyers to have new and open pricing discussions with clients; and it is convincing law firm management to create entirely new roles altogether to support pricing and project management requirements. For some firms, it is also pushing them to really rethink the lawyer/client relationship and offer something truly innovative.
What started as a simple call from clients for a bit more transparency in the billing process may well turn into a cultural revolution in the legal profession. To manage the change, law firms are proving that they need the insights and experience of business professionals more than ever before – and, if anything, such opportunities are multiplying.
Whislt this is good stuff it points to two other big trends:
- the need for non-legal skills such as projet management in the legal delivery business; these are not a catch-all for your 'BD' function.
- that clients want more certainty than law firms are prepared to offer- with ABS other sources of supply are going to be able to exploit this weakness.
Posted by: Cityunslicker | January 04, 2012 at 02:19 PM