In the first post in this three-part "Pricing Legal Services" series, I outlined some alternative fee options that have gained traction in the legal industry over the past decade. In this second installment, I focus on factors that typically influence clients' pricing model choices in a range of circumstances. I also share a useful resource for clients trying to choose the right fee arrangement.
An unsurprising observation from my previous post was that hourly rates still prevail as the first choice for most clients in most matters, based on market surveys of AFAs in and outside Canada. Nonetheless, other options are being used with some regularity.
Choosing an AFA: Factors Driving Popular Fee Arrangements
In our experience, the most popular fee arrangements are variations on two themes – hourly rates and fixed fees. After decades of criticism by clients, lawyers and legal commentators alike, why is the hourly rate still so popular? And what's now creating a toehold for fixed fees to catch on?
Hourly rate variations
What's behind the enduring appeal of hourly rates? My own guess is that they're just so easy to use. No specialized staff, scoping, fact-finding or up-front meetings and information are required – the client and outside legal team can just get to work. This sort of simplicity is particularly appealing in the following situations:
- When the matter is urgent,
- When the situation takes us into complex unknown territory,
- If it is hard to scope or determine a critical path at the beginning; or
- Where many changes and re-directions can be expected along the way.
This method also works well – whatever the nature of the matter – when there's a history and trust relationship between the lawyer and client, and where the lawyer has reliably delivered efficiency and value in the past at the hourly rates.
The appeal of fixed fees is obviously the predictability for the client's budgeting purposes, and the focus on the total cost to achieve the desired result. This method does require more resources and expertise on the client's end to assess, implement and monitor, but many clients find the benefits to be well worth the effort. Fixed fees seem to be gaining traction with clients who have staff with the time, experience and data to price appropriately and manage the fees and external counsel relationship.
Fixed fees do come with greater risk (on both sides) that the work required may not fit "fairly" into the agreed price. These fee options therefore seem more popular with clients on higher volume, more routine matters with fewer "unknown unknowns". Again, however, they can work well in any situation where there's a relationship of trust between the lawyer and client and a significant ongoing volume of work, so that any anomalies can be "smoothed out" over time.
The Right AFA for the Right Circumstances: Making the Choice
To help you choose the right fee arrangement for your circumstances, we have created the Fee Arrangement Assessment Guide. This guide takes the 6 most common types of fee arrangements at Stikeman Elliott and identifies some common factors that we've seen clients use in choosing one option over another. The resulting matrix can be used to guide your choice of fee arrangement based on the following:
- Nature of matter: Where is the matter on the spectrum of routine and familiar to complex and unfamiliar?
- Outside counsel's experience: What experience and capacity do you have in-house and what's required from the outside legal team?
- Urgency to get started and availability of information: Do you have the time and necessary information about the matter do the pricing work up front?
- Availability of data on past matters: Do you or your outside legal team have robust data on similar past matters to allow you to determine an appropriate price at the outset?
- Capacity of your staff and ability to scope and monitor: What internal resources and inclination do you have to scope, monitor and manage the fee arrangement?
- Annual budget and cash flow preferences for the business: What are your internal business imperatives around budgeting and cash flow for legal spend?
The guide is of course just a suggested framework which we've created based on our own experience. Obviously it's just a starting point and the factors and possible fee arrangements can be expanded and changed depending on your own legal department's business needs and practical preferences.
The Overarching Importance of Value
No matter what fee arrangement you choose for any matter, in my view it's crucial to have the "value conversation" between in-house and external legal teams. I think this should happen at the very least at the beginning and end of every matter, and often along the way as well. The value conversation takes many forms and has different elements for different clients, but essentially it boils down to a discussion of questions such as:
- What does a successful result to this engagement look like to the client?
- What value does the client ascribe to that result? and
- Can the law firm deliver that result cost-effectively in a manner aligned with the client's view of value?
In my experience, if as in-house and external counsel we're able to have pricing discussions more frequently against the background of the value conversation, then we can collectively create a dialogue that will hopefully lead us over time to practical "win-win" pricing approaches that will work for us all.
Please share your feedback and thoughts on successful and less successful pricing approaches and fee arrangements you've used. Also look out for the last post in our series next month which will cover pricing automated legal services and "hybrid" legal services that blend legal technology products with human time and expertise.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.