In the first of a three-part series, we survey the expanded options for pricing legal services that have emerged over the last decade for clients in the market generally, and at Stikeman Elliott. The second post in the series will focus on how clients choose among different available pricing models in different circumstances.
In the wake of the 2008 crash, legal fees came under the microscope around the globe, and a new mindset towards pricing legal services emerged. A decade ago, the Association of Corporate Counsel launched the “ACC Value Challenge” to promote alternative fee arrangements and “value-based billing” divorced from hourly rates. Over the same period, the rise of legal technologies created new opportunities for automating services which don’t fit well in an hourly billing model.
With all these innovations and new opportunities, has pricing really changed in practice? Yes and no.
Market Surveys Show Increasing Use of AFAs, But Numbers Are Still Small
In its Value Challenge materials, the ACC identified 4 general categories of pricing arrangements: hours-based; fixed fees; contingency arrangements; and “piece of the deal”. Altman Weil reports that 64% of U.S.-based firms are using some form of AFA for some matters and estimates that up to 6-10% of overall firm revenues derive from some form of AFA. Figures reported by CounselLink are similar: AFAs were used in 9.9% of matters and accounted for 7.5% of billings in 2016.
In the Canadian market, the Canadian Lawyer's Corporate Counsel Survey for 2018 shows that AFAs were the predominant billing arrangement with companies’ primary counsel only 3% of the time. Mixed billable hour/AFA arrangements were prevalent in an additional 28% of such relationships and, among those counsel who used AFAs to any extent, almost 45% reported that they felt AFAs were better value than traditional arrangements, as opposed to less than 5% who felt that AFAs offered poorer value. Based on a smaller sample size at Stikeman Elliott, over the past 4 years, roughly 4% of our revenues flow from AFAs. In addition, our clients are increasingly asking for budgets at the outset of more traditional hourly rate mandates that would not technically qualify as AFAs.
Clearly there are some niches for some clients where AFAs have caught on, but the great majority of clients in the market, as at Stikeman Elliott, still seem more comfortable with hourly billing for most matters, despite the range of options we offer.
Most Commonly Used AFAs at Stikeman Elliott
We find our clients to be predominantly interested in the first two types of pricing arrangements identified by the ACC - hourly rate-based and fixed fees. The most commonly-used forms of each at SE are:
- Hourly rate-based AFA models:
- Hourly rates with a phase-by-phase budget
- Hourly rates with a “risk collar”
- Hourly rates with a success fee combined with a busted deal discount
- Fixed fee arrangements:
- Fixed fee for a selected phase or phases only
- Fixed fee for an entire matter
- Monthly retainer for specified services
More recently, additional pricing complexities have arisen with the introduction of automation opportunities into many of our legal services. At Stikeman Elliott, our services are very much “bespoke”, with human labour being predominant. However, we find increasingly that aspects of the overall transaction or service, for example a particular contract or common legal question, can be automated for the client, or a particular process can be significantly streamlined with legal technology. Use of technology and automation does require time, effort and adaptability to change on all sides to implement successfully. Despite the proliferation of “off the shelf” legal technologies, it is still very labour-intensive to introduce and customize the technology to the needs of the client and team, and to make the coding work with the legal nuances as part of the broader matter. There is no one-size-fits-all approach to pricing as different clients have different needs, pressures and goals. To date, a relatively small subset of our clients have been interested in integrating automated products and legal technology into their legal processes, but the numbers are growing. As a result, we are still learning and are interested in feedback from others’ experiences.
Client Feedback - Most Popular Tool: Phase-by-Phase Budgets and Budgeting Software
As we focus on value-based pricing and developing user-friendly AFAs, we’ve found that one of the most popular and effective tools for cost-containment for both client and firm, whatever the nature of the AFA, is the relatively simple phase-by-phase budget. This tool can be customized to any matter, used with both hourly rate and fixed fee models, and structured as a simple paper-based template, or automated with our budgeting software, depending on the client’s preference.
To create this budget, we break the matter down into high-level phases (typically there are about 7 to 12), scope with the client what must be done in each phase, and assign each phase a budget range. Depending on the level of data we and the client have from past matters, the range for each phase can be based on detailed steps and granular costs, or it can be a high-level estimate.
Once the budget for each phase is established, we are able to track and report on our time spent on each phase and our progress opposite the total budget. In addition to improving our interim cost reporting to the client, the budget tool allows both the client and our firm to collect better data to help price future matters – whether hourly rate-based or fixed fees.
Other relatively simple measures that respond to client feedback about improving the client experience with pricing are: calling first to explain that an invoice is coming, developing a more user-friendly invoice format, and providing better explanations of disbursements.
As our legal world changes it’s important to keep pace with our clients’ needs in all arenas, including the pricing options we offer. We continue to believe, along with the ACC, that value is paramount and that our fee structures should be “win win” for both clients and firms. Law firms and legal departments alike have worked hard over the past decade to be flexible, to define value and to collaborate to find fee arrangements that work on both sides. In our next post, we will offer some ideas on how to decide which fee arrangement will work best in which circumstances. We will also expand on the growing challenges of pricing technology and automating legal services.
Please share your experiences – your most successful arrangements, your biggest pain points – so we can all continue to learn and improve.
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