Legal Fee Structures. If you’re a client and have to hire a law firm, you’re probably in the midst of a difficult time. It could be that your business is going through a stressful merger or acquisition, that you’ve been sued or have cause to sue another party, that you’ve run afoul of government regulations or any number of other challenges.
Once you’ve hired a law firm to help guide you through this difficult time, you’re faced with an expensive invoice — which is obviously an experience that nobody enjoys, but it seems like modern clients have more to say about their fees than they did in the past. Let’s explore why law firms are experiencing more pushback on their legal fee structures and how they can reduce friction with fee-sensitive clients while still receiving fair compensation for their services.
Why clients have grown more sensitive legal fee structures
In large part, clients’ fee sensitivity has to do with the different rates of innovation between law firms and the legal departments of their clients.
Legal departments are subject to top-down pressure from their boards and must fight against the perception that they’re nothing more than a cost-sink, an unpleasant yet mandatory money pit. This pressure has always been present to one degree or another, but now there are innovative technologies and approaches for executing legal work that enable legal departments to act.
Consider the fact that 68% of law firms reported that they had lost business to legal departments in-sourcing more work. And according to a recent CLOC survey, 71% of legal departments reported that their highest priorities were to implement new legal technologies and automate their legal processes.
As a result, legal departments are able to conduct more work internally, either by making that work easier to do or by streamlining the more administrative duties that would otherwise take up their time. Thus, legal departments have more leverage when it comes to discussing their law firm panel’s legal fee structures.
Equally important and very much connected to this trend is the growth of the legal operations role within legal departments. It was only a decade or so ago that the idea of having a dedicated legal operations professional was a novel one, let alone an entire legal operations department. Now, nearly every organization of a certain size has a team of legal ops professionals whose sole focus is on ensuring that the legal department can work more efficiently, contribute to revenue and better assess the return on investment for outside vendors — a category that includes law firms.
While legal departments have been innovating, law firms have had little reason to do so. Instead, they’ve simply withstood the growing pressure from their clients to reduce costs and become more efficient. Or at least, that’s been the case until recent years. Now, there’s been a distinct acknowledgment amongst legal professionals that law firms need to put forward a better model that meets the realities of the current legal market.
What this means for law firms
Transparency and communication are key
The simplest way that law firms can help assuage fee-sensitive clients’ fears is to communicate and provide transparency. Clients need to know exactly what they’re getting for their money, and they need to be able to inform other stakeholders on their board or in the finance department exactly why their invoice was X dollars higher this month.
There are a number of easy ways for firms to do this — they can provide more descriptive invoices, clearly explain their revenue model to prospects, debrief their clients to break down exactly what went into their services, be proactive about discussing potential challenges and so on. The main thing to keep in mind is that clients don’t always understand the value they’re getting from their law firms. And even if they do, they’re also beholden to non-legal stakeholders that will have an even harder time understanding value.
Investigate alternative legal fee structures
The industry’s (very) slow but steady move away from the billable hour model is significant enough to merit its own post. But for our purposes, it suffices to say that billable hours do not align with client expectations and isn’t cost-effective for them — two key factors that are sure to cause friction with fee-sensitive clients.
Law firms that frequently find themselves wrapped up in a painful billing conversation with their clients (or even in lawsuits over unpaid fees) should evaluate alternative legal fee structures, like:
- Fixed fees
- Broken deal/success fees
- Capped hourly estimates
Segment to maximize value
Not every client has the same resources to spend, not every legal matter has the same requirements and not every legal service takes the same amount of effort. Why should they all be billed the same?
If you provide frequently productized legal services, such as contract reviews, those may be best suited for a fixed fee. Complex and variable legal services such as litigation, on the other hand, may be more suitable for the billable hour model or a hybrid model.
Apply the same logic to your clients. Is one business small, but growing fast? Discounted services may be appropriate, or you could offer them an appropriately sized retainer. For larger, established clients, it could be worthwhile to customize your services and billing models to their preferences, or to offer a discount if they commit to a certain retainer size.
Part of the reason why clients seem more fee sensitive today than they did in the past is because law firms largely operate in the same manner they have in years past. Immersed in the culture of their broader businesses, legal departments understand the kind of return to be expected from innovative initiatives. When their law firm panel charges higher and higher hourly rates without improving their service delivery, clients will naturally feel inclined to question the value they’re getting for their dollar.
Fortunately, there are many opportunities for law firms to realize efficiencies today, such as:
- Downsizing their real estate footprint: The demands of the COVID-19 pandemic showed us that remote work — even in the legal industry — is possible. During their annual Law Firms in Transition Survey, Altman Weil estimated firms would be able to save as much as 3.5% of their revenue on average after reevaluating their real estate needs.
- Adopting technology that makes a demonstrable impact: The legal industry has been traditionally wary of thoughtlessly implementing technology for technology’s sake, which is reasonable. Some solutions are expensive and time-consuming to learn how to use. But there are plenty of solutions out there that have data-backed, demonstrable improvements to law firm operations, such as contract management systems, digital payment platforms, legal customer relationship management solutions and more.
- Offering unbundled legal services: As stated previously, legal departments are bringing more legal work in-house. Rather than fight against this trend, law firms stand to gain by working with it. Collaborate with your clients to decide which legal tasks your firm is best suited to take on and which are best handled internally on the clients’ side; doing so will lead to higher client satisfaction and more cost-effective service.
- Outsource transactional tasks: The legal industry is still a highly specialized sector to work within, but not all tasks require a partner’s high level of expertise and expensive time. Tasks like eDiscovery, contract management, legal research and more are essential, time-consuming and require relatively less skill. Outsourcing tasks like these to alternative legal service providers is often the best way to provide more value for your client’s dollar.
Search for guidance when adjusting your legal fee structure
No lawyer needs to be made aware of the risks of making drastic changes. But those risks can be mitigated through research, data and expert guidance. For law firms looking to provide their clients with the maximum value for their fees, reach out to the team at Exigent. We’ve worked with many firms before to identify ways to improve cost-effectiveness for a variety of legal matters and have built up a depth of experience in delivering more value to clients.