The commercial relationship between lawyers and clients is fundamental to the long-term strength of the profession, yet billing and fees is the least subscribed category in the rankings. This suggests that most firms are still clinging to the status quo and have yet to get a grip on such a vital area.
“In the last ten years there has been a huge shift in the way in which professions are regarded in society,” says Andrew Hedley, a legal strategy consultant. “The professional was the master and the client was the servant, but that attitude has reversed. Clients do not have the same level of respect for the professions that they used to have and are very much the master in the relationship. Psychologically, that is quite hard for a lot of law firms to get their head round.”
Billing for work on the basis of time has long been traditional in the professions. It has been seen as providing a fair return on the effort expended. But clients see it as a blank cheque in which they bear all the risk and pay the cost of the firm’s inefficient working practices in an increasingly computerised world.
“There is a need to reduce the role of the billable hour as the organising principle of a law firm,” says Huseyin Leblebici of the University of Illinois, as quoted in Managing the Modern Law Firm: New Challenges, New Perspectives. He expects that over the next 25 years, clients and law firms will mature their relationships to a point of far greater alignment. Happily, some of the rankings’ entrants were able to display that alignment in their submissions (click here for rankings).
As a start-up organisation for the credit derivatives marketplace, Markit Group could not afford to pay up front for the time consuming task of extracting and cross-checking critical data for its Reference Entity Database. The stand-out entry, Allen & Overy, offered to do the work for a heavily reduced hourly fee, plus a fixed fee every time the verified data was used. The firm is taking on an element of risk but if the service to which it is contributing is successful, it will be rewarded by a stable and profitable cash flow that reflects the value it has created.
Norton Rose is highly commended for its hard work in creating a market for third party funding of major litigation, which is already established in Australia. Its US$174m claim was launched on behalf of insolvent company Stone & Rolls against former auditors Moore Stephens. The firm worked with IM Litigation Funding, one of the UK’s first specialist litigation funding companies, to transform a funding structure that was designed for smaller claims.
This improves access to justice for organisations with substantial claims which cannot afford litigation or its inherent risks, even though they have a strong case. “We are dedicated to bringing litigation funding into the mainstream in the UK,” says the firm. “For us, this initial success is just the beginning.”
Bond Pearce finds that clients often bemoan the “tyranny” of the hourly rate, and is commended for developing two products that use collective conditional fee agreements, backed by after-the-event insurance cover for disbursements and opponents’ costs. This helps clients recover more of the money owed to them, while removing the risk and cost of pursuing litigation.
Mr Hedley points out that – as research consistently shows – cost certainty is one of the high importance criteria that clients apply when they are looking to appoint lawyers. He says the traditional hourly rates model does not relate to the value provided to the client.
“It offers very little reward for an insight, which might only take five minutes and adds enormous value,” he says. “Clients are buying years of experience and expertise and want to pay for the value that brings to them.”
This will often be a lump sum for particular types of work – a strategy increasingly used in other professions. This approach requires law firms to be much more efficient and to make better use of technology. They must know the cost and value of standard legal processes and stop “re-inventing the wheel” on each assignment.
The rest of the commended firms stayed with the traditional time model, but improved the way they handle the process. Nick-Carter Pegg, head of professional services practice at BDO Stoy Hayward, finds that, compared with other professions, many law firms still have poor practices over fees and billing.
“A few of the ‘horrors’ that BDO regularly comes across are not agreeing fees in advance, not sending invoices promptly when the work is done and not keeping clients informed of time and cost as it is incurred,” he says. “Poor practices increase the amount of bills that are disputed and take longer to get paid.”
The commended firms are all giving their clients certainty and transparency. Their new systems aim to break down the assignment into manageable parts, against which budgets can be set and agreed with the client. They then report their actual time and costs against those agreed figures.
DLA Piper finds that its system helps it to factor in the budgetary experience of previous cases, refining the model each time it is used. The key advantage for Pinsent Masons’ clients, meanwhile, is that the system ensures that the fee quote is based on proper consideration of the engagement’s scope and client preference for how the work is done and by whom.
Norton Rose’s system is geared towards giving in-house counsel realistic legal costings for mergers and acquisitions. “Through early detailed discussion about the mechanics of the deal, we are able to gain an early insight into the commercial priorities of the transaction,” says the firm. “This plays an important part in tackling in-house counsel’s concerns that their external lawyers sometimes do not have sufficient commercial awareness.”
In the past, the legal profession has been notorious for its high and inefficient billing. The low response to this category shows that most firms are still reluctant to address the value issue and to start thinking outside the box of the hourly rate.
“It has been happening outside the professions for years, but it is a new and different way of working,” says Mr Hedley. “Clients want to know what they are paying for and want to pay no more than the value it adds to their business.”
