MANAGING CLIENT EXPECTATIONS: Strategic Fees and Billing Arrangements LOWEL MORGAN
1 The Jamaican Bar Association Annual Week-end Conference Hilton Rose Hall Resort & Spa, Montego Bay, St. James 18-20 November 2016
Managing Client Expectations: Strategic Fees and Billing Arrangements Presented by Lowel G. Morgan Managing Partner | Nunes, Scholefield, DeLeon & Co-Partners
INTRODUCTION One of the trending topics within the Caribbean legal fraternity for the past 3-5 years is ‘increased competition’ which has been to a great extent fuelled by the sheer number of law graduates coming into the profession. There has been from the year 2000 to 2016 a more than 100% increase in the number of attorneys with practicing certificates and the numbers are ballooning exponentially from year to year. This increased competition is made more acute by the global economic realities of our post-recession, technological age which has enhanced client discernment and heralded a downward pressure on fees. The challenge that many law firms in Jamaica and the Caribbean are facing is how to effectively price legal services in a way that is profitable and sustainable for the firm while simultaneously satisfying the client’s appetite and expectation for lower, more competitive fees. I have argued recently in a paper on ‘Strategic Planning in Law Firms’ that this increased competition has created a need for lawyers to pay greater attention to business strategy. The fact is that it is no longer acceptable or sustainable to think of the practice of law as a profession where you show up to work and find a solution to your client’s legal problems. The practice of law is a business and partners cannot afford to just be just legal experts— they also need to be active business managers.
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Financial performance, of course, is a key consideration for any business manager and particularly law firms looking to make and sustain profit margins. An effective strategy on financial performance must take into account the issue of pricing in the context of increased competition and its impact on the firm’s bottom line. Effective business managers must actively manage not only staff but also client expectations to lock in and keep clients. Client loyalty has become erratic and unstable and if clients’ expectations are not managed effectively, firms and practitioners will lose business which will have a direct impact on financial performance. Pricing is essentially the process of determining what a firm will receive for its services. This process is complicated by the need to consider a host of factors such as the internal costs to the firm in delivering its legal services and nebulous concepts such as brand and reputation. It is suggested however, that the central focus for law firms in pricing their products should be to align client needs to firm objectives through innovation and a willingness to embrace change. Innovation does not necessarily mean radical sweeping changes to the way we do business—it can simply mean making incremental adjustments or improvements to not only the types of products or services we offer but the way that it is delivered. We employ strategic pricing methods to aid in managing client expectations as prudent business managers to ensure continued success and even survival. Reflecting on my own experiences as Managing Partner of Nunes, Scholefield, DeLeon and Co. for the past 6 years and through consultation with a number of my esteemed colleagues on the topic, I have decided to zone in on the following areas or concepts which I consider crucial to a contemporary discussion on client expectations and strategic law firm pricing:
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1) Value and Packaging 2) Communication
VALUE AND PACKAGING Though the billable hour is still the traditional and most utilised method of billing it is a constant source of disquiet for clients who complain about high rates and fees. It has been noted that time billing “rewards inefficiency and dilatory practices” and that it “focuses on the billable hour and not on the production of value to the client” but nevertheless it remains the predominant method of pricing legal services.1 Innovation and management of client expectations in this regard must commence with the Firm’s willingness not necessarily to discard the billable hour altogether but to (1) devise objective and acceptable ways of selecting rates for a particular matter or fee earner; and (2) consider Alternative Fee Arrangements (AFA’s) when appropriate to do so.
The Billable Hour The problem of the billable hour in the context of increasing client discernment has been summarised by Herb Thomas2:
“I suspect much of the frustration with the billable hour would ease if clients thought firms had managed to get rates right. As it is, clients think rates are high and want a better deal, whether through straight discounting or alternative fee arrangements, and law firms try hard to hold the line on rates in an effort to maintain realization… Clear pricing is integral to great client service. You aren’t delivering superior client service if your clients don’t understand your basic fees. Law firm pricing generally falls well short of the mark. Firms have been persistently internal facing when setting hourly rates. Clients often have little basis for understanding why lawyers are billed out at their assigned rates (beyond a rough notion of seniority), and invoices can be
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Review of Billing practices: The Way Forward
4 tough to parse as a result. Put another way, if an hourly rate is understood as a proxy for value, than any subjectivity in pricing is an obstacle to transparency.�
One of the ways which Firms can strategize on pricing and preserve the integrity of the billable hour is focus less on factors such as internal costs and seniority and more on experience/specialization and the nature of a particular matter. What Thomas suggests is that law firms utilize an experience-based approach in setting hourly rates which may provide to clients a more cogent and justifiable basis for setting rates. This may very well be necessary innovation for the future as the challenge for many law firms in pricing often times is to demonstrate value “not collectively across seniority bands, but lawyer by lawyer.� Besides the experienced-based approached, pricing can be influenced by the nature of the subject matter. This is an approach that my firm frequently employs particularly in relation to urgent or unusually complex matters. For example, injunction cases often require instructions to be taken and executed in pressurized circumstances within a narrow window of time. Current desk matters must be cast aside immediately to focus on getting the injunction application before a judge as soon as possible. Clients can readily appreciate the impossible turnaround time and the demanding nature of the legal work associated with these types of matters and are generally willing to pay higher rates without complaint. On the converse, firms should be willing to lower rates for routine, mechanical work as a means of achieving value for money from the perspective of the client especially if the lowered fees can lead to an increased volume of work given to the firm.
The important thing to note is that is that the billable hour still has a useful role to play in pricing strategy but other factors must be considered in determining the billing rate so that clients will feel comfortable with the fees that they are charged. There is ample scope to
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exploit a fee earner’s unique experience, learning, and success rate as objective and transparent grounds for setting higher rates which will be easier to digest for clients who ultimately write the cheques. Prices ought to be commensurate with “brand-named” attorneys in a way that reinforces their reputation in the field and boots profit margins for the firm. Additionally, all matters are not created equal and rates should be adjusted to reflect the nature and complexity of certain legal work where appropriate to do so. The whole point in managing client expectations is to keep the client happy or at least satisfied enough that he stays put. A client will feel disgruntled if he feels that he is being charged exorbitant fees without any real basis or justification. Fees and rates must be closely aligned to the client’s expectation of realizing value.
Alternative Fee Arrangements AFA’s include:
Fixed Fees
Capped Fees
Monthly Retainer
Blended Hourly Rates
Contingency Fees
Discounts (Value/Negotiated/Discretionary)
Percentage of Project
Value Billing
Hybrid Structures
AFAs with clients outside of the billable hour are nothing new. Many firms already apply “fixed fees” to certain types of matters where the nature of the work is non-litigious, routine and fairly predictable (Registration of Title, Modification of Restrictive Covenants etc.).
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Innovation is likely to come from an increased resort to the use of AFAs in a diverse array of legal matters and the degree of customization employed to meet client needs. I share with you some pertinent thoughts of one of my colleagues Ms. Georgia-Henlin-Gibson who used to be a partner at my firm in Jamaica but now runs her own successful practice in litigation and other areas of the law: Lawyers need to stop thinking of themselves as just professionals and more as commodities. Innovation in pricing is all about how your structure the deal for the client. It’s about packaging and presentation similar to selling products in a supermarket or clothing store. Lawyers thus have to be flexible and creative in order present attractive deals for clients which do not hurt the bottom line of the firm.
These sentiments are perfectly suited to frame a discussion on innovation and AFA’s. Law Firms must embrace the fact that the traditional model of pricing is often times not aligned to client expectations in retail and other service industries. Clients frequently ponder: “if bankers, accountants, doctors, land surveyors can name a price why can’t lawyers?” AFA’s are meant to provide dynamic options which are fair to both the firm and the client. The simple fact is that clients want a pricing strategy that allows for risk sharing and predictability and these are the two critical factors which drive the push for AFAs. Time does not permit to discuss all the AFAs in detail but one particularly intriguing AFA which clients are now requesting routinely is “capped fees” even in litigation. Clients reasonably expect and want to know what a particular legal service will cost them in the long-run. They need to budget and organize their own financial affairs.
With capped fees, the firm and the client agree from the outset that a particular service will not cost more than X figure. The problem is that if firms are not good at estimating what it will take to produce a particular outcome they may be billing legal work at an undervalue
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which will drain the firm’s resources and reduce profits. Capped fees can only be employed as successful AFAs if firms are able to accurately estimate beforehand the costs of a particular legal project. That project must be subsequently managed effectively to ensure that time and resources are not disproportionately spent on seeing the legal project to a satisfactory conclusion for the client. Innovation for the law firm therefore requires that partners and fee-earners are trained in areas of business and project management which are traditionally not a part of the curriculum at the law school. Stu Gooderham3 provides an interesting hypothetical which I submit could be a glimpse into the future of law firms and project management or as he terms it, the “enterprise planning approach”: “Consider this scenario: A client asks for a quote for a new employment-related matter. The partner goes into the ERP system and selects ‘new matter quotation’. Within the quotation form, the partner creates a ‘work breakdown structure’ which enables him to subdivide the matter down into a number of phases and tasks, such as planning, discovery, preparation for trial, and such. For each task, the partner identifies the individuals with the right skill set (which is available in the system) and the period of time the task is likely to take. Then, for each task, the partner defines the estimate of various costs and revenue detailing the matter category along with worker record. The sale and cost price of the worker automatically displays. Instantly, the partner can ascertain the profitability of the matter. If the client signs off, with a click of the mouse, the system automatically converts the matter quotation into an estimate held on the matter. The estimate may then be converted into a budget. Once the matter commences, again with a single click, the partner can generate a report for client perusal on ‘actual’ versus ‘budget’, tracking the estimate for each task in real-time – for example, communication, research, trial preparation, etc. This sophisticated approach to pricing will be hard to fault by clients. In addition to ensuring matter profitability, clients, too, will be assured that the firm is offering realistic pricing, and know exactly where the firm’s value-add is.”
One should appreciate that capped fees may potentially generate more profits to the firm if the proposed figure is set high enough to realize sizeable profits but low enough lock-in and
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attract new clients. The firm must then manage the project as efficiently as it can without compromising the ability to achieve the desired legal result. When presenting options to the client on AFA’s the key term to remember is flexibility. The deal struck must benefit not only the client but the firm as well and it must be suitable for the nature of the specific legal problem. The firm in its quest to be effective managers of client expectations should embrace hybridity and customization in its pricing strategy. A ‘capped fees’ arrangement, for instance, may allow for a ‘success fee’ add-on which represents the value of the legal result to the client. If the client loses he is financially protected by the cap which he has negotiated and budgeted for and if the client wins the firm has an opportunity to realize greater profits. Firm-client relationships blossom when lawyers feel that their hard work is respected though adequate pricing and compensation and clients feel that they have gotten real value for their money. When real value is achieved, expectations are satisfied.
COMMUNICATION With the traditional model, law firms quote their price to clients who must either take it or leave it. Firms may also sanction discounts or reduced billing rates typically to appease loyal, influential clients or obtain volume work. With increased competition and technology clients are more aware and fickle than ever before. Pricing conversations are necessary in order to counteract the downward pressure on fees. It gives the firm an opportunity to understand precisely what the client expects and to demonstrate value and transparency to the client in relation to those expectations. Additionally, the firm has an opportunity from the outset to not only manage client expectations but to shape and lead them. My partner and Head of Conveyancing, Alexander Cools-Lartigue, shared some thoughts on communication and pricing:
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“Clients have become terribly price sensitive and you must treat each case as it comes. You must be able to read a client and know if he is trying to play you against another attorney or just shopping around. But generally, it’s all about flexibility and making the client feel comfortable. In conveyancing, our fees are based on a scale but when I am dealing with a client for example I set up a list of all the incidental costs and procedures and then quote a percentage range for fees so that the client knows I am flexible. Sometimes, when I am dealing with a vendor it’s necessary to work out a figure for firm profits and costs and then guarantee to the client that regardless of what has to been done on the project you will get no less than x figure with this applicable percentage. You have to make the client feel comfortable. Pricing is both a science and an art and you cannot underestimate the power of soft skills and personality.”
Effective and innovative pricing strategy must begin with a recognition that clients are generally satisfied and willing payers when value has been demonstrably communicated and achieved. Value is subjective and should be viewed from the perspective of the client and his specific needs. Alan Hodgart and John Cussons write:4 “To understand what “value” means to a client, a lawyer must understand what the client is buying. Rarely are clients buying a legal opinion; the reality is they are usually seeking a solution to a business problem. Clients seek value in both the calibre of the services they receive and in the substantive nature of the representation. In terms of service, research indicates that, among other things, clients value the following: • A commercial understanding of their legal requirements; • The firm‘s depth and breadth of expertise of experience; • The firm’s ability to innovate and add value; • The personal chemistry and close working relationships that can exist between them and the firm’s attorneys; • The firm’s responsiveness; and • Price In terms of the product delivered, clients relate the price they pay to the importance of the issue to them…From a practical standpoint, the price for legal work should be set based on the client point of view – that is, the fee is a cost that should relate to the received value – at a level that falls within the firm’s profitability parameters. There is no “silver bullet” when it comes to pricing.”
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Having understood what the client values it is up to the firm to structure its presentation on price to lock in the client. A unique and mutually attractive value proposition must be identified with each client along with a range of options to choose from. Consumers are infatuated with choice: “this colour”, “that size” and “this price”. Remember that clients do not care what it costs you to deliver legal services. They do not care about your overheads or partner compensation schemes. Those are internal issues which are relevant to the big picture of firm profits but they have a very limited role to play in pricing conversations and managing client expectations. With clear and effective communication prices do not have to be compromised in the face of steep competition in the market. The objective is to demonstrate value to the client and demystify and re-contextualise the factors that influence what clients perceive to be excessively high fees. Client expectations should be ascertained and redefined so that applicable fees are viewed as reasonable and fair or a real bargain in retail parlance. Through effective and innovative communication, firms will also be better informed as to when to take hard-line positions with clients looking for cheap prices without consideration of true value. Understanding the business model of your client and their true financial position can shield the firm from being pressured to discount prices or waive fees. Sometimes effective pricing and communication must signal to the client that this is a top brand with an unrivalled history which will cost top dollar. It is all about flexibility and being attuned to the needs of the client and the firm. Sometimes clients’ expectations are unreasonable and uninformed to begin with and the goal of the firm is to lead (not just manage) the client’s expectations through effective communication.
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Additionally, effective communication can inform the underutilized innovative pricing strategy of “no charge� which may yield substantial profits in the long run. Sometimes big, fickle clients tacitly require you to audition for their work and prove your pedigree. The firm may wish to consider doing a particular legal project for free knowing that it can achieve the desired result and with the knowledge that there is a likelihood of substantial billable work to come in the near future. The client should be trained to expect high quality representation and the attendant costs for such representation. Conclusion: Innovative pricing does not involve any grand strategy. It does involve a willingness however to embrace change be flexible, take risks, and experiment. Sometimes, the traditional hourlyrate billing is the most appropriate pricing which the client is more than willing to accept. Other times, viable alternatives must be presented and agreed upon. More importantly, pricing is directly related to the concept of value which can no longer be viewed from the perspective of the firm. The client is king and the client’s perception is therefore the point of reference. Effective communication is needed to demonstrate value and understand client needs and behaviour in order to make a successful pitch.