Alternative Fees and Legal Services Value in Aus & NZ

In a comprehensive study by the Corporate Lawyers Association of New Zealand (CLANZ) and the Australian Lawyers Association (ACLA), the ACLA/CLANZ Legal Department Benchmarking Report 2010 delivers the results of the most extensive study of its kind ever conducted. My good friend and former CLANZ president Ron Pol, and his company Team Factors conducted the research with some of the largest corporate and government users of legal services in Australia and New Zealand, with an average legal spend of $5.5 million in New Zealand and $13.5 million in Australia.

Here are some of Ron's findings:

"Selecting good outside lawyers was not regarded as a pressing issue facing any legal department, but the need to reduce outside legal costs featured consistently as a top priority". 

"The actual extent of alternative fee arrangements is less than some reports suggest. Notwithstanding continued antipathy towards hourly billing and reports of a surge in alternative fee arrangements, the report confirmed hourly billing's continued dominance. On average, standard and discounted hourly rates still represent 85% of fee arrangements by value, in both New Zealand and Australia. Across the board, fixed fee arrangements represent around 13% of the balance. This means that, overall, the impact of most of the alternatives beyond fixed fees seems virtually negligible.

"It's hardly surprising that costs are amongst clients' top concerns", says Ron, "but it's not just the size of legal fees; the way that lawyers communicate costs – and the timely reporting of unexpected overruns – seems to be a big part of the issue." 

"The general counsel of some of Australasia's biggest organizations, with some of the largest teams of in-house lawyers and most sophisticated legal procurement systems, reported that when they asked law firms for fee estimates, the final cost was consistently on or below budget just 4% of the time".

I must say I don't find many of these results surprising. Over the last several years, I have consistently found legal buyers to be extremely dissatisfied with the way their law firms bill, primarily in the way that budgets are never met and that even fee caps have been exceeded by 30-40% in some cases! The research by Asian Counsel Magazine depicted in the figure below seems to verify this as it identifies the key reasons a client leaves a law firm:

The ACLA/CLANZ Legal Department Benchmarking Report 2010 also identifies some other interesting points in terms of the value that clients seek from law firms, which is shown in the table marked 73.1. The point about the ability to provide legal advice in a commercial context is one I come across often and I have heard many a client complain about 20 pages of legal briefing and analysis but little concrete advice in terms of corporate decision making, and of course, these lengthy reports cost money! Additionally, the issue related to make sure marketing is related to the client's business and not the firm is something I have discussed at length here. Overall, if you look closely at the table it is evident that many of these factors are related to firm culture and the ability of the firm to build a market driven firm based on knowledge (what we refer to as market and knowledge orientation). For instance, a few examples from the table above:

• Be proactive – pro activity is part of responsiveness and covers a wide range of issues. One cannot be pro active without relevant knowledge of what's happening in the legal market place and how that may apply to clients
• Differentiate – differentiation requires the interplay of many firm processes and systems but all these rely on the ability of the firm to develop a relevant and implementable strategy based on client insight, innovation, and strong leadership
• Invest in non chargeable time understanding my business – the traditional paradigm of law firm management based on billable hours and limited KPIs that don't reward other factors, such as developing and sharing new knowledge, is a key reason why lawyers are not incentivized to spend this time. There is a huge difference between making time and having time, its got to be made based on firm expectations!

It really is about time that the demands of clients related to the value they seek from legal service providers is more widely articulated and accepted within law firms.

 

 

 

 

 

 

Comments

[Ron Pol]

Yes, meeting budgets seems to be a big issue. When some of Australasia's largest organisational users of legal services seek matter budgets from law firms, general counsel report that the final bills are always on or under budget just 4% of the time and, overall, nearly a third (32%) reported that bills are on or under budget more oftebn than not (ie 60% or more of the time).

Little wonder some companies and government agencies are moving towards alternative fees.

In our experience, we have seen some tremendous successes with alternative fees; not so much because of the fee structure themselves, but because of the sometimes very simple structural and behavioural changes that, if well designed, can follow. This is what really changes the paradigm, and most exciting is when neither firm or client treats it like a zero-sum game.

It sounds trite, but there's an increasing body of evidence illustrating win-win situations, with the client enjoying significant and sustainable savings, and the right law firm actually increasing its profitability.