Alternative Fees in Asia: are law firms and clients catching on?

The revolution of alternative fee arrangements (AFAs) is here to stay – or so we are told. The never ending stream of media and blog articles that cite the legal profession as undergoing drastic change in terms of the hourly billing model is almost overwhelming and anyone reading these stories would likely believe that this revolution is in full swing. Whether this is the case is subject to question as identified in a recent blog post by my good friend and colleague Patrick McKenna, based in the US. He says:

"Client revolution indeed! Among all of this one sees a lot of smoke, but . . . where's the fire?"

"Regular readers of my blog may remember my rant (#396) back on June 30 of last year, entitled: CLO's Are Not Serious About Change.   In that post I reported on an interesting experience working on behalf of an AmLaw listed, "Go-To" regional firm of over 500 attorneys. I spent two weeks initiating contact with the General Counsel of more than 35 Fortune 500 Companies to explore their interest in investing one-hour to meet.  The invitation was to discuss how this particular law firm could provide exceptional client service and deliver a potential savings of between 25 to 40 percent, or more.   And that proposed savings was accompanied by specific details of guaranteed responsiveness, assured predictability, enhanced added-value, and references from some top New York based Fortune 50 existing clients. To my absolute chagrin, I confessed in my post that I completely struck out! No bunts, no hits, not even a sniff of interest. I subsequently heard back from a couple of GC's via Legal OnRamp that . . . "unfortunately, change comes slowly."

Larry Bodine (a US based legal marketing consultant) also provides links to a couple of studies that show relatively weak demand for AFA from clients:

• Study finds no groundswell for AFAs
• Study finds weak client demand for AFAs

In Asia I am not aware of any rigorous studies that have attempted to identify the degree of demand and usage for AFAs although research by the Institute of Knowledge Development based in Melbourne suggests that 40 percent of external legal spend is managed on an AFA basis (my good friend Ron Pol of Team Factors in NZ has just released a report on legal department spend and structure in Aus and NZ which I anxiously await). Whether Australia would be indicative of Asian markets such as Hong Kong, Singapore, Vietnam etc is hard to say. They are all in differing stages of development with varying competitive dynamics. I can only draw on some recent experience to shed light on the idea of whether AFAs are prevalent and indeed part of an overall revolution in law firm client relations. Having completed a number of client surveys for local and international firms in Asia my general view is that it is the client who is generally unaware of the alternatives and indeed somewhat comfortable with the hourly billing process. Often times they seem more concerned with flexibility in billing such as discounts to the hourly rate. Having brought up the concept of AFAs I am often surprised to hear from the client their overall lack of knowledge and awareness in this area. This is especially so for litigation related work where they tend to believe it is not possible to use arrangements such as fixed fees. This seems to support the views of Patrick McKenna who goes onto say:

'In summary, there is little incentive to change business practices unless it benefits you. For many GCs the positive / negative impacts are still too slight. They are in an accountability blind spot and few have someone going over their spending decisions with a critical eye. Most CEOs worry about their company winning the litigation, not whether the legal spend has risen by another "x" percent this year. It all makes one wonder: 'Who will put pressure on the GC to change?'

Apart from the client view, I have also spent a lot of time working with some of the more prominent law firms in Asia (many which are well known local firms). The better firms have bounced back very quickly from the GFC and indeed I know some which are having their best years in certain practice areas. The views of these firms is that they don't need to change given they are doing well and there is little pressure from the client side in terms of AFAs. In fact, I know firms which have turned away potentially large clients who have pricing expectations that don't match the workings of the law firm.

Perhaps Patrick McKenna sums it up best:

In the end things will change. Corporate behavior will slowly evolve; more CEOs and shareholders will take notice of legal spend as it grows and grows; GCs will adopt new practices simply because they don't want to stand out as someone who is not following what has become 'best' practice. Things will change, but on the client side, it may yet be a long, protracted process.

Comments

[Ron Pol]

The evidence of extensive research with corporates and government agencies across Australia and New Zealand that together spend more than NZ$2 Billion on lawyers supports this, as you will see when the ACLA/CLANZ Legal Department Benchmarking Report 2010 arrives. With reports of more use of AFAs, we wondered what 'more' really meant. (If 60% of GCs now report use of AFAs and it was only 20% earlier this is not necessarily a 'three fold increase in the use of AFAs' if it only represents a tiny fraction of their total legal spend).
We investigated the use of AFAs as a proportion of legal spend. In both NZ and Australia results were also remarkably similar. Essentially, although some organizations report significant, and sometimes very large, proportions already on AFAs, across the board the average is still around 85% with hourly rates (full and discounted). Most of the balance (around 13% in both countries) is with fixed fee arrangements. Again, although some report up to 40% of total legal spend under value billing arrangement, across the wider market that leaves a trifling 2% with other AFAs, such as value billing.

[Ron Pol]

Australian and New Zealand general counsel did however generally report intentions to increase their use of AFAs, but this has not yet translated into much beyond individual initiatives from the more innovative legal leaders, such as Telstra's Will Irving. To help provide independent assistance for general counsel and law firms thinking about ways to better connect fees and value, the report also explores the success rates in practice of a number of AFAs. Unsurprisingly, various fixed fee arrangements seem often the easiest effectively to implement in many cases.