In 2017, it’s a buyer’s market when it comes to legal services, according to a report released Thursday by the Center for the Study of the Legal Profession at the Georgetown University Law Center and Thomson Reuters’ Peer Monitor.
The report examines the challenges the legal industry has faced in the 10 years since the start of the Great Recession, and how law firms have had to change the way they operate to accommodate their clients’ budgetary needs.
Perhaps the most significant challenge has been clients’ insistence on predictable and manageable bills, the report’s authors said.
“One of the most potentially significant, though rarely acknowledged, changes of the past decade has been the effective death of the traditional billable hour pricing model in most law firms,” the report said.
Clients are not only pressuring law firms to come up with alternative fee arrangements to replace the billable hour, but when they do agree to use billable hours, they’re insisting on budget caps, according to the 18-page report.
“From a law firm standpoint, a budget approach is in some ways worse than an [alternative fee arrangement], since it imposes a fixed price (in the form of a budget cap) but forces firms to ‘earn their way up’ to the fixed price through recorded billable hours,” the report said.
In other words, under an alternative fee arrangement, if firms performed the work more efficiently than expected, they would still get paid the agreed upon amount. If the model is to use the billable hour but cap the final fee, firms get paid less if they do the work efficiently, but they don’t get paid more if it takes longer than expected.
Only 10 to 20 percent of law firm revenues come in the form of traditional billable hours that are not discounted, estimated the report’s authors.
For lawyers, talking to clients about how to price a matter is an increasingly important part of maintaining client relationships, said Robert Bodian, managing partner of Mintz, Levin, Cohen, Ferris, Glovsky and Popeo.
“Ten or 20 years ago, you would get work and you would just send your bills,” Bodian said. “The hours are the hours. That doesn’t work for a lot of clients, because they don’t have control over the hours.”
Law firms are hiring people to help with pricing and efficiency, such as chief pricing officers or project managers, but those people won’t be able to do much unless the lawyers are willing to be flexible with billing, Bodian said.
The report pointed to several other major changes for law firms since the Great Recession—clients’ willingness to “unbundle” matters traditionally handled by a single firm, problems with the ratio of lawyers to equity partners and a growing divide between the top and bottom of the legal services market.
Clients are increasingly willing to dole out work to several law firms or types of service providers, rather than relying on one firm to handle all parts of a litigation or transaction. To reduce costs, clients will now give some work to a less expensive firm, some to a non-law firm vendor and keep some for in-house lawyers, which has “led to a steady erosion of the traditional law firm franchise,” the report said.
The traditional structure of a firm, where a large number of lower-paid associates supports a small number of higher-paid partners, has been eroding over the last 10 years as well, according to the report. Clients’ unwillingness to pay first- and second-year associates, a reduction in the number of associates and the growth of the nonequity partner tier has meant that there are not enough lower-paid lawyers to support the higher-paid lawyers at many law firms.
These challenges have helped widen the divide between the most and least profitable firms, the report said. So, how is a law firm leader to ensure that his or her firm is on the winning end of the spectrum?
“The firms that are more proactive in responding to their clients’ demands for different pricing models and work processes are the outperforming firms,” said James Jones, a lead author of the report and a former managing partner at Arnold & Porter, legal consultant and senior fellow at Georgetown’s Center for the Study of the Legal Profession.
What that requires, Jones added, is going to clients with options for various pricing models and redesigning how they manage matters before those clients ask for it.
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