Alternative fee arrangments: a way back to hourly rates?
The current situation in the legal services market has increased the pressure on lowering legal fees and exacerbated competition among lawyers. Today 'value for money' means 'more for less' and this often leads to a three-tier price cutting process: while negotiating the deal; at the internal censorship stage ("can I really bill this time?") followed by additional negotiations when clients receive invoices.
A major challenge for law firms is not how to prepare perfect specifications to invoices or being very tough in negotiations. This is important, but it is much more sensible to find out how to define services and products most relevant to current challenges - and do it in a way to minimise risks of endless discussions over bills. It is perhaps less challenging to identify such products and services, but much more difficult to implement the ideas, in particular when it requires structural changes within law firms.
In general, hourly rates are more and more often replaced with fixed fees, capped fees or other arrangements considered by clients as more transparent and - in particular - value-related.
Hopefully the discussion on fee arrangements will lead us in a direction of how legal services can be shaped in a way to add value to the clients' business. But perhaps the time has come to go one step further and to re-think the whole business concept of a commercial law firm.
Given current market conditions, the most common mistake law firms make is that instead of thinking how to re-define the way their business is structured, they focus on laying off a couple of associates and support personnel - with the aim of waiting until the situation improves.
I am afraid the situation will not improve. The smartest firms will be those who adapt first to the new market conditions and who turn difficulties into competitive advantages.
Clients are more and more interested in legal services priced in connection with the value created by lawyers. They will not be eager to come back to hourly rates just because the overall market situation has improved.
In addition, in the UK new regulations concerning the ownership of law firms are in force as of May 2010. This means that it will be possible for non-lawyers to co-own UK law firms. This may lead to more drastic changes in the market, also when it comes to pricing models, than anyone could imagine (inspiration from other sectors, requirements of new investors, etc). And if this works well in the UK, then it is just a matter of time until other EU countries consider similar regulations.
Mariusz Kowalski
Regional chair
PM Forum Poland
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