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The State of Legal Pricing 2013 - by Toby Brown

The State of Legal Pricing 2013 - by Toby Brown

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Published by Ryan McClead
An analysis of the current state of legal pricing.
An analysis of the current state of legal pricing.

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Categories:Types, Business/Law
Published by: Ryan McClead on Jul 10, 2013
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05/16/2014

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THE STATE OF LEGAL PRICING 2013
Toby Brown
Director of Strategic Pricing & AnalyticsAkin Gump Strauss Hauer & Feld LLP
1
 
Partners, Executives, CFOs, CIOs, CPOs, Marketers, and Legal Pricing Aficionados of all types, titles, and roles, I have come to report that the current state of legal pricing isabsolutely chaotic.There are three methods of dealing with a chaotic situation. First, the completely rationalapproach is to dig a hole, climb inside, and wait for the noise overhead to subside before comingout. Personally, I fight the urge to do that on a regular basis. The second option is to lower your shoulder and plow into the fray, driving hard and hoping beyond hope that the chaos has another side upon which you might one day emerge. This is the approach most of us are now valiantlyattempting. And finally, you can stop pushing and seek a higher vantage point from where youcan watch the chaos unfolding below. From there you can study the movement of the mob andlook for patterns, repetitions, possibilities, and opportunities.This State of Legal Pricing is my first attempt to describe our current situation from thathigher vantage point. From this modest beginning, and with the help of my colleagues and thecommunity at large, I hope we can begin to calm the chaos and create a rational market for legalservices.
The Current Legal Market
The market has fortunately grown tired of the Alternative Fee Arrangement (AFA) buzz- phrase-term and has begun to more properly focus its attention on the broader function of  pricing. Pricing as a profession has been around for some time now and generally refers to thetask of determining best prices for products and services in order to maximize profits. It should be noted, especially for those in the legal space, that profit maximization is not focused on asingle sale. Instead it is measured at the firm, client, or product offering level. So for thisdiscussion about the legal market, we will presume that the legal pricing function serves at that broader level, where prices attract customers and support the business.Every market craves rational pricing. That is to say pricing where the buyer has someunderstanding of the value associated with their needs or the goods they are purchasing, and theseller has an expected revenue for each type of good or service. Unfortunately, the extreme rangeof services provided by law firms and the dynamic nature of the legal market itself have workedagainst the establishment of rational pricing for legal services at a product level.The dynamism in the legal market comes about for several reasons. First, in myexperience, there are not a lot of truly comparative legal service offerings from firm to firm, or 
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A special thank you to Ryan McClead (http://www.linkedin.com/in/rmcclead) for his input and editorial guidance.
 
The State of Legal Pricing 2013 – by Toby Brown
- 2 -even from matter to matter within firms. Litigation in a given category has a broad range of service types and pricing levels. From the highly complex to the mundane, prices vary to asignificant degree. While we may eventually see fee-level pricing appear at the more commoditylevel for certain kinds of offerings, even there, we may never see a transparent market pricingmechanism.Secondly, we don’t sell widgets. While there is a push for task coding of time entries asan attempt to establish pricing data on a per task level, a client does not buy one deposition, twofilings, and a side of legal research. They buy resolutions to disputes. Even if we were to offer afee per task pricing option, clients rarely if ever make purchasing decisions at the task level.Suppose, for example, we set a standard price of $25,000 per deposition. Then in thecourse of a matter, we determined that a CEO or CFO needed to be deposed. Such a depositionwould very likely require much greater resources and attention than the deposition of a mid-levelexecutive. Should the firm honor their “standard deposition” rate for the deposition of a CEOand perform a lot of extra work for free? Should the firm differentiate low, medium, and highlevel deposition rates? We are now descending a slippery slope hoping for a rational stopping point.Third, even if universal task codes were adopted across the industry, and were usedeffectively, the per task market price would still not be achieved without establishing much moredetailed market information. As a market we haven’t even determined standard case types at this point. How much resource will we expend to agree upon task-level pricing for one sub-type? Inthe process, we may commit a significant amount of industry resource to develop a standardnumber that ultimately has no meaning within the specific confines of any specific case.A rational market does not ascertain useless pricing data. It has no patience for that. Sounless clients start buying depositions rather than resolutions, there will never be an incentive for the market to determine a price for depositions. Even if the market could determine such a price,it would only be for a certain level and type and would not be universally applicable. I just don’tsee the market needing that level of detail in product pricing especially when it struggles to findreasonable pricing mechanisms for much higher product levels (e.g. - the matter level).The most likely outcome of any overt attempt to create something like a legal pricingmarket is that rational pricing behaviors will only appear within tiny pockets of the market. Tosome degree, we can already see this beginning to happen at the far end of the commodityspectrum (e.g. patent prosecution). It is reasonable to expect that this commodity pricing will“evolve up” within certain market segments over time, but I question how far up it will or cango.Given this challenging market environment, we now turn to the behavior of the market participants driving such chaos.
Client-Side Pricing Chaos
In-house legal departments are now facing the same cost savings pressures as other corporate departments. In the past “legal” was able to largely avoid this conversation withleadership. They would dodge the question by insisting that they could not predict the number of 
 
The State of Legal Pricing 2013 – by Toby Brown
- 3 -lawsuits or deals they would have and therefore could not provide an estimate of legal fees. After all, without this base-line budget, how could they possibly reduce it? Consequently, outside firmswere long spared the indignity of managing costs, and the cognitive strain of lowering rates.During the economic downturn of 2008, when leadership broached the subject, they nolonger accepted the standard answer. One CEO commented that “the legal department was thelast bastion of cost savings” for the company. The issue was not the amount of legal work, butinstead the cost of it. Now the General Counsel (GC) has to toe the same line as every other department head; minimize the costs and increase the productivity.
Discounts 
The first and most obvious line of attack for in-house legal departments to reduce legalspend was to request discounts. In recent years, many have significantly increased pressure ontheir outside firms for larger and larger discounts. As one lawyer commented in 2010, “15 is thenew 10” as in a 15% discount off of standard rates. (I have heard that some GCs even attendconferences and write the level of discount they are getting on their name tags for all to see; aspontaneous market level reaction to the lack of clear pricing across the sector.) Another type of discount is the rate freeze. As firms make their annual move to raise rates, many GCs are askingfor, or in some cases demanding, they stay the same. Discounts and freezes are an easy andquantifiable way for GCs to demonstrate the appearance of savings to corporate management.
Distrust 
Another market level reaction (in addition to the
Conference Name Tag Exchange
) is ageneral and growing distrust of outside firms’ billing practices. As budgetary pressures mounted,clients began focusing on very specific aspects of legal pricing that they deemed “abusive.” Oneeasy target was billings from first-year associates. A number of clients viewed this as
training 
;something for which they believed they should not have to pay.. In many cases, the backlashagainst paying for first-year hours may stem from the public awareness of young lawyers’salaries thanks to the lock-step increases across the industry. At $160,000, first-year associatesoften make higher salaries straight out of school than many senior in-house attorneys, plus theyget additional bonuses for billing lots and lots of hours, which only adds insult to injury.Unsurprisingly, first-year associates have become a lightning rod for client anger and distrust.
AFAs and RFPs, PDQ 
Some clients have continued experimenting with Alternative Fee Arrangements (AFAs)and have expanded their use of Requests for Proposals (RFPs) in securing legal work. Here theyoften ask for fixed fee proposals in order to compare pricing between competing firms. Thiseffort has led to market drops at the fee level for certain types of legal work, such as patentlitigation, where fixed fees, or fixed fees per phase - and in some cases fee caps (hourly billingwith a ‘not to exceed’ amount) - have been more widely adopted. However, since in-house legaldepartments have never before faced the challenge of defining the scope of a matter, many RFPslack a useful scope. Consequently, too many RFPs are vaguely worded or provide outdatedmetrics with an eye towards getting competitive bids from various firms. Many firms struggle togive coherent responses to these RFP questions and too often this results in completely

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