Way back in 2008 the Association of Corporate Counsel (ACC) launched the ACC Value Challenge. Its stated intent was to ‘reconnect the value and cost of legal services’. This seemed to both catch and further define the mood of increasing dissatisfaction in the hourly rate (which has been well documented elsewhere).
Looking back, in some respects the ACC were extremely wise when they launched the initiative – they chose not to define what ‘value’ meant in this context. But, while one definition would be too generic in nature, the lack of a definition has inadvertently created confusion both for corporate counsel and law firms alike. And, to this day, it has contributed to a lower take up of alternative fee arrangements (AFAs) than initially predicted.
Therefore, what should corporate counsel and law firms do now when seeking to ‘reconnect the value and cost of legal services’?
What makes a fee arrangement ‘alternative’?
The key first step is to ensure clients and law firms are speaking the same language.
The term itself, ‘alternative fee arrangements’, is a strange one. By its very definition, it says what it isn’t- an hourly rate. This has led to some law firms to view any work not billed by their standard rate as being ‘alternative’.
A term Positive Pricing (and other law firms) prefer is ‘appropriate fee arrangements’. Why this subtle shift in naming? Simple. Whatever the agreed fee arrangement is, it needs to clearly align with the economic interests of client and lawyer, so it:
- is structured to encourage completion of a clearly specified (and identifiable) client objective
- encourages and incentivizes the lawyer to identify ways to be more efficient
Therefore, it’s one which clearly reflects the appropriate value of the transaction. In sum, an appropriate fee arrangement.
A question of value
As a general rule, a client doesn’t want to buy a lawyer’s time. It’s the expertise that comes with that time which is important. Expertise which (hopefully) will help the client achieve their business objectives, however defined.
The first thing to acknowledge is that clients’ realize value from their respective law firms (and lawyers) in a number of different ways. It may range from the more tangible areas such as cost control and the total absolute cost of a matter, to the specific legal expertise being provided (and the associated knowledge transfer to the client). It can include the certainty of ‘outcome’, both financial and legal (indeed, for some clients, cost predictability and management of cash flow may be as important as the actual amount). It can also encompass the speed of resolution or completion of the matter (something which can be extremely important for example in litigation or M&A matters).
Using Alternative Fee Arrangements sensibly
If ‘value’ is therefore key, how can both law firm and client develop and implement appropriate fee arrangements that meet (or ideally, surpass) expectations?
A fundamental requirement is trust between both parties. Where trust exists between law firm and client, there is a fundamental shift in the relationship, encouraging greater partnering behaviour. Put bluntly, it means that both parties are pulling in the same direction and against a shared view of ‘success’ and value.
Before blindly embarking on an alternative fee arrangement, law firm and client should consider the following three key points as a minimum:
- How will the proposed commercial arrangement support the (client’s) business in achieving their goals?
- What are the elements of potential value which are most important to the client (and does the proposed commercial relationship support this)?
- How will both parties best measure and track how value is delivered? (This will help in both being able to clearly articulate the value delivered internally, and also be used as a basis for future, similar, arrangements.).
Successfully implementing an AFA requires having clearly understood and articulated expectations and having clear responsibilities. Even at the most basic level, recognizing that different fee approaches require different forms of management, both from a law firm and client perspective is a good start.
However, nothing can replace the dialogue between law firm and client. For lawyers, this means listening with empathy and responding appropriately. For clients, it means giving a clear and specific brief about what is important how it helps drive value, both at matter-specific and business level (as ultimately the question of value is the client’s to make.) For both, it means ‘speaking a common language’ based on trust, openness and honesty.
There and back again. It’s a question of value.
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