If the price is right
Jill Nelson, Senior Director for Product Management at Intapp, explains why modern pricing problems require a modern pricing solution
September 6, 2019 RSS
Since the Great Recession, client’s faith in the billable hour has been shaken, causing many to look for alternative systems of dealing with their matters. Some clients may opt to create an in house legal team, whilst others may push for Alternative Fee Arrangement (AFA) based pricing, rather than the billable hour. This sharp reversal on a form of pricing that had been practised since the 60’s, has dramatically shifted the status quo: strengthening the value of in-house legal firms, whilst undermining the profitability of traditional law firms. So what is the problem with traditional pricing, and why is this having such a significant impact on the way we practise law?
The problem with the billable hour
The billable hour inevitably led to friction between firms and their clients, as the level of visibility clients had over the pricing process was at best opaque, and at worst, non-existent. Lawyers and pricing teams have traditionally had to rely on pulling together clusters and insights based on personal experience, to determine the pricing of a matter, which isn’t a good representation of accurate insights. Indeed, it is likely that two equally competent teams may quote very different prices for a matter, based on their own individual experiences. One may have had a negative experience with a particular type of matter, which will skew his estimation of the level of work required and the value of the work undertaken, whilst another lawyer may well have had a string of quick successes with this form of matter, and would charge less for the same work. The inconsistencies in pricing between firms are alarming to clients, as it brings into question the metrics with which pricing is established – leading to a souring of relations between firms and their clients.
Clients can easily feel that the price that they are being quoted may not be an accurate representation of the service they are receiving, and may worry that they may be overcharged or under-served (in comparison to other more established clients), as they have little visibility over the process leading up to the pricing quote; only the results thereof. This has led to the growing popularity of the in-house legal team, wherein firms on retainer are replaced with full time employees, working solely on one firm. Given the lack of transparency regarding pricing amongst legal firms, the rationale is obvious: whilst firms on retainer are – broadly speaking – independent of oversight from their clients, in-house teams are part of the structure of the firm itself, and the actions of the team are far more transparent and easily monitored.
As a result, many legal firms have moved to AFAs, where clients can choose from a range of fee schemes based on metrics such as case completion and task billing, or arrange entirely new contracts based on early completion bonuses, or ‘fee collars’. However, with so much internal legal expertise within in-house teams, companies have started to hold their outside legal firms more accountable, scrutinising the firm’s bills and work effort with an expert eye.
Opening a window of visibility
There are two issues at play here: the inaccuracies inherent in pricing, and the lack of client visibility throughout the process, both of which are problems which can be addressed by the legal-tech sector. New AI based pricing solutions are on the market which can construct pricing estimates based on the data collated by lawyers in previous matters, whilst still remaining impartial and unbiased. This can cut through internal bias, and human ‘perception’ of a matter, and can assess pricing based purely on the raw data available: how many hours were spent on a matter, what expenses were accrued, how long did the matter last for, etc. This removes the disparity between different human estimations, and establishes far more accurate pricing based on empirical evidence, whilst also streamlining the pricing analysis process, allowing firms to focus on their operations, and remove the lengthy process of calculating pricing based on past experience and deliberation.
Whilst humans may be influenced by a range of variables leading to wildly different prices, an AI will base the price on established metrics and the available data, returning the same quote for a matter. Consequently, pricing solutions give clients the confidence that their matter quote is based on empirical evidence which can boost the relationship between a legal firm and its clients, as they can trust in the legitimacy of the outcome, providing an element of transparency and accuracy that many legal firms were simply not able to provide previously. It allows for profit maximisation for legal firms using AFA arrangements, as firms can use the data from previous similar AFA’s in order to ascertain the likelihood of accomplishing the targets, and to ensure profitability. In addition, scoping and resourcing matters can ensure better margins for the firm. Both sides of the relationship can be content in the knowledge that neither one nor the other feels suspicious, maligned, or disadvantaged.
The times, they are a changin’
In the client-empowered era, legal firms have had to try harder to demonstrate their value and build trust among clients, while at the same time find ways to facilitate growth within the firm. Many have found that the transparency provided by modern pricing strategies enables them to price matters more accurately for the client while resourcing matters more accurately to ensure better margins. Most importantly, it is a step forward and a way to create a better more cohesive relationship between law firms and their clients by improving transparency, accountability, leading to shared success.
Article first published in New Law Journal