ILTACON 2022: How Sophisticated Sellers of Legal Services are Normalizing Alternative Pricing Models
A highlight of Day One of ILTACON included the Becoming a Sophisticated Seller of Legal Services – Normalizing Alternative Pricing Models panel with Bill Josten, senior manager, Enterprise Content – Legal, Thomson Reuters Institute. He was joined by Kofi Mundy-Castel, solution specialist & product owner, Fulcrum GT; Sharon Scenna, senior solutions management director, Intapp; and Bernardo van der Laat, managing director, PredictaBill.
Panelists discussed market trends shaping the legal pricing landscape and shared guidance on assessing and selecting the best provider and pricing model. The interactive session including audience polls and feedback.
Legal Current had the opportunity to talk with Josten after the panel, and below is a recap of the conversation.
Legal Current: Let’s start with what differentiates a sophisticated seller from an ordinary seller. What are the traits of sophisticated sellers?
Josten: There’s truly a lot that sets them apart, but perhaps the biggest key is knowing who you’re selling to and the market you’re selling into. That means knowing not just who the client prospects are, but really getting to know how they operate, how their business functions, what their long-term goals are, and what their board cares about. All of these things factor into what they value, and ultimately, the key to becoming a sophisticated seller is learning how to sell on value rather than price.
That’s where the second factor of the market comes in. We’re entering a period in the legal market that is expected to be highly competitive. As demand softens, law firms are going to find themselves returning to the status quo ante of pre-pandemic times when what was new business to one firm was business that another firm had lost – a mature, essentially zero-sum market. In such an environment, the ability to stand out among competitor firms is vital. That’s hard to do if a firm is competing on price, because someone can come along and simply undercut the rates. But a firm that is selling on its ability to understand and deliver against what the client truly values is in a much better competitive position and demonstrates a higher level of sophistication.
LC: What is driving law firms to become more sophisticated in how they serve clients?
Josten: There are a lot of factors driving a desire to become more sophisticated. First, clients appreciate a more nuanced, sophisticated approach because it shows an affinity for innovative thinking on the part of the law firm – it’s not just business as usual based on billable hours. Second, the market is getting more competitive, so firms are looking for a way to stand out. Third, with a higher level of sophistication to client service often comes a more sophisticated approach to pricing and matter management, both of which can be major contributors to firms finding additional profitability at a time when clients are increasingly concerned about budgets and outside counsel spend. And finally, though this list is far from exclusive, it can provide firms with a platform to more effectively leverage the technology stack they’ve spent several years building, improving efficiency and creating better workstreams to alleviate the burden on lawyers while increasing satisfaction on the part of clients; so it can be a win-win.
LC: Describe the market trends shaping the legal pricing landscape.
Josten: It’s no secret that the overall economy is in a state of pretty tremendous upheaval. Law firms have been relatively untouched to this point, but many of their clients have either felt the impacts already or are preparing to.
Clients have been watching budgets closely for many years now, but that is likely to increase dramatically. As a result, law firm rates and invoices will be scrutinized. To this point, law firm rate increases have grown by pretty healthy strides, but there’s no guarantee that will continue, particularly as clients become more concerned about their own bottom lines.
We’re hearing a lot about the need for predictable pricing. During the Great Financial Crisis, we heard a lot about alternative fee arrangements (AFAs) and saw them jump up to almost 20% of law firm revenue. But then they plateaued. Now, we’re hearing renewed calls for higher use of AFAs, so that percentage may finally start to increase.
Really, for clients, the key is predictability; they generally aren’t too concerned whether they achieve that through a fixed fee, a capped fee, or some other means. But not every AFA carries the same amount of potential advantage for the law firm. So it’s really incumbent on law firms to come up with ways to 1) understand what the client wants to achieve, both in terms of outcome and pricing, 2) propose alternatives that meet those goals, and 3) ensure that the alternatives presented also have a good mix of risk-sharing between the firm and the client, and potential upside for the law firm should they perform well.
LC: Let’s touch on the importance of innovation. What are you hearing from firms about implementing innovative solutions to better serve clients?
Josten: It’s really an “all of the above” type of situation right now. Law firms are looking for best practices from peer firms and other industries, as well as some internal experimentation to try and come up with new offerings. In some examples, this involves new segmentations of legal services where the firms are looking at how matters are handled and priced, then repackaging their service offerings to better deliver solutions to discrete problems. In others, firms are looking at how technologies such as client portals and the like can better serve clients through improved transparency and collaboration.
In contrast to years past – where most firms wanted to emulate what others had done that seemed to work – more firms are willing to engage in some calculated experimentation and risk-taking to try innovative things in the hopes of standing out.
LC: How do alternative pricing models align with law departments’ priorities?
Josten: According to the 2022 Report on the State of the Corporate Legal Department, the top priority for legal departments is improving efficiency. When done right, alternative pricing models can fit into this priority incredibly well. A fixed fee, for example, can give a law firm ample incentive to innovate and improve efficiency as a means of increasing the profitability of a matter. Hypothetically, a firm could charge the same amount of money, or potentially even slightly less, to take on a matter and know that the revenue was guaranteed under the fixed fee. If the firm could then produce a favorable outcome on the matter in less time, both the firm and the client win: the client gets their outcome faster, and the law firm is rewarded because it found a better way. This, in turn, delivers greater value to clients by helping them meet the broader goal of increasing efficiency while still controlling budget.
The sticky part will come as law firms propose new pricing alternatives, and clients will have to agree to them. Clients often criticize law firms for not proposing enough alternative pricing options, while law firms in turn criticize clients for being unwilling to agree to anything other than billable hour arrangements.
Perhaps the current state of economic affairs will encourage both sides to revisit this issue and agree to get back to innovation and iteration. There’s no guarantee the first effort at new pricing strategies will work. But without the lessons learned from new attempts, innovation becomes quite difficult.