New research confirms that law firms, facing intense competition and challenging market conditions, are increasingly focused on long-term solutions to persistent problems. According to the 2020 Legal Finance Report, conducted by GLG and Ari Kaplan Advisors, 68% of law firm lawyers expect their firms to consider building contingency practices in the years ahead—and nearly 90% predict that their firms will offer more alternative fee arrangements.
In mid-September, Aviva Will sat down with premier legal business strategist Peter Zeughauser to examine the key considerations for law firms interested in building risk-based practices. What follows are highlights from that conversation, which is archived here.
Trends driving risk-based pricing
Client expectations. Quality has become “table stakes”: Clients have come to expect high-caliber legal work from elite law firms. Conversely, factors such as price flexibility and budget certainty have become critical differentiators, cited by 93% of in-house lawyers as important law firm attributes.
Competition. Law firms not only face growing competition from peer firms, but also from new players. With the rise of artificial intelligence and alternative legal service providers, 66% of lawyers say competition from traditional and emerging competitors is an important business challenge.
Erosion of the leverage model. Law firms are slowly moving away from the leverage model, a trend deepened by the pandemic. As billable work moves from associates to partners, the partnership structure itself is changing. A growing number of firms have moved to a tiered partnership model, creating new challenges in the pricing of legal services.
Dispersion & consolidation. The market for legal services is becoming increasingly polarized. Using their existing leverage, large firms have consolidated their positions by extracting top talent from smaller firms. This has created a domino effect, whereby lawyers at top firms, facing competition from lateral hires, are increasingly likely to leave their firms to build practices independently. In effect, large firms have grown and small firms have emerged at the expense of mid-sized firms.
First steps in building contingency practices
Speaking with clients. Firms should be able to talk about alternative pricing options with clients. Even if the firm is not prepared to take matters on risk, it can demonstrate sophistication either by entertaining client-led conversations or by proactively gauging a client’s interest in alternative structures. Firms must understand the unique needs of their client set, beginning with an open dialogue.
Implementing pricing programs and educating partners. Before developing risk-based practices, firms must make pricing an internal focus. This can be done in several ways, including:
- Building a pricing department. Some firms have opted to hire pricing professionals to focus on setting litigation budgets and developing innovative pricing structures.
- Investing in lawyer education. Other firms have put the onus of developing new pricing models on their lawyers and have therefore invested in lawyer education around law firm finances.
- Incentivizing creative pricing. Some firms have built profitability and client satisfaction into their compensation structures, thereby incentivizing lawyers to offer more compelling pricing arrangements.
Taking risk on one piece of a matter. Rather than take an entire matter on contingency, firms can test the waters by offering risk-based pricing on just one part of a matter. For instance, a large defense firm could offer to do a summary judgment motion on a discounted, flat-fee or contingent basis in exchange for an eventual uplift or premium. If the client wins the motion, it would be left with a significantly reduced bill from which the firm could collect its premium. Even if the client loses the motion, the fees from the motion pale in comparison to the fees the firm would generate over the course of the suit―and the firm establishes itself as a trusted partner.
Working with a legal finance provider. Firms can fast track the development of contingency practices by working with legal finance providers. Financiers add value in several ways, including:
- Sharing and diversifying risk. By working with a finance provider, law firms can take a larger number of meritorious matters on risk, thereby diversifying their contingency portfolios and helping ensure the eventual success of the practice.
- Smoothing cash flow and compensation. In the short term, risk-based practices reduce a firm’s operating revenue. By providing capital, finance providers can smooth cash shortfalls so that partner compensation is not disrupted.
- Educating clients and stakeholders. Finance providers can help educate clients about the variety of pricing options available to them and educate internal stakeholders on building a risk-based practice.
- Identifying matters. Through the diligence process, financiers can help firms identify which matters are appropriate to take on risk.
The nuts and bolts of risk-based practices
Watch the webcast for an in-depth analysis of how to build or expand a contingency practice. Topics covered include:
- How different pricing models align (and misalign) firm and client incentives
- How law firms should think about compensating partners in a risk-based model
- Where firms typically stumble in building risk-based practices