Hi there,
Last week I talked about the potential of value-based pricing to help solve one of the most pressing challenges faced by today’s GCs — budget cuts.
TL;DR: According to Axiom’s latest report, which surveyed 300 GCs on how resource constraints are impacting how they deliver services to the business (half were enterprise), 96% have faced budget cuts that averaged 11% over the past year.
The irony is that in the face of budget cuts, in-house teams often feel cornered and resort to slashing headcount.
Headcount is the natural target.
With now reduced capacity, the in-house team leans on their outside firms to handle a lot of matters they could have handled in-house if properly resourced.
It’s a frustrating thing to see happen 😣 when we know many in-house teams who have been able to protect — and even justify additional — headcount by implementing a more effective program around how they source their outside counsel.
That leads me to the point I want to address today.
Why aren’t more in-house teams using value-based pricing and alternative fee arrangements (AFAs)?
Axiom’s report referenced many of the limiting beliefs and objections that our team is very familiar with.
Like:
🚫 AFAs are hard to negotiate and are administratively burdensome.
🚫 We don’t know how to benchmark what we should be paying using AFAs.
🚫 AFAs don’t give us cost certainty and when scope creeps, we end up overpaying.
🚫 Firms cut corners and give us their "B-team" when engaging under an AFA.
Today, I’m going to challenge the thinking behind these assertions head on.
1. AFAs don’t have to be hard to negotiate or administratively burdensome.
The reality is that how business gets done in the legal marketplace is changing.
We’ve got to stop reverting to the excuse that lawyers are change-averse or bad at “business.” The sooner we move beyond those excuses, the more quickly we can equip attorneys to thrive in the new marketplace.
With the right fit-for-purpose RFP platform, AI-enabled scoping of matters (leveraging industry best practice templates), and clear guidelines and thresholds for AFA use, it’s a short learning curve for in-house lawyers to build the cognitive muscle 🧠 around using AFAs. We’ve seen it time and again with our clients.
These clients also tell us that most of the time, their firms are also happy to engage using a well-thought-out AFA arrangement. It rewards them for efficiency and encourages them to resource their staff more effectively to deliver outcomes for their clients.
2. Benchmarking in legal is broken; AFAs can help fix it.
In the past, enterprise legal teams have largely relied on hourly rate data, triangulating various pricing benchmarks to negotiate “the best” hourly rates.
The problem with this approach is that when you rely on billable hours negotiated at “best rates,” you still have no way of knowing whether this is a good price for the value of the services you’re receiving.
Even if you think you’re getting the best rates compared to industry benchmarks, what’s to say your firm (or another firm) couldn’t have the done the work in two-thirds of the time? Or with the help of an associate rather than a partner?
And I can’t tell you how many times I’ve seen an audience of GCs sheepishly raise their hands when I ask: "Who's been told by their firms that they’ve negotiated the best rates in town?"
Spoiler alert. You’re not alone.
Without a scope of work for how many hours a firm can expect to take on a matter, it’s kind of like writing a blank check. 💸
Using AFAs, nearly any type of matter, even complex IP litigation, can be broken down into predictable phases, and those phases broken down into specific activities — early case assessment, depositions, witness prep, document review, etc.
Firms know what it takes in billable hours to deliver each of these activities.
And even if they don’t know the exact number of hours, they don’t need to. They've got the data to know the range they can work with.
So it’s a short stretch for them to deliver predictable fixed-fee pricing at each phase.
“How much should it cost for a firm to handle a certain type of matter?”
As more firms and in-house teams turn to AFAs — and platforms like PERSUIT accumulate this pricing data to deliver new benchmarking data by matter, phase, and activity type — this question will become, well less of a question.
3. When done right, AFAs provide both cost certainty and the flexibility firms need to deliver the right outcomes.
As my team puts it, a good fixed fee isn’t actually “fixed” at all.
That’s because a good fixed fee arrangement will be paired with a mechanism that allows for fee adjustments when there is a material change to the original scope of work — what we call a material deviation.
For example, during the deposition phase, depositions might be scoped at $10,500 each with an estimate of 10 needed.
If you have a +/- 30% material deviation clause (i.e. discussion need only happen with your firm if costs are 30% more than the original scoped price for that phase), and 2 more depositions are required, then no price change and no discussion is required. The change is still within the original scope.
But if you need 5 more depositions — which is outside the material deviation parameter — then you’ve already agreed on the activity price. So that’s an additional 5 x $10,500 = $52,500.
This approach actually increases cost certainty over what we've had before.
And if a particular phase requires significantly more work than anticipated — like 30 depositions rather than 10 — you can have an open discussion with your firm using the agreed upon framework and relevant pricing data points to renegotiate that phase.
As I have said time and again, "It took longer than we thought it would take" should never be the basis for renegotiating with your firms.
4. Finally, if you’re getting the "B" team, then it's time to find a new firm.
I cannot tell you how many times I have heard in-house lawyers worried that an AFA will incentivize the firm to deliver below-par work via the “B” team.
If you're working with a firm you think would respond in that way, you probably shouldn't be working with them in the first place.
I think this fear is more theoretical than real.
We’ve had thousands of AFA engagements on PERSUIT and I have not heard a single complaint along those lines.
And in the unlikely event that a firm thinks it’s ok to deliver subpar work via the "B" team for an AFA, then fire them. There are plenty of law firms — indeed the vast majority — that wouldn’t dream of behaving that way.
In the current do-more-with less environment, AFAs are a proven way to control costs and achieve cost predictability.
And they’re one of the few levers in-house teams have to respond to cost-saving demands without sacrificing headcount.
What misconceptions are holding your team back from using AFAs more often?
Hit reply and tell me!
Cheers,
Jim
P.S. You’ll find your inbox one e-mail shy next Friday (not that many of us would complain about that 🤷🏽♂️).
Beginning this week, we’re moving our newsletter publication to a fortnightly schedule (that’s every other week for you non-Aussies 🦘).
We look forward to providing you with even more in-depth and useful industry insights as we move to this new schedule. Stay tuned!
