A lot has been written about the death of the billable hour and the rise of new alternative billing arrangements (AFAs), with a recent survey reporting that 95% of all firms, and 100% of firms with over 250 lawyers, are using AFAs in some way, shape or form. But the percentage of revenue accounted for by AFAs remains low and two-thirds of the firms using AFAs acknowledge that they are doing so only reactively. And when they were not talking with clients about AFAs, many large firms have instead been offering clients discounts on their hourly rates, often substantial ones.
Why are so many law firms struggling with the way they negotiate fees with clients? The easy answer might be that the bargaining leverage has shifted, as law firms got caught with excess capacity during the recent economic downturn. But in my view, that shift in leverage explains why law firms are getting paid less, not why they are struggling with how they negotiate fees. Indeed, I would argue that law firms have always had a tough time negotiating with their clients. Prior to the downturn, when law firms were regularly raising their hourly rates by 6% or more each year, they were not really “negotiating” their fees so much as announcing them.
In my experience, many law firm partners, especially those at the larger firms, find it difficult to negotiate with clients about what they should be paid for their services. Some of the problem has to do with the assumptions about what it means to “negotiate” and the need for there to be winners and losers in any negotiation. Some of it has to do with fears about putting the relationship at risk by bargaining about rates. A not insignificant part of the problem is that few lawyers ever receive much training on professional service fee negotiations – because many firms don’t consider such training relevant for associates and many partners find it embarrassing to acknowledge they might benefit from it. I suspect these negotiations even trigger identity issues for some law firm partners, who resent having to explain why they are worth what they charge. Whatever the combination of factors that conspire to make fee negotiations challenging, it has always struck me as odd that individuals who are otherwise great and effective negotiators, able to be creative in the solutions they craft and persuasive in how they present them to their counterparts when they are negotiating on behalf of their clients, seem to forget all of that when they negotiate with their clients. The best many come up with when clients push back on fees are some painful grimaces and an offer to knock their rates down a bit.
Clients contribute to this problem. Many default to asking for a rate discount, and to backing up the request with either a complaint about something – staffing, responsiveness, recent results, etc. – or with a plea about their budget constraints. When a client connects fee negotiation either to complaints or to inconsistently used, often-generic assertions about needing to spend less, law firms partners are much more likely to view the discussion as a nuisance to be speedily overcome, than as an opportunity for a genuine, constructive conversation about how lawyer and client will work together.
Over the next several weeks, I will tackle some of what I think are the greatest gaps in how law firm partners and their clients negotiate fees and make some suggestions for how both sides might address them. I will put the onus on the law firms, who need to improve profitability and the client relationships in order to survive, but I will point out, wherever possible, how clients can contribute to a better way to do this. For a discussion oriented toward making more systemic improvements in how firms handle fee negotiations, as opposed to this one which is more focused on the behavior of individual partners and clients, see this white paper.