Our law firm clients report an uptick in their requests for non-hourly billing agreements. Requests range from phased approach flat fees to a per case flat fee for similar cases. Other requests include a bid document in which the lowest bid in the first round only meant you earned the option to submit a lower bid in a successive round.
In other instances, the prospective client reserves the right to compare the firm’s actual effort expended to the agreed upon fee. Typically, however, there is no corresponding provision that allowed the law firm to request additional fees if a phase was higher than anticipated. This provision essentially equates to hourly rate competition in disguise.
I believe most clients know who they want to win. I’m not suggesting nefarious, just that the legal service relationship is very personal. When clients include current firms in their bidding process, red flags should exist for the other firms. A client’s existing lawyers are familiar with the client’s approach to case management and likely have strong relationships with the primary decision makers. While a uniform set of assumptions for all bidders to follow makes the process fairer, the veteran firm will still have a better sense of the complexity and duration of the requested services.
Too high, too low, or just right
Bidding for legal work is a much about data and numbers as it is about a firm’s experience and instincts. A firm bidding for client work must review all relevant data and decide to bid a certain amount, which is ultimately a judgment call. If a firm or lawyers are risk averse, a maximum possible fee offering is typical, which is not likely to succeed unless the firm’s implied hourly rates are substantially less than the other bidders.
Bidding the work too low can also lead to poor results. A client may attribute a firm’s low bid to a lack of experience and reject it to avoid the possibility of poor representation. On the other hand, if a client happens to accept a firm’s low bid, the firm may get a poor return for the resources expended or even end up with an actual loss of money.
It is important for firms to understand the difference between a reduced realization on a standard hourly rate and an actual loss of money. Many lawyers define losing money as the difference between their standard hourly rate and the realized rate on a matter. In a sense, this is true if the firm or the lawyer is at full employment and would forgo work at standard billing rates. If the firm or lawyer is not at full employment, a reduction in hourly rate is not likely an accounting loss, which occurs when the actual cost (payroll and variable overhead) is greater than the revenue received.
Behind the scenes
Law firms must also recognize when a client is just fishing for a better effective hourly rate. If a client’s RFP instructs bidders to price matters based on identified levels of hours per phase or task, there is very little room for differentiation except on rate.
A firm should also consider the reasons for its inclusion in the bidding process. Is there a previous relationship? Has there been any targeted business development with this client? Does the firm or lawyer have high profile expertise? Does the firm have a solid reputation for handling similar matters? The list could go on, but understanding how the client perceives the firm or its lawyers value can inform your response. In many bidding situations, firms are included to set the upper and lower ranges. Knowing where your firm fits in the bidding process will allow you to create a more relevant response.
Please look for our future posts on the following topics:
- Actual win versus strategic win
- Advanced bidding features
- Pricing designed elicit more information
- Contract General Counsel services
- Technological value adds to build client loyalty
- Effectively communicating cost savings related to various billing approaches
- The impact of pricing and cash flow considerations on pricing