Is the Netflix Model the Next Big Thing in Law Firm Billing?
Robert Swenson, CPA, MST
More law firms are beginning to reconsider their billing practices, whether in response to client demands, stagnant revenues or other factors. Although alternative fee arrangements, such as flat fees, contingent fees and blended rates, have topped the list of options for some time, a new approach is slowly gaining ground — subscription-based legal services. Is this something your firm should consider?
The case for subscriptions
It is likely that your clients are already familiar and comfortable with subscription models. Everything from music, TV shows and movies to food, gym memberships, pet supplies and clothing are available on a monthly fee basis. And it is not just consumer-oriented products that have gone this route. Think about software as a service (SaaS), cloud storage and office products. Those, too, can be billed on an automatic recurring basis.
There are many potential benefits of a subscription model for law firms. It provides predictable costs for clients, eliminating the possibility of sticker shock or collection issues. And it provides a steady revenue stream and cash flow stability for the firm.
Unlike hourly billing, which discourages clients from reaching out until something has gone wrong, the subscription model helps clients avoid "crisis mode." When clients do not fear getting nickel-and-dimed for every contact with their attorney, they are more likely to be proactive about seeking advice. This strengthens client relationships and boosts client satisfaction.
The subscription model also is scalable in a way hourly billing is not. After all, no matter how much you improve efficiency, you can bill for only so many hours in a day. While hourly billing can incentivize inefficiency, a subscription model discourages it. Greater efficiency means you can serve more clients, generating more monthly fees, with little, if any, change in overhead.
The subscription model is not appropriate for every kind of matter (litigation is an example.) If your firm is interested in trying a subscription approach, it must determine the scope of the services included. You might want to restrict subscription services to those related to a certain niche, such as small businesses or IP licensing. This will allow you to develop an in-depth understanding of the services your clients are likely to need and better target pricing.
Or you might offer different pricing tiers, with a lower fee for routine services only, such as document preparation or review, and a higher fee for unlimited phone calls and advice. The less expensive plans initially will produce less revenue, but they give you the opportunity to get your foot in the door with start-ups and other clients that may bump up to pricier plans down the road.
Expect to make some substantial investments in software upfront. Technology is the key to maximizing the efficiency that powers the subscription model. Investments in software for website management, document management, client intake and similar template forms, along with billing and other task automation, can free up significant time and capacity.
Beyond legal services
You also need to think about other value you can bundle into a subscription package. To prevent clients from treating their plans like an HBO subscription, regularly canceling and re-upping depending on their interests or needs, require a minimum subscription commitment, say 12 months.
Include some type of additional membership benefit such as hot topic video presentations or monthly Skype conferences with your attorneys, so subscribers feel they are getting something for their money, even if they do not need any services in a particular month. This may also reduce the risk of violating ethical rules prohibiting attorneys from charging unreasonable fees. The next big thing just may be your billing.
Ways to Avoid Competing on Price Alone for New Legal Work
The increasing and relentless price pressure on outside legal services will only continue in 2020 and beyond. Why?
- In an effort to control and reduce outside legal spend and gain more predictability and transparency in outside legal service delivery and results, law firm clients ( especially large buyers) are continuing to use requests for proposals (RFPs) to select and retain outside lawyers and firms.
- New automated RFP/reverse auction platforms designed specifically for legal services (such as PERSUIT and BanyanRFP) have dramatically increased the efficiencies for corporations and other clients to use RFPs to select panel firms and more easily conduct reverse auctions to attain the objectives described above. Many Fortune 10-1,000 companies, general counsel and legal operations executives now have and use these platforms, including Microsoft, Citibank, Walmart, GE, Novartis, Dow, Staples, Shell and Land O'Lakes, among others.
- Even without hiring based on RFPs, almost all major law firm clients and other sophisticated clients now demand and get significant discounts off standard/rack hourly rates, with average industry-wide discounts ranging from 10% to 30% or more. The aggregate of these discounts can account for anywhere from 10% to 80% of a specific law firm's annual revenue.
- Many clients are also increasingly demanding that their work be done on a flat- or fixed-fee basis, with clients getting guarantees they will not be billed over a set, specific amount for the work, case, matter or phase (especially for intellectual property prosecution, employment, municipal and repetitive matters and cases).
The above can and do dramatically cut into law firms' realization and profit, and with an economic downturn, will only intensify.
A Race to the Bottom
Due to the above factors and others, available outside legal work is increasingly awarded to the lowest bidder, i.e., it is often a race to the bottom. Unless your law firm has the optimal mix of people, processes and technologies in place to efficiently service commodity and low hourly rate work, lowball bid wins often cause a plethora of internal issues, such as a less-than-optimal lawyer being assigned to do the work, responsiveness and service often suffering due to low hourly rate/internal realization and write-offs and write-downs, among other issues.
Make no mistake – all legal services, even high-end work – are and will continue to experience price pressures, i.e., most legal services will increasingly become commoditized.
In response, many leading law firms are adopting legal, LEAN or Six Sigma process management and also knowledge management techniques to create internal efficiencies to avoid these issues that impact realization and profitability.
Other ways law firms can increase their capabilities to effectively compete in this price-pressure-heavy environment for outside legal services include considering formally assessing, reviewing and implementing appropriate upgrades to:
- The Firm's Practice
If your firm still uses antiquated time, billing, financial analysis and reporting systems, upgrading to the latest ones that use artificial intelligence (AI) can dramatically improve internal efficiencies. AI-enabled platforms designed specifically for law firm management offered by Intapp, Thomson Reuters, ZERØ, LexisNexis and many others are well worth considering.
- Your Firm's Current RFP
Intake and Response Process
The ability for lawyers, groups and teams to effectively compete on price can also be fueled by the below (which do require time and investment):
- Consider creating and internally marketing a pricing and billing tool kit for all lawyers in your firm. Doing so will minimize pricing inconsistencies and the total of non-billable time spent on billing, invoicing, pricing and related tasks;
- Consider creating, maintaining, using and training/educating all lawyers and relevant staff on inventories, menus and/or databases for the following: All available pricing tools/analytics; past and preapproved alternative fee arrangement (AFA) options and internal approval processes; practical definitions of key financial terms and metrics; how to scope, estimate and budget, along with what tools are available to do so; value-added features, benefits and offerings; and relevant, prior work product and templates; and
- To get everyone at the firm working
from the same playbook, if your firm has the resources, work with
firm leaders' support and backing to educate, train, coach and
regularly remind all lawyers and relevant staff on:
○ How to select which RFPs to respond to, i.e., how to make the go/no-go decision and determine the firm's minimum retainer required and other qualification criteria, and how to plan and have strategic conversations/communication before proposing or pitching for new work. Institutionalize an accompanying pipeline, follow-up and reporting process;
○ How to scope and budget a case or matter and provide them with expert internal or external coaching assistance when responding to RFPs/requests for qualifications (RFQs);
○ How to describe and build value when trying to win new outside legal work, i.e., how to sell the firm's value proposition from the client's perspective; and
○ The pricing process: Be sure lawyers know that when negotiating for new work and associated rates, clients might interpret the meaning of terms differently than they do, so it is important that the lawyer and client agree on how the following terms are defined: estimate, quote and budget; fees versus total cost; and value.
Make a video or audio recording of each session, and then transcribe it so that firm staff or an external trainer does not need to redo them each year (which is very time consuming and expensive). Use the transcribed remarks to help write the tool kits (to also post on the firm's intranet) as described above.
If your firm does not have the resources to create and offer such training programs in-house, consider utilizing online and on demand training sessions designed specifically for lawyers, or vet and retain qualified outside experts to provide the training.
Most traditional law firms continue to make the mistake of remaining in a largely reactive posture when it comes to organic new business, which puts additional pressures on margins and profitability. Why are lawyers mainly reactive? Because all lawyers face considerable time pressures and, as a result, most continue to wait to receive RFPs, RFQs and other requests for information that may yield new work. Waiting for work to be offered is strategically risky because the market will then define what type of work the firm receives and does, and as a result, the firm's financial performance and market position will largely be dictated by outside forces.
Work to become more proactive
A better approach is to deploy the time-proven, organic growth strategy used by many other leading professional services firms (such as major accounting, consultancy and engineering firms) and work to become more proactive, i.e., taking strategic initiative to identify the types of clients and work that is ideal for the firm/practice group/lawyers and then creating and implementing plans to appropriately position for and obtain it.
This strategy is referred to as "proactive positioning," which some natural rainmakers already employ, but most lawyers do not. Nothing will change the fact that most lawyers do not like and are not very good at sales/client/business development, no matter how much training and coaching they receive. But, lawyers are the primary sales and service force in all law firms.
To avoid having to compete mainly on price, how can a lawyer or firm plan and implement an organized, proactive positioning program?
- Whether as part of a reactive RFP/RFQ or proactively as part of a key client program, the lead lawyer (along with a related client service professional) should schedule time and initiate discussing fees, costs, budgets and total costs with key clients. Use annual reviews, satisfaction check-ins, after action meetings and focus groups to have these conversations regularly, both by matter and for all their outside legal work;
- Identify and focus on relevant high-value, niche or specific life-cycle clients. Work proactively to get on relevant RFP distribution lists;
- If your firm does not already have one, consider hiring a full-time, experienced, client-facing client service or experience (CSX) executive whose job would be to create and implement a proactive client development strategy and program. The program can include identifying key clients and targets of greatest value, those that are at risk and wish-list clients (including those potential clients that have and use RFPs and whose RFP distribution list your firm would like to be added to). The CSX could also be responsible for creating and implementing the other tactics described in this article;
- Develop new or more value-added services. Consider bundling, packaging and/or repackaging existing services or products, which several leading firms have done and are doing; and
- Identify new markets and buyers in a data-driven, trackable manner, and then create and implement a proactive positioning strategy and outreach program.
In this current, hyper-competitive market for outside legal services, it is not easy to position and compete for new legal work or to avoid having to discount rates or fees to win new work.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.