No doubt you’ve heard the definition of insanity is doing the same thing over and over again and expecting a different result.
It’s a popular quotation which is often “mis-attributed to Albert Einstein, Benjamin Franklin, and Mark Twain,” according to Huffington Post reporter Clara Santa Maria.
The disconnect between “This is really happening” and “We’re doing something about it” remains perplexingly wide.
Mr. Furlong’s post is a reaction to the results of the fifth annual Altman Weil Law Firms in Transition Survey, which draws pointed conclusions about the pace of change in the legal industry and the way law firms are facing those changes, including this one:
Along with many external market pressures, there is internal drag from partners who don’t fully understand the need for change, who don’t feel any sense of urgency to change, or who are simply resistant to doing things differently.
Of the survey’s respondents, 95.6 percent said they view increased pricing competition as an ongoing trend, while 80 percent expect shifts to nonhourly billing structures to continue. But only 29 percent of respondents said their firms had made significant changes to their own pricing practices in the wake of the recession.
Altman Weil has been fairly aggressive in encouraging firms to use alternative fee arrangements. The survey found that so-called AFAs tend to be less profitable for firms, but that they can be more profitable for firms that introduce them pro-actively, rather than waiting for clients to insist.
At a recent event, Anatomy of a Fixed Fee Negotiation: The New Market Dynamic, the title of the Second Annual Pricing and Profitability Conference in Washington, DC, our own Russ Haskin moderated a panel event on the subject, and here are a few of the most salient themes:
- Gradual increase in AFAs. AFAs continue to grow gradually, and it’s a conclusion corroborated by several sources. Certainly it was the sentiment at this conference, as we can see evidence in the Altman Weil study and our own CounselLink data, which has some $7 billion in invoice data since 2009 and suggests a growth rate of between 11% and 13% from 2009 through 2012 (YTD).
- AFA significance is changing. AFAs have moved beyond fees and are increasingly being viewed as mechanisms for relationships. If AFA negotiations were about cost from 2009-2012, this year they are about value.
- Drivers and demands for AFAs. The practice groups that tend to be cited as more progressive will also be the most likely to adopt AFAs because of industry pressure and risk profiles. Banking, M&A, litigation and defense are viewed as the most progressive and likely to adopt AFAs.
- AFAs should be based on outcomes. Understanding pricing and value means understanding the client’s desired outcomes – agreement monetization around desired outcomes are more likely to be successful.
- Getting Creative with AFAs. Some larger firms are getting creative about delivering value. For example, offering “secondments” where a law firm sends an associate to work onsite as part of an agreement. General Counsel (GC) tends to be receptive toward this idea as a way to deepen the understanding of their business and invest in long term relationships. Other firms have created 24/7 “help lines” a GC can call anytime. These call centers are staffed with associates that know their business well.
- Industry Nuances. Banking is regulated, so fee agreements with 3rd parties are subject to audits where a GC has to prove they made the best business decision. This means regulated industries have more rigor around negotiations and fee structures to avoid the appearance of favoritism, or because “we have a relationship.”
- Deeper divide? There was a sentiment among conference attendees that traditionalist firms are taking on more and more unprofitable business and, as a result, falling further and further behind. This is deepening the divide between progressives and traditionalists.
These points demonstrate that not all is cloudy – there are some rather vibrant, creative and progressive ideas being implemented around AFAs.
As for Mr. Furlong, he’s running his own week-long survey — Design Your Ideal Law Firm (Law21) – and we’re looking forward to the results.
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