Pricing strategy Pricing Lawyers (in France)

Transcription

1 HEC Paris Majeure Marketing Pricing strategy Pricing Lawyers (in France) With more than lawyers in France, competition is fierce and the client interest has to be taken into account more and more 1. Traditionally, lawyers, like most part of the consulting industry, are paid on an hourly based rate. The client is paying for the knowledge of the lawyer, who had estimated a rate determining the price of his law-firm services. Therefore, the price of a lawyer is mainly set after comparison of competition prices. In 2009 the average rate for a partner was around 450 in Paris and 600 worldwide 2. In France, the actual trend is the decrease of these rates. When facing the needs of companies, this rate is difficult to negotiate. Indeed, in France it is forbidden, for now, to be paid as a lawyer, only on the result of a case. Thus hourly rates are not guaranteeing a result, but are the remuneration for a job. This way to get services from lawyers is highly criticized. As a stereotype, it seems possible that if your employee is rewarded by the time he passed on your issue, the client interest doesn t match with the law-firms interest: the company is aiming to get a problem solved as fast as possible, whereas the more he spends time on the case, the more the lawyer will have profits. Authors have already described all the problems that can be brought on behalf of the hourly rate. As a nonexhaustive list we can cite the unpredictable cost for the client, the difficulty to justify the added value for the client, the penalization of efficient lawyers, and the decline of collegiality that it can lead to in the law-firm 3 Thus, there is long scope for improvements done on pricing lawyers policies. Those improvements must leads to a real shift in the mind of law-firms: law-firms have to make clear in their clients mind that services they are proposing is designed in the client s interest. We can look at the different ways a lawyer is defining a price through three particular paradigms. These stereotypes are unrealistic as they are stated in a way to stress the disadvantages of nowadays pricing policies. The client is aiming to see a lawyer for many different reasons, leading to different ways to conceive the service demanded. The first typical case consist in defending its company from a law attack (I), you can also see a lawyer if you aim to attack another person (II), and finally you might see a lawyer in order to just have advices (III). For each of these cases, we would consider the clients demands, the lawyers basic interests and the way to price it. 1 Les métiers du droit, Etude XERFI La facturation des cabinets d avocats, Juristes associés, 01/07/2011, n Why Every Lawyer Should Consider a New Billing Approach in 2009, Of Counsel, March 2009, Jim Hassett

2 I. Company facing a law attack In this first case we can imagine that the client is totally unknown from any litigation law-firm. The goal of this client is, then, to have its interests defended as well as possible. He isn t aware of what litigation is and he would like to get out of the mud with as less damage as possible, knowing that as a profane, he doesn t know if no damage at all is a possible way out. In this type of situation the lawyer is perceived as omnipotent. In the client mind, the specialist of the law must know some tricks to save his client. The lawyer s position is there really ambiguous. He can react on the same litigation field and deciding to come into the procedure. It then means a lot of time to resolve the case, plus a strong externality on the resolution of the conflict. This externality will always allow the lawyer to put the fault on anyone but him if the case is not solved in the client s interest. The second option that the lawyer can propose can be to resolve the case with a compromise. Then the end of the case is quick, it is costly predictable and the client can manage to be out of trouble with few damages. If the lawyer is pricing only on hourly rates, he will, for sure, prefer the procedural litigation issue. As a long time solution, it will provide him some revenues that will be maximized. In comparison with what could be expected from a compromise, there is higher chances to make more profit with the litigation option. It is here clear that no serious law-firm would really apply such pricing policy, but this stereotype gives an idea of what are the relevant interests when setting a price. At the same time, it might not be the best solution to satisfy the client. And this is a crucial point as forthcoming challenge is not to make more and more money, but is rather to attract clients, and then, to give them satisfaction. Lawyers have thus to improve the result they are giving to a client, based on what is relevant for the client, which has to be combined with what is valuable for the lawyer. In this typical case, if price is fixed on an hourly rate, we must admit that client s interest is not lawyer s interest. As we have said, French law prohibits the payment based only on success fees. Still, this type of wage, if blended with other types of payment, is a good way to make the lawyer responsible for the solution he is proposing. Furthermore, it seems that this type of fees is trendier as it has increase by around thirty points within five years 4. Therefore, we must admit that a typical success reward must be set in place, before the case is resolved. It must be a reward based on the solution found, and at the same time, the rapidity of the solution, if it fits with the client s needs, must also be pushed. It could look like a percentage on the compromise which could be higher than a percentage on the court issue. In any case, it must be clear that the lawyer is liable and that the solution he is proposing must match the client s needs. 4 La facturation des cabinets d avocats, Juristes associés, 01/07/2011, n 323

3 II. The company needs to attack someone This case arises when the company has to deal with a legal problem and is not sure that litigation is the best option. It can be an issue with a competitor, but it also can be an issue with a client or an employee. According to the client s point of view, the final aim is there to make clear that an unacceptable situation is not going to stay for long. And in this case, as the start of the case is given by the company itself, there is a real choice to make that has to be clearly stated at the beginning. The company may want to simply deal with a problem and to obtain damages from the other part, but there can be another goal leading to make usage of law. Suing someone into court may be useful in order to give a clear intention that the company is reacting. In this type of case the communication is most of the time more important than the damages and the company has a strong interest to go into court. The lawyer s interest is the same as above: maximizing profits and satisfying his client s expectations. As the two options may not be clear enough for the client, it is the lawyer s job to express these possibilities. The pricing of this service, if based on hourly rates, will bias the lawyer s answer: the lawyer will be more likely to lead his client to the litigation field. In this type of case, the fees should be blended fees based on the results, like what is described above, but not only. Indeed, the result have to be determined not only as the results of the legal suits, but also as the results in terms of communication if needed, in terms of discretion if required the idea here is to focus on the final goal rather than to stay focused on the basic result of law suits. III. Companies need for daily advices The third typical case where a company asks for law services is the daily life of the company. There, the company is looking for the best advices to have the safer contracts, the best relationship with employees, clients, and the law. As the company is looking for guarantees, it might be relevant to ask for services from a big name. Indeed, the company may want to receive advices from a well-known lawyer. For law-firms, giving advices is the most profitable situation. It allows relying on fixed revenue as the client here is not paying for one particular mission, but for a constant service. The goal of the lawyer here is to be recognized as a good one in order to be demanded from a company as the exclusive law reference. By doing so, the lawyer will be followed by his client when making a spin-off, or moving in another firm, which is as valuable as fees. As the lawyer might provide other services than just advices, this case leads easily to propose alternative fees to the client. For example, the company Tyco ( world leader in electronic security ), made a blended contract with an English law firm which is: fixed fees for the commercial legal work. As the commercial legal work is almost similar from one year to another, it seems fair to make an approximation and to set it as fixed fees. To this type of fee there is a bonus for the law firm if client s satisfaction is improved by 35%. The main problem here is to set the determining criteria that will measure satisfaction. And finally there is a bonus if litigation is reduced by 15% 5. 5 Killable hour, The Economist, 8/30/2008, Vol. 388

4 This type of blended agreement is a good way to preserve lawyer s profits whilst providing justifications for fees and safety for companies. What is the most important for companies is predictability. As parts of law are unpredictable, the risk must be spread all over the entire service given by the law firm. Shepherd, an American law group, targets to make this predictability an asset against competition. This group is proposing an upfront pricing by saying: you will always know how much our work is going to cost before we do it 6. 6 Why Every Lawyer Should Consider a New Billing Approach in 2009, Of Counsel, March 2009, Jim Hassett

5 Bibliography - Les honoraries des avocats, Laurence Neuer, Le point.fr - The Price of law: How the market for lawyers distorts the justice system, Gillian K. Hadfield, Michigan Law review - Why Every Lawyer Should Consider a New Billing Approach in 2009, Jim Hasset, Of counsel - Etude Xerfi, les professions juridiques - Killable hours, The economist vol An alternative to alternative billing, and it s not value pricing, Way Shepherd, Compensation & Benefits for Law Offices - Market and Regulatory Forces in the Pricing of Legal Services, Dean Lueck, Reed Olsen, Michael Ransom, Journal of regulatory economics - Pricing in a Recession, Ed Wesemann, Of counsel