American Lawyer Media has released its latest law firm pricing report: Alterntaive Fee Arrangements at Legal Departments and Law Firms ( April 2013). The special report highlights six key findings:

• 95% of law firms say they are using AFAs, down from 99%
• 22% of law deparments use AFAs for more than half of their work, up from 12%
• 24% of law departments are satisfied with AFAs; only 13% of law firms
• 62% of law departments say law firm are more cooperative than two years ago
• 50% of law firms participated in a competitve bidding, up from 36%
• 75% of law departments aproached preferred law firms only, down from 83%

However, the real lessons are the hidden gems within the report’s case studies.

Sedgwick’s Theodore Barnfield, Manager of Client Accounting, described a pair of AFA scenarios, one with a hybrid request (mostly volume discount) and one with a fixed-fee request. Both seemed reasonable to the firm, said Barnfield, until someone actually crunched the numbers. Turns out, neither was profitable! The first (hybrid) required the firm “to massively rejigger the terms” and the second (fixed fee) required the firm to drop the client.
Is your firm measuring the profitability of its AFAs?

Ann Bruder, General Counsel and Senior Vice President of Commerical Metals Company (CMC), pointed said her two biggest vaue drivers are “predictability of outcome along with a predictablity of the costs to achieve that outcome.” Also, as she compared a large national firm with a local real estate boutique, she found “[t]he difference in billable hours at the partner level was almost $400 an hour.” She questions whether size is a competitive advantage for large firms.
Is your firm able to guarantee predictability? Has your firm defined its competitive advantage?

A. Verona Dorch, General Counsel, Vice President and Corporate Secretary of Harsco Corporation, supports the use of procurement in purchasing legal services. “When cost is the prime consideration, things are more commoditized than we want to admit and the negotiation is more business-like. This is where prcurement’s involvement is extremely valuable.” For other matters, she says procurement brings “some tools to the table that help us get the best price,” especially when “we can use procurement as the bad guy [in negotiations].” Dorch also supports legal process outsourcing (LPO): “If you look at the level of the lawyers getting into these LPOs, they’re top tier lawyers. They’re becoming real competition to the law firms.”
Is your firm ready for procurement’s influence in proposals/negotiations? Has your firm investigated LPO?

So, firms need to 1) run profitability analyses on its AFAs, 2) offer clients predictability, 3) plan for procurement’s role in buying legal services, and 4) keep an eye on LPO organizations.