True alternative pricing entails a fundamental shift in the understanding of value, writes Allocatur Consulting director Liz Harris.

Many clients still believe that negotiating a discount on the rack rate is an alternative pricing arrangement.  But it's still just the billable hour, and so are blended rates, volume discounts and the like. True alternative pricing models involve, if not the complete abandonment of hourly billing, at least a price component that is determined by the value delivered.

I recently attended a Legal Spend Management Conference in London, where some of the leading corporate counsel from the UK, EMEA and the USA shared their experience in alternative pricing models.  The general trend, in which DuPont was at the forefront more than 10 years ago, is convergence of firms and negotiation of fixed fees, either as annual retainers for particular types of work or fixed fee per matter.

In-house counsel, such as John Soderberg from Alston Transport and David Symonds of Tyco, regularly negotiate fixed fee arrangement in complex litigation and commercial transactions, including major PPP projects.  The concept that it is too difficult to fix fees in this sort of work is simply not accepted by sophisticated general counsel. 

The recent Blunn-Kreiger report on the review of Commonwealth Legal Services Procurement clearly identifies the need for strong management of legal costs, and reiterates statements from the Federal Attorney General encouraging the negotiation of alternative pricing strategies.  With a significant stakeholder such as the Commonwealth Government taking this approach, the move away from hourly billing is a trend which is now hard for those in private practice to ignore.

A further overwhelming trend from the UK conference was the very extensive outsourcing of legal work, not just to India, but to South Africa, Eastern Europe and the Philippines.  Whilst this is not yet occurring to any significant extent in Australia, there is no doubt it is on the horizon and international clients will utilise their experience in other jurisdictions with their Australian lawyers.

The most sophisticated alternative pricing arrangements tie price to value, and that involves discussions between client and lawyer to ascertain what both sides see as value, and clearly scope the work.  One of the problems is changing the mindset that lawyers have created for their clients - measuring the worth of the job by the time the lawyer has spent. However, when commercial clients and lawyers focus on ROI at the outset, the discussion about what fee represents value can be enlightening.

Lawyers need to learn how to articulate the value of what they are doing for the client, whether it is avoiding a lawsuit, negotiating resolution of a tax issue, or finalising documents in a timely fashion to facilitate settlement of a commercial transaction.  In this regard, DuPont are again leading the way, introducing a scheme where their CFO attributes a value to legal work, enabling DuPont to demonstrate that their legal team is actually a profit centre.  Private lawyers have much to learn from this example.

Liz Harris will be discussing alternative billing arrangements in a live online ALB eLearning seminar on May 5 from 1pm. For more details visit the ALB Masterclass website.