alternative fee arrangements | Lamiroy Consulting Blog

In this article, we look at managed legal services. We explain what they are, and what the benefits are. We also look at how they work and at how they are priced. We end with some tips and considerations.

The legal market has changed dramatically over the last few decades. Initially, there were only two options. Larger companies would have in-house legal departments, who mainly offered first-line legal services. The other option were law firms, who offered first and second line (i.e., litigation) services. Over the last decades, that market has changed with several new players who are all offering managed legal services.

What are managed legal services (MLS)?

Let us start with managed services, and then expand into managed legal services. The Wikipedia defines managed services as “the practice of outsourcing on a proactive basis, certain processes and functions intended to improve operations and cut expenses.” It is something that is very common in the IT world. Companies who do not have a dedicated IT department may rely on a third party for their IT needs. Or companies may only outsource certain IT aspects, like e.g., security or hardware support to a third party with expertise in the field.

When the services that are being outsourced are legal services, then we are talking about managed legal services. Managed legal services could be described as a solution to a legal problem in the form of a predefined bundle of – mainly legal – services for a transparent price. It is a model that puts the client first and does so by introducing transparency, efficiency, and technology at scale. Managed legal services often are used as a solution to high-volume work that is time critical, cost sensitive, and carries a risk if not performed accurately. Examples include contracts and contract review, articles of incorporation, document review, compliance with specific legislation, debt collection, standard court appearances, etc.

These managed legal services are typically provided either by law firms or by alternative legal service provides who specialize in specific services. As we already dedicated a previous article to alternative legal service providers, the focus of this article will mainly be on law firms offering managed legal services.

What are the benefits of offering managed legal services?

Why would your law firm consider offering managed legal services? There are benefits both for your law firm and your clients. We talked in the past about productizing legal services, and managed legal services fall perfectly in this approach. By standardizing and automating as much as possible of the process, law firms can reduce the cost and improve efficiency. This leads to increased quality, timeliness, and transparency on the side of your law Firm. In turn it also results in greater transparency and cost-efficiency for the client, and typically also in reduced service times.

With managed legal services, clients typically know exactly in advance what they will be paying and what they will be getting. They may pay either a fixed fee for each service rendered (e.g., a customized contract that is generated), or they pay a fixed subscription fee. (More on that later). In other words, managed legal services do not rely on billable hours but instead use alternative fee arrangements (AFAs).

Another benefit for the law firm has to with knowledge management. By using managed legal services, the knowledge within the law firm is moved from individual lawyers to the underlying service infrastructure.

Danh Nguyen, in Legal Business World, described it as follows, “As a service model, it’s more considered and effective – and gives clients more bang for their buck – because it’s driven centrally from the clients’ own business objectives and needs. A managed legal services provider invests time and effort into understanding those objectives and needs and assembles a cross-functional team that works collaboratively (sometimes, cross-regionally) to co-design and deliver tech-enabled solutions. These solutions integrate technical expertise in specified areas of the law, regulatory affairs and government relations, project management, and change and stakeholder management.”

How does it work?

How it works in practice entirely depends on the managed legal services you offer and on the needs of your clients. Clear communication and collaboration are the key elements when determining exactly what the client can expect and how technology can be integrated to automate processes. Typically, you will assign a team with members of your law firm as well as from your client to do this. You must be clear about what is covered and what is not. Often, managed legal services also use legal project management.

Types of managed legal services

There are different types or categories of managed legal services a law firms can offer. Overall, four different categories can be distinguished.

Regional / geographic coverage: your law firm provides support for clients who don’t have a substantive legal presence, team, or capabilities in a particular geographic region. Often, for smaller businesses, e.g., smaller law firms can fulfil the role of an outsourced legal department.
Expertise: your law firm can provide technical expertise or experience in certain specialised areas of the law that you happen to specialize in.
High Volume work: your clients can outsource very specific high-volume tasks to you that involve lower risk legal, regulatory, or contractual projects (e.g., response to request for proposal (RFP) processes, review of high-volume transaction due diligence documents, etc).
Repetitive work: your law firm can take on repetitive legal work, such as repetitive contracts and standardised playbooks.

Pricing

We mentioned earlier in this article that managed legal services typically use alternative fee arrangements. The two models that are most commonly used are subscription billing and itemized billing. Itemized billing can be used, e.g., for high volume and/or repetitive work. In both cases, clients know exactly what they are paying for.

You can also work out package deals with your client. Those can be tailor made, depending on what the client needs. And note that the package deal does not necessarily have to be limited to purely legal aspects. The big accounting companies all offer managed legal services where legal, fiscal, and compliance services are combined with accounting solutions.

Some additional tips

Clear communication remains essential once the project is up and running. This implies that you must make sure the teams on both sides get to know each other and know what to do to cooperate. It also means that you, as a managed legal service provider, need to keep your client up to date of everything you do for them. To this end, you can provide reports, organize meetings, use a client portal, etc.

As the dedicated legal service provider of your client, you represent your client in their relationship with their providers and customers. Parties must make sure that the way your law firm operates under these circumstances fits with the company culture of your client.

Accountability and performance reviews are also important. How and how often do you measure performance? Will you offer a service level agreement? What about troubleshooting and what do you do when issues arise? And what about escalation if more advanced expertise is needed?

It is recommended to work out these details in advance.

In conclusion, managed legal services are on the rise. They increase profitability and productivity for the law firm, while offering transparency, higher accuracy, and cost-efficiency for the client.

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The market of legal services is experiencing unprecedented and profound changes. In recent years, we’ve seen the rise of alternative legal service providers (ALSPs), and a rapid increase in the use of Artificial Intelligence. We now even have legal chatbots and robot lawyers, and some of them are offering free legal services. The legal consumers are embracing these changes: in a recent survey in the UK, seven out of ten respondents would prefer to use a robot lawyer to a human one! This should not come as a surprise, and the culprit can easily be found: Billable hours are one of the main reasons legal consumers are reluctant to consult a lawyer.

In the past, we have written about the death of the billable hour. With the current evolutions in the legal market, that demise is more imminent than before. And there are plenty of good reasons to kill it off, and to start focusing on Alternative Fee Arrangements (AFAs).

So, what are Alternative Fee Arrangements? There is not standard definition, but basically any arrangement where the client is not charged by the hour is an Alternative Fee Arrangement. (There is debate about whether volume discounts are an Alternative Fee Arrangement or not, but that discussion is largely academic).

There are different types of Alternative Fee Arrangements. In the article on the death of the billable hour, we payed attention to:

capped fees,
fixed and flat fees,
contingency agreements (where payment depends on the result),
holdback (payment in phases and dependent on whether certain conditions are met),
blended fees (lowering the cost of billable hours by delegating),
cost-plus model (cost plus reasonable profit), and
subscription billing (where the client pays a recurring fee to take care of its legal business).

Why opt for Alternative Fee Arrangements? All the arguments in favour of AFAs are the arguments against the billable hour.

From the point of view of the legal consumer, billable hours undoubtedly offer a lousy consumer experience. First, there is a fundamental double uncertainty: the client does not know in advance how much it will cost to address his or her legal issue, and if litigation is involved does not know what the end result will be. So the legal consumer is expected to commit to paying an undefined amount of money for an unknown result.

There also is the factor that being charged by the hour is always perceived as expensive. And the fact that the client is being charged for everything, including communications does not really make sense. Imagine you have a computer or car problem, have it fixed, and when you receive the bill, you are also charged for phone calls and consultations, on top of the actual repairs.

For lawyers, too, billable hours have negative side-effects that affect the overall productivity of a law practice. As you constantly have to keep track of everything you do, it necessitates a lot of extra administration. A survey published a year ago revealed that only 29 % of the time a lawyer spends working is billable, and that the rest was mainly administration, as well as some time spent on acquiring new cases. Add to that, as mentioned above, that the fact that clients are being charged for communications can easily become an obstacle for clear and essential communications.

Recent progress in the fields of Artificial Intelligence and process automation further illustrates that charging by the hour becomes less and less meaningful. How much time are you going to charge, e.g., for a contract that is compiled or reviewed by an AI system in seconds? Or what about eDiscovery, where computers can scan thousands of documents in minutes for relevant information, where it would take days to do the same manually?

In short, as the legal market is changing, the demand for Alternative Fee Arrangements is only expected to grow. In future articles, we will have a closer look at some of these Alternative Fee Arrangements.

Sources:

Lamiroy Consulting Blog

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