Is the price right?

Harriet Creamer discusses how KM can help firms drive efficiency with respect to alternative billing arrangements

Alternative billing arrangements are by no means a new concept, so why do you think they are in the spotlight at the moment?
“A lot of firms have been exploring and implementing alternative pricing arrangements for some time now. For example, in the capital markets arena it’s been common for firms to operate to a cap, which is effectively a fixed fee. So, while firms have been working in this way to some extent for a while, over the past year or so – with the economic climate being what it is – in-house counsel have become a lot more aggressive. They have sensed that there is less work around and firms are pitching more, so there’s an opportunity to push on pricing.”

Clients are also expecting more value-added services as a result. Are there any other internal or external drivers, aside from the economy?
“I think that the push for alternative billing is predominantly client driven. It’s a miracle to me that hourly billing has survived as long as it has. In most consumer situations you would request, at the very least, a quote for the services or product you’re purchasing. And you wouldn’t expect an open-ended, hourly rate.
The main pressures for law firms are definitely economic. With the awareness that there is less work around, and the fact that many firms have large cost bases and lots of lawyers, clients are pushing for more structure on the way their law firms bill for their services. I expect they have been very frustrated with the hourly rate for some time now.
There are also lots of reasons why firms should be looking at internal efficiencies – and having to bill in a different way forces firms to analyse their processes and helps promote efficiency.”

Where does KM come into this?
“The main role for KM is driving that efficiency. Firms need to look more closely at their business processes. If you go back to a time when there were less alternative billing methods around, but firms increasingly had to operate within a cap, many found it difficult operate. For example, at the end of the job they would find out that they had exceeded the rate and couldn’t recover the cost or the time they had expended.
Some firms are examining how they bring work in within the structure they have set themselves. If it’s a cap you must ensure you can do everything that is required within that limit. If you’ve got a blended rate, or a maximum rate per hour, you have to be highly organised and ensure the output is commensurate with the rate charged. You need to look at how you do the work – how you resource it and where your profits are made. KM can help with all of this, as they understand how all the processes fit together. They can enable the firm to streamline the processes and ensure that the right people are doing the right work, at the right time. KM can also assist by delivering appropriate tools for each transaction.
Historically, KM lawyers have tended to be academic and sometimes compartmentalise the things that they do. They look at how the instruction is received and then break it down. Instead of looking at the transaction as an entire process, KM touches in at every point throughout the job and ascertains at which point knowledge will be required. KM can unpick the transaction process and provide a framework or toolkit to enable lawyers to be more effective. Instead of concentrating on individual tools and polishing them until they’re beautiful, they should be looking at every single tool in the box and ensuring they are all in working order.”

This all plays to KM’s strengths…
“Exactly. Law firms have long been exploring how to get more value out of their KM function and the way some have done so is to give their knowledge mangers client-facing work. While it’s absolutely essential for KM to understand the client base so they can help lawyers deliver great services, I do think that in this climate it’s more important for KM to be spending time behind the scenes making the firm more efficient. If they’re doing lots of direct services to the clients, they begin to see themselves as an outward-facing service, rather than one intended to move the law firm’s own business along.
KM’s emphasis needs to be on facilitating efficient service delivery – as much to drive the firm’s own profitability as to provide excellent service. It’s a twin motive. The more pressure there is on fees, the more important this is.”

What about the relationship between KM and other departments within the firm?
“From a business development perspective, KM lawyers will often produce information for pitches, or thought leadership.
There are also links between KM and learning and development – and I think they need to be made stronger. If you’re going to use your KM lawyers to drive the reorganisation of your processes they also need to manage transaction management training.
In addition, if there is a missing link between KM and the finance department, KM will have a better understanding of the profitability implications of the work they’re enabling lawyers to do. I’m not sure that many KM teams have much to do with the internal finance function. However, many have been systemically collecting information about what firms have quoted and what they have received for years. But I haven’t yet come across a KM lawyer who has been empowered to use this analysis to come up with best practices and lessons learned. For example, working out if there was a difference and what accounted for it – the deal may have changed in some cases, but at other times it might have been that the work wasn’t handled efficiently.”

There was much discussion around integrating KM with business development some months ago, which seems to have died down?
“My original vision for the KM lawyer role was that you’d concentrate initially on providing the appropriate toolkit for lawyers. When I started in the role a few years ago, we were focused on delivering excellent service and managing risk. But ultimately, once KM had those basic processes in place, they would spend time thinking about how the law was changing, how practice was changing and how firms could capitalise on that. In this way, they could hit the ground running when new practice areas came up, while also driving development in new practice areas using their existing knowledge base and clients.
However, in terms of KM actually doing business development, I think it can be distracting, as it’s not always playing to their strengths. It’s crucial that they have close links to clients and that they’re feeding their knowledge into the process – but I don’t think they should be in the front line. What eventually happens is that the focus goes on business development and a lot of the KM work doesn’t get done.”

Firms realise that alternative billing is something they must do – but is there much resistance?
“Yes and no. If you have clients who are insisting that this is how they want to operate it’s difficult to resist. Although firms will find it hard, even the more difficult or traditional partners are being dragged into the modern world.
There are types of work where alternative billing doesn’t apply. If you’re doing big-ticket M&A work, it’s very unlikely you’ll get ‘pinned to the ground’ with an alternative billing arrangement. If it’s high profile, clients want the best advice and will pay for it – and the fee will probably be a drop in the ocean to them.
But in more price-sensitive areas of work – such as capital markets – alternative billing models do work well. Similarly, in some private acquisition work, the big City firms have been looking at fixed fees for a long time, in order to remain competitive with the larger international firms.
Alternative pricing has been around for a long time but the current economic climate has given clients more confidence and they are also more sophisticated. They understand inefficiency and are no longer willing to pay for it. They won’t go so far as as to decrease the quality of the work, but alternative billing is important to them.”

Harriet Creamer is director of Outer Circle Ltd. For more information visit http://www.outercircle.eu