Pam Waldow is a Partner and GC at legal consultancy, Edge International in the US. Pam writes great articles, the latest of which I thoroughly commend – Straight From The Horse’s Mouth: GCs Say What They Want From Outside Firms. I agree with all of it except one of the comments made by...
Pam Waldow is a Partner and GC at legal consultancy, Edge International in the US. Pam writes great articles, the latest of which I thoroughly commend – Straight From The Horse's Mouth: GCs Say What They Want From Outside Firms
I agree with all of it except one of the comments made by the GCs Pam interviewed, which got me thinking about a perennial issue that confronts lawyers. The comment in question was, “please reuse previous work product and then only charge us for updating and changing it".
In recent years, clients have become increasingly voluble about their disinclination to pay for effort as opposed to results. In other words, the message has been coming through loud and clear, "I want to pay an amount that is commensurate with the value and benefit that I feel that I am getting. I'm not so keen on a fee based solely on how long you spend on the matter."
Fair enough. Firms need to eschew the traditional cost-plus mentality (which they should) and instead work backwards. What does the client consider to be the value that they are receiving, what is an appropriate fee commensurate with that value and then how do we produce that work or outcome profitably? I have no problem with this.
The problem is front-loaded development cost...
However, this is the point at which things start to come unstuck, particularly in the context of either:
- a top quality document or suite of documents that was created for the needs of a specific client but which is capable of being repurposed and redeployed to other clients in similar scenarios (this is the situation referred to in Pam's article). An example might be a complex and novel financing structure, or
- a very important document or suite of documents is drafted to cater for the needs of a specific client but which the client will repeatedly deploy internally (such as employment contracts) or externally (such as terms of trade for a business, loan documentation templates for an institutional lender or a franchise agreement)
What these situations have in common is a substantial amount of front-loaded development cost. As an economic concept, this is hardly a novel or unique problem given the very significant initial investment required for example in the writing of a best-selling novel or the creation of a music album or a piece of software or the colossal upfront development cost of new technology such as the first iPhone, the first hybrid electric/petrol motorcar or a new pharmaceutical.
Amortisation is the only sensible option...
So what is a business to do with those development costs? Clearly, the only viable option is to amortise the development costs at a price level commensurate with the consumers perceived value and willingness to pay.
The alternative would be that the first person to buy John Grisham's 'The Firm', the first person to buy U2's latest album or the first person to buy Microsoft Word would be shelling out millions or perhaps hundreds of millions of dollars. The second and all subsequent copies of the novel, the album and the software license would be sold based on production cost which, even with a 100% markup, would be a handful of dollars and maybe even less.
Such a scenario is obviously farcical and unworkable.
Which brings us back to our original challenge and that is, how should firms price work where there is a considerable initial development cost? At one level, the options are very simple. Either the first client to commission the work pays the whole of the development cost or clients have to accept that firms have the right to amortise that cost.
Time for hard choices...
Put simply, this means that like any other producer of intellectual property (music, literature, software etc) the firm has the right to sell it as many times as it can and at a price based on the actual and perceived value and benefit being delivered, not the production cost.
So, my message to general counsel and clients generally is this; can you get your heads together and have a vote on whether you want to either;
- pay for lawyers' time and effort, or
- pay for outcomes, solutions, results, peace of mind and, (critically, but something you give no credence to in these conversations), transfer of legal and commercial risk and responsibility to the law firm.
If you only want to pay for lawyers' time and effort, that is fine but don't complain if you happen to be the first client that needs a firm to develop a novel and bespoke solution and accompanying suite of documents. You will be charged the whole of that development cost.
If, as is the recent trend, you really want to pay for outcomes, solutions, results, peace of mind and transfer of risk and responsibility to the law firm, that is fine but then your request that firms 'reuse previous work product and then only charge us for updating and changing it' is commercially unrealistic and unreasonable.
You can't have it both ways. Your call.