Large-scale International firms are increasingly being pressured into offering alternative fee arrangements to attract and retain clients. Firms like O’Melveny & Myers and Kirkland & Ellis have recently made moves away from hourly billing, and large PRC firms have also been forced to be more flexible in billing.
For many years, smaller PRC firms have sold their legal services at highly competitive rates, offering clients ‘off-the-record’ discounts instead of formally introducing formally stated alternative billing policies. Now, given fewer high-end transactions in the market compared to previous years, larger players are joining the price war.
The result is some serious low balling. “Our pitch was the lowest we could possibly go but we still got undercut,” said a partner at a mid-sized PRC firm, who recently lost three out of five pitches due to fee differences to a firm ranked within the ALB China 10 largest firms.
Against the background of the downturn, domestic and international clients have been increasingly cost sensitive, and a buyers’ market has allowed them to impose their agendas on firms. At the same time, domestic firms are sometimes willing to concede even more ground in order establish relationships with new clients that may pay off in the long term.
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Alternative fee arrangements of international firms
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To compete globally, international firms like Kirkland & Ellis have introduced discounting rates to extract promises of future work. Mayer Brown, O’Melveny & Myers (which also implemented volume discounts) and Reed Smith are all offering fixed-fee structures to their clients.
The Chinese legal market, however has called for special treatment. Due to the fact that the clients are more sensitive to cost and local players offer extremely competitive fee reductions, international firms have to offer Chinese clients lower fees than they do in other markets. Hogan & Hartson, for example, uses a different billing structure in China, Orrick offers percentage discounts, and O’Melveny & Myers examines capital market transaction fees on a case-by-case basis. |
Price competition – the client view
Despite price-slashing becoming increasingly common, former legal director for Kodak in Asia Mao Rong, who recently joined Reed Smith as an of counsel in Beijing, argues that discounts vary with the project or transaction and domestic or smaller firms don’t have to give a hefty discount to win a mandate.
“Regardless of the GFC, every penny that a company spends has to make good sense. In-house counsels are looking for expertise from firms that can provide something that an internal team cannot. If the selected firm can eventually prove the value of its services, companies are always willing to pay,” says Mao.
Similar to Kodak, large domestic companies’ purchasing decisions are based primarily on perception of service value rather than price alone. Despite budget restrictions, China Ping An Insurance’s external counsels include Jun He, Zhong Lun, DeHeng, Commerce & Finance, DLA Piper and White & Case – all of which are among China’s largest.
“When we engage law firms, we consider the complexities of the matter, the experience of the lead lawyers and the approximate time frame. We hire more experienced lawyers when the transactions are more complicated even if it means we have to pay more. But if we think that the price is too steep, it can always be negotiated,” said Yao Jun, general counsel of Ping An.
Cap on fees
The question of how firms should structure fees is matter-dependant.“Different firms exercise different billing methods, but a firm must be able to come up with the most ideal and reasonable billing solution for the type and complexity of the transaction,” said Yao. “Obviously, we prefer fixed-fee billing structure due to budget control. We would usually pre-arrange a timeframe where the work would be expected to be completed and hence cap our legal expenses.”
Many clients prefer fixed fees or capped fees. However, sometimes an incentive component is tackled onto the fixed fee arrangement to push firms towards the best possible results.
“In litigation cases, we would prefer a success-based, fixed fee arrangement. If the result of the litigation is good, the firm will receive a certain amount on top of the fixed fee. In transactional matters, this arrangement will also spur the external counsels to work more efficiently and complete a deal within a given timeframe. It is a win-win situation for the client and the firm,” said Yao.
In today’s market, few firms would argue with him.
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