As competition heats up, can law firms avoid low-cost chaos? Richard Li reports
With the economy under pressure and slowing, the legal departments of many enterprises are keeping a closer eye on their budget control, resulting in fierce competition within the legal services market.
In response, some law firms have reduced their service prices, while others that believe low-price competition is harmful to the long-term development of the profession are tending to help clients control budgets by more flexible billing methods, and are winning premium clients by improving their own strengths.
While most in-house counsel we spoke to agree that they are facing budget constraints, quality of service is still important to them. A balance between cost and quality is the real decision they have to make. Most of them tend to negotiate a flexible billing method with the law firm, rather than the traditional hourly billing method.
In this year’s survey on the billing rates of Chinese law firms, our analysis of legal fees is based on 29 firms, ranging from niche outfits to full-service practices. We are highlighting our findings through a series of infographics, and present the full table of billing rates at the end of this article.
Our survey offers a snapshot of legal billing trends in China’s vast legal market. Although several law firms declined to reveal their rates for their own reasons, the law firms participating in the survey are varied in size and areas of practice. While the results and findings are interesting, the purpose of this article is to encourage more firms to be transparent with their legal services for the ultimate benefit of their clients and the wider legal market.
The survey results, meanwhile, reveal a major gap among law firms with the prices of their legal services. For example, the hourly rate for a junior associate ranges from RMB800 (US$113) to RMB2,500, while the hourly rate for a senior partner ranges from RMB2,500 to RMB5,000.
There are a variety of alternatives to hourly billing. In the survey, we find that, in many law firms participating, the percentage of legal work billed by hourly rate is not more than 50% (as shown in our table). Law firms are generally adopting flexible billing methods to cater to the differing demands of clients. The common alternatives to hourly billing include fixed fees (or fixed fee range), capped fees, and contingency fees. The legal work may also be billed by assignment, or in proportion to the amount of the subject of mandate.
Law firms may also combine their billing methods. Xu Guojian, the Shanghai-based managing partner of Boss & Young, says his law firm may charge the clients a separate fee or a flexible combination of fees. “We give our clients the freedom to choose the billing methods that best suit their demands without breaking current laws and regulations,” he says.
For litigation cases, more law firms are billing their legal work by “basic fees (fixed fees) + contingency fees (success fees)”, that is, the client will make an advance payment first and the lawyer will charge a sum of money in proportion to the amount of compensation the client receives (or in a fixed amount) when the periodical result is achieved or the case is concluded. “This billing method is advantageous, for it fully arouses the initiative of the lawyer to achieve a satisfying result and relieve the clients of the burden of legal fees in the preliminary stage,” says Yuan Xiaobin, the Chongqing-based chairman of the board at Zhonghao Law Firm.
James Chen, the Guangzhou-based managing partner of Zhuoxin Law Firm, believes that the billing method combining basic fees and success fees is becoming more popular among clients because it links the legal fees with the litigation outcome. “The success fees are generally higher than the total fees of hourly billing,” he says, “and the law firm will assume certain risks but may gain higher benefits. Many law firms are open to this billing method, especially for litigation or non-litigation cases that are likely to win.”
David Lin, the Beijing-based managing partner of Dare & Sure Law Firm, says the billing method of fixed fees plus contingency fees for litigation cases is advantageous in controllable budgets for clients, with predictable preliminary expenses and later expenses. If the law firm wins the case, it will have higher revenue and profits. “This method, however, has the disadvantage of uncertain outcome,” he says. “In addition, if the caseload surges, the court takes a longer time to conclude a case, and the law firm has to wait a while to receive the contingency fees.”
Kevin Zhou, a senior partner in the Guangzhou office of Advance Law Firm, says the contingency fees bring incentive to the lawyers under mandate. “This billing method, however, does not always work,” he says. “It is only applicable to cases whose details are complicated, such as cases relating to trademark and patent infringement. For cases that are simpler and less time-consuming, hourly billing or fixed fees are preferred.”
According to Shen Ronghua, a senior partner in the Shanghai office of Wintell & Co, the percentage of legal work billed by “hourly rates + capped fees” is rising in comparison with other billing alternatives. “The strong point of hourly billing plus capped fees lies in that, on the one hand, some clients expect a direct perception of the legal fees, while on the other hand, they expect that the legal cost of a specific case is controlled,” he says. “As this billing method balances these two demands, it is preferred by many clients.”
Liu Jianqiang, a senior partner in the Shanghai office of Tiantai Law Firm, believes that different billing models have their own advantages and disadvantages for different clients and cases. “Hourly billing can better reflect the relations between the workload of a lawyer and the legal fee, but clients worry that lawyers may overwork for more legal fees,” says Liu. “Fixed fees can reassure the clients, but some cases have such a large workload that the legal fee quoted is far from sufficient to cover it.
“The fees fail to reflect the actual workload of the lawyer. The method of billing by contingency fees focuses more on the outcome of the case. In fact, the outcome of many cases fails to reflect the work done by the lawyer, as the outcome is a matter of luck to some extent. In one word, there is no billing method that suits all. Different billing methods will be adopted for different clients and cases.”
Xu Guojian, from Boss & Young, says the functions and effects of different billing models are not absolute, and their pros and cons are relative. “In essence, different billing models are the results of compromise between the cost/revenue of legal services and the demands/expectations of clients,” he says. “A good billing method may counteract the inconsistency and promote good co-operation.”
Chris Zhao, APAC chief regional counsel at DuPont, says billing methods of law firms are more diversified than before, and billing by an hourly rate is not the only option.
“In response, we have conceived some solutions: First, project billing; and second, new service mode. For example, Herbert Smith Freehills offers alternative legal services. They are cost-efficient and their quality is assured. Third, some projects may be outsourced to professional institutions instead of law firms, e.g., the Big Four accounting firms and their legal teams. Their solutions include legal advice and financial advice, which may help control costs.”
Allen Jiang, the legal department general manager at Sinochem International, says they are inclined towards a capped or fixed fee. “In our company, budget management applies to every project,” he says. “We will begin the budget reporting process right before a project kicks off. It is normal for something unexpected to happen during the implementation of a project, but it is not easy for budget adjustment. Therefore, we will reach an agreement on billing with the lawyers beforehand, because a major adjustment of billing midstream will impose a great challenge on us.”
Suning Sports’ legal director Liu Chuantao says the ability of managing budget and fund should be one of the basic abilities of legal affairs managers. “In this regard, we explore some effective methods,” he says. “For example, at the time of negotiation, we will convince the law firm to adopt flexible billing plans such as charging by fixed fee, capped fee, success fee, etc. In this way, we can obtain high-quality service and achieve a controllable budget at the same time.”
But some companies still rely on hourly billing. “The law firm engaged by us bills its services by hourly rate,” says Sabrina Xian, chief legal officer at Shanghai Fundamental Media Group.
“Which law firm is affordable is decided by the board of directors,” she says. “If the board believes that risk control is above everything, we will co-operate with red-circle law firms for the greater benefit of the company in the future, even if it means bigger cheques. Meticulous and professional law firms are preferred, especially for IPO and compliance affairs.”
Max Zhang, head of law corporate at Bayer (China), says, “On the one hand, it is reasonable that law firms charge high price for some services, for they have high added value and require high intellectual input. On the other hand, we are now in the era of sharing economy.
“Law is no longer monopolized by law firms, or a few people. Some services, especially conventional services that contain a lot of duplicable and non-unique work, can be packed into software and solutions, and sold in the market. In this case, the service price should be low. The law firm should consider how to pack these services into products and sell them in large quantities,” he says.
In the face of fierce market competition, some law firms are choosing to cut their service fees to attract clients. Shen Ronghua, from Wintell & Co, says low-price competition is detrimental to the entire legal profession, “because it results in vicious competition among law firms, and lowers the quality standards of legal services”.
Shen says it is understandable that clients expect to control costs. On the other hand, he says, “we believe that, if the price of legal services reflects the respect for the labour of a lawyer, it will have a positive effect on the entire legal profession. It will be a win-win situation for both lawyers and clients.”
Zhan Hao, the Beijing-based managing partner of AnJie Law Firm, agrees. The legal market is a market of free competition and low price is one of the strategies sought by the law firms. Unreasonable pricing, however, will ultimately harm the long-term development of the law firm itself. “From our experience, a law firm will adopt a reasonable and flexible pricing scheme based on the demands of its clients on the one hand, while on the other hand, it may utilize its areas of specialties to bring maximum value to its clients and maintain the edge.”
Yuan Xiaobin, from Zhonghao Law Firm, says low-price competition has always been present. It has become particularly serious in the past two years because of the economic downturn and clients’ loss of purchasing power. “On the one hand, some clients award contracts to bidders making the lowest quotations,” says Yuan. “They will end up with less satisfying legal services. On the other hand, lawyers of some small to mid-sized law firms try to gain business in traditional areas by low-price competition, and this trend will tend to increase further.”
Low-price competition, however, has had little impact on Zhonghao Law Firm. “Our clients mainly are medium and high-end enterprises, which have high standards and requirements for legal services,” says Yuan. “They generally will not mandate lawyers through low-price bidding. If a client hires external lawyers who quote the lowest price, we generally choose not to co-operate with this client.
“We choose clients who value good service, recognize our high standards, and are willing to pay reasonable legal fees. We seek more opportunities of co-operation with these clients.”
David Lin, from Dare & Sure Law Office, also sees a rising trend with low-price competition, attributable to fierce competition due to a sluggish economy, on the one hand, and to application of technology to some standardized services. Lin adds that low-price competition is unsustainable. “We insist that specialty and quality should be the priority, since low price but frequent competition will not actually increase the revenue or the status of the lawyers or the law firms,” he says.
“A lawyer or a law firm has to improve the revenue and status by more professional services, and better and more suitable publicity and marketing. In addition, the clients won by low prices may not be premium clients. On the contrary, premium clients are willing to pay more for high-quality services.” Dare & Sure Law Firm positions itself as a law firm that provides professional legal services for complicated services, with a focus on intellectual property, competition law, data and privacy protection, administrative compliance, and finance. “The overall time available is fixed. That’s why we spend our time on matters and cases that produce higher profits,” says Lin. “We should also actively apply technology to law, to reduce the labour for repeated and standardized work, improve productivity, and cut costs for the clients.”
In practice, it is a going concern of many clients to control the cost of legal services. But how can a law firm achieve the balance between this concern and a reasonable compensation to its lawyers?
Quan Zhaohui, the Guangzhou-based managing partner of ETR Law Firm, says that, naturally, clients pay more attention to cost, but the expenses built into legal services are necessary. For example, the costs incurred by a thorough, detailed and independent due diligence investigation, in the process of M&A or dispute resolution, are indispensable. Otherwise, the clients may face higher costs for breaking laws and regulations later.
“Therefore, it is necessary to establish and improve a medium to long-term relationship between clients and lawyers, and to segment the business,” says Quan. “This is mutually beneficial. It helps enhance information symmetry and reduce the cost of replacement. It helps clients to develop the consciousness of rule of law, and helps the lawyer to have a thorough understanding of the important legal demands of the clients in that area.”
Shen Ronghua, from Wintell & Co., says it is most important to achieve balance in the matter of cost. “On the one hand, the law firm expects that the price of the legal service can reflect the value of the labour of the lawyers,” he says. “On the other hand, we understand that our clients need to control their costs. We need to strike a balance.
“We assist our clients and develop a billing pattern in a more professional way. For example, when we have an assignment, we help the client to analyze the stages of the case, the difficulty of each stage, and the corresponding workload. Then we will propose capped billing or a package fee for each stage. This billing method requires that the lawyer has rich experience in dealing with the whole case or assignment, and be able to effectively analyze and propose a reasonable and balanced billing pattern.”
Xu Guojian, from Boss & Young, says that clients are most concerned with the quality of legal services, except for a few that are more sensitive to the billing rates. “In other words, clients are willing to go for services of better quality, as long as they have their costs under control,” says Xu.
“Low-price competition has had little impact on our firm as a whole, except in some cases. If we let low-price competition continue to disturb the market order without containment, it will have an adverse effect on, and cause disorder to, the profession in the long run.”