A Rolls Royce service for a Nissan price?

Asking how much you get paid is tantamount to requesting somebody's age: you just don't do it. ALB, however, did, and the responses we got from firms and clients revealed some startling differences

The billing rate is part of the whole choice equation but rarely is it the deciding factor, says the counsel from an international investment bank in Singapore.

Clients in this region are always asking for lower rates and fees, stresses a partner from a prominent UK law firm.

Ask counsel at banks and financial institutions around the region how important cost is when selecting external lawyers and it is prioritised some way below factors such as experience, creativity and accessibility. Put the same question to lawyers in private practice and there is nearly universal agreement that clients are exercising greater pressure on their external firms' fees than ever before.
Clients are becoming far more discerning customers of legal service providers as they seek to handle more and more matters in-house.

Inwilling to over-man their in-house departments, and unwilling to accommodate some of the charge-out rates being requested, companies are scrutinising fee and billing arrangements more than ever. Fee caps, volume discounts and panel use are now the norm.
David Graham, general counsel of Morgan Stanley Asia Pacific, says:

"We do not exert pressure in terms of billing rates. However, in the current environment, there is a natural compression of margin for both investment banks and law firms and this effects how projects are 'priced' by both.

David Kreider, general counsel of China Mobile, adds: I personally review all bids and quotes very intensively.

And clients are having to. With stock markets still in a slump and many offerings postponed, companies continue to be restricted from raising the necessary capital to fund deals.

The latest M&A tables from Thomson Financial confirm that primary market activity is at an all-time low. Announced M&A transactions involving Asia ex-Japan entities for the first half of 2003 have fallen by 28.58% (from US$51.96bn to US$37.11bn) from the same period last year. And lawyer participation on announced deals has plummeted a staggering 51.96% (from 207 transactions accounting for US$24.91bn to 129 transactions accounting for US$11.97bn).

Will Irving, deputy group general counsel at Telstra, says: We have seen, in real terms, reductions in our external spend. In other words, the legal market is still relatively buoyant and over the last three or so years firms have wanted to increase their charge-out rates. Our budgets have not been going up in lockstep with that, so in a sense we've got less hours that we can brief out externally.

David Krasnostein, chief general counsel at National Australia Bank, adds: 'Cost wise, we're extremely efficient here. Our legal fees as a percentage of the group's assets have declined over the last three years quite significantly.'

In-house counsel are now demanding a detailed breakdown from firms of where their money is going.

Irving says: 'We have pre-agreed estimates for all the work that gets briefed out. We have an electronic billing system. The firms can't bill over the estimate. So, we've locked in a lot of discipline there. And, by having that estimate process for every single matter that gets briefed out, we actually drive a lot of efficiency because the firms have to stop and think beforehand, and so do we, about what work really needs to happen and when.' So much efficiency in fact that Irving claims to have shaved at least 10% off his bill, in the system's first year of use, when looking at like-for-like matters. 'We try for caps and success-based billing when we tender,' adds the Singapore counsel.

In the current climate, a lot of the work is being put out to tender, and driving these changes are the Wall Street investment banks.

For many of the large international firms in Asia that rely on the big-ticket deals, clients' drive for greater efficiency has made it even more imperative to stay close to key clients and be sensitive to their concerns. The alternative is a rather humble exit from the region as witnessed by CMS Cameron McKenna, Cravath Swaine & Moore and Dewey Ballantine, among others.

The result is that firm rates are right down and the region is witnessing a lot of discounting as certain firms try and buy deals to build credentials in certain specific sectors.

My suspicion is there has been considerable discounting going on given the low level of work available in the corporate commercial area over the last few months in this region,' says Graham.

One Hong Kong-based lawyer in private practice went further.

"Predatory pricing is happening more and more. There was a transaction recently that we were involved in where a City firm agreed to do a certain aspect of a transaction for ridiculous rates completely unprofitable.'

He adds: 'People are offering to do a piece of work for HK$30,000 that would probably cost them HK$500,000 in time costs for example. So they will be making a loss and the only explanation that I can give for that is to get the client through the door.

Weird science
When it comes to fees and rates, there is no scientific framework within which firms operate. That said, international firms are generally more expensive than local firms, and partners and associates come in charge-out grades (newly made, young partners may be cheaper than a senior partner; similarly, senior associates just short of partnership are more expensive than juniors).

Morgan Stanley's Graham, who generally requests fixed fees or estimates from his firms rather than hourly rates, says: 'When we instruct outside counsel, we usually ask for an estimate and then negotiate. What we look for is an overall reasonable price for the project rather than what amounts to a charge-out rate per hour of the relevant partner's or associate's time.'

Although firms are generally willing to be flexible with their billing arrangements, clients realise that firms do have break-even rates.
'We try to be commercial but at the same time we won't just compromise and take the commodity approach that some firms do, says one lawyer in private practice. 'In certain situations, we would be prepared to be more flexible on fees.

Several factors are cited by firms as influencing their billing rate. Firstly, the type of client is a key consideration, in terms of what services they demand from their lawyers. Sophisticated international companies are naturally more demanding and as a result expect a very good service for their transactions.

It's more difficult for these types of clients to ask for a cheaper fee,' says one lawyer in private practice.

There is the sophisticated client that wants the Rolls Royce service and is willing to pay for it; and the sophisticated client that wants the Rolls Royce service and is not willing to pay for it because they know that the market is competitive. The former is the type of client that we, and I assume everybody, wants to serve,' he adds. 'There is a greater realisation of competitiveness in the market and, even within this category of clients, a greater capacity to maybe try it on.

On the other hand, some firms' approach is to charge a very low fee but supply a limited service. And some clients are happy knowing that they will not get a great service but because it's cheap that's all that they care about.

Secondly, the type of work is a key consideration. Some types of work are more commoditised than others. Initial public offerings, for example, are notoriously unprofitable. Very few sophisticated clients are willing to pay heavily for this type of work, meaning that if the client can't get the fee that it wants it really can go somewhere else. Smaller firms are increasingly targeting this type of work and it is where beauty parades are most frequently utilised.

There is evidence of undercutting, particularly on capital markets transactions, says Graham. 'This would not always encourage us to use that particular firm.'

A further factor cited by firms as influencing their billing rate is the nature and extent of the relationship with the client.

If we have a long-standing client of another office,' says one lawyer in private practice at a UK firm, 'that relationship will effect how we apply our fee rate or proposal.

He adds: We put a lot of effort into maintaining strong relationships with key global clients. But what we don't do is prioritise between delivering a good service between different clients. We can't as a matter of professional ethics, and we can't afford to give less than a first-class service. It sounds very idealistic but if we decide to take on a piece of work, we apply the same standards.

Billing, as a concept, is mostly applied on a transaction-by-transaction basis. There are few rules.

Benchmark hourly rates are frequently sent across to clients with estimates, except for the more commoditised work where lump sums are common. And while PRC clients in particular will often ask for an estimate, see it as a cap, and commence heated negotiations, other clients will not look at billing rates at all.

'It's like any bidding process,' says one lawyer in private practice, 'People take into account the firm, what service they are offering, and how comprehensive that service is. But fees, at the end of the day, are definitely a key factor for any client.'

Next issue: ALB takes a detailed look at what leading firms across the region are charging, and how important billing rates are in corporate lawyers' buying decisions