Time to increase fees?
Exclusive research conducted by Iberian Lawyer reveals that almost a third of law firms in Spain and Portugal plan to increase their fees. Is this feasible or is it too much of a gamble?
Nearly 30 per cent of law firms in Spain and Portugal are planning to increase their legal fees because the economic climate is improving, exclusive research conducted by Iberian Lawyer has revealed.
A survey of more than 250 partners and business development professionals at law firms in both countries showed that 29.6 per cent of respondents answered “yes” to the question: As there are signs that economic conditions are now improving, will you put your fees up? Furthermore, 38 per cent of respondents agreed that with economic conditions improving, fees would become “less of an issue”.
A total of 27 per cent of Spain-based respondents said they would be putting their fees up, while 37 per cent of Portugal-based respondents demonstrated a similar inclination. Meanwhile, the survey also revealed that 37 per cent of Spain-based respondents thought that fees would become less of an issue as economic conditions improved, while 43 per cent of Portugal-based respondents shared this view.
However, even those who said they did plan to increase their fees, admitted that it would present a challenge. “We will of course seek to increase our fees if possible,” said one respondent. “A lot of value has been lost – too much – in the past few years and efforts should be made in the sense of recovering some of it.” But the respondent added that clients remain very cost sensitive and will remain so for the “foreseeable future”.
Another participant in the survey also expressed doubts that fees would go up: “The pressure on fees has been so high, and has damaged the view that clients have on value for money so much, that an increase in fees even after significant improvement in the economic conditions will be unlikely to occur.”
Foreign firms to blame for low fees
One participant in the survey commented that the downward pressure on fees would be “difficult to change” in the coming years. However, they added: “This pressure is an opportunity for medium-sized firms and a risk for the larger firms. Fees should not affect the services, if you are not happy with fees, do not provide the service.”
Another respondent lays the blame for lower fees at the feet of foreign firms. “Fees pressure in Spain is remarkably strong because of the presence of foreign law firms. In order to gain market share, they have sold their services at a loss, damaging the entire profession,” they said. However, they add: “Some specialities remain very well paid because of the added value received by clients and the client´s difficulties in finding alternative legal service providers. Clients behaviour is changing because their policy of focusing only on fees brought them big failures and losses.”
But one law firm expert said it would be “interesting to see which firms gamble on increasing their fees”. He added: “I´d expect the firms that have the clarity and confidence around the value they provide to increase their fees, but it will require both clear and careful communication with clients. Most [firms] will worry it is too big a risk. Many firms are scared to increase their fees because they fear losing business.”
Some leading firms in Spain do not expect fees to increase in the near future. A Cuatrecasas, Gonçalves Pereira spokesman says that, if the early signs of economic recovery in Spain and Portugal continue, the firm anticipates that its revenues are likely to increase “due to more cases and a higher market value”. But the spokesman adds: “We do not foresee fees rising in the short term – except for those matters requiring very complex and specialised treatment – for this to happen, the market demand would have to increase significantly.”
However, other law firm leaders reckon fees will go up. Uría Menéndez managing partner, Luis de Carlos, says fees in Spain have remained steady, or decreased, in recent years, “due to the drop in activity as a result of the economic crisis”. But he adds: “Now that we are beginning to see activity increasing due to the economic recovery, it is logical to expect fees to increase, albeit in a limited way.”
Rafael Jiménez-Gusi, a partner in Baker & McKenzie´s Barcelona office, says his firm is among those that will increase its fees. Why? “The main reason is that the M&A activity is back. If we look at statistics, the level and value of deals are close to the ones we were seeing in the same period of 2008. There are more and bigger cross-border/cross-continent deals so a firm like ours is benefiting from this increase in deals.”
The survey also suggests that, rather than switching between different law firms, clients would get better service if they fostered long-term relationships with their current legal advisers. Two-thirds of respondents (66 per cent) said they agreed that clients are more likely to get a better service if they give their legal advisers the “security of ongoing work”. This was a particularly commonly held view in Portugal, where 80 per cent of respondents agreed with this assertion (compared to 61 per cent in Spain).
However, some respondents voiced their disagreement with this point of view. “I do not think that clients get worse service by not giving the security of ongoing work,” one said. “I think legal service providers try to give good service and good advice in the course of their service provision, obviously in the hope that a satisfied client will seek further legal services.” Another respondent said: “I believe the opposite, giving the best possible service is the best way of getting ongoing work. I also believe the fees model law firms have been using in the past has to be rethought.”
Meanwhile, the report also hinted at the damage that had been done to law firm-client relationships by the decision of some clients to purchase legal services via competitive tender. A total of 40 per cent of all respondents believe that choosing legal services via competitive tender has damaged the relationship of trust between law firms and their clients and means a client´s legal adviser is less likely to be “looking out for unforeseen problems that could damage the client´s business”. It suggests that law firms subjected to competitive tender processes may be less likely to “go the extra mile” for the client in question. Ninety-two per cent of respondents said clients seemed more likely to run competitive tenders since the start of the financial crisis, while 83 per cent of respondents said clients were being “less loyal and shopping around for services based on low price”.
A total of 39 per cent of respondents to the survey agreed that, with more price pressure during the economic downturn, law firm-client relations have become “less constructive and cooperative, and more conflictual”. This was a slightly more commonly held view in Spain, where 41 per cent of respondents agreed with the statement, compared to 34 per cent in Portugal.
On the issue of loyalty, one respondent remarked that client loyalty was now unusual and that price was “key in their decisions”. The respondent added: “I believe it will take a long time to revert the current situation. Nevertheless, there are loyal clients and I believe they get higher value for money in the long term.”
Clients will need convincing
But it is the issue of fees that is causing the most disagreement in the market. Some lawyers say the decision by some firms to drop their fees ended up harming not only the firms in question but the legal market as a whole. As one respondent to the survey put it: “The real victims of the crisis were those law firms that offered highly commoditised services, those were generally the firms that put fees down. These strategies damaged the legal market and themselves.
However, whether clients will accept fee increases is another matter. Sareb general counsel, Oscar Garcia Maceiras, says the crisis has meant clients are more sensitive about legal costs. However, he adds: “Companies have learned to distinguish between sensitive legal activities or crucial legal matters, where they do not rule the possibility of legal fees increasing, though not substantially, and commoditised work, where the trend is not fee increases, but rather fee decreases or fees remaining at the same level.”
Other clients say firms should exercise caution if they decide to increase legal fees. Estradas de Portugal concessions legal director João Canto e Castro says: “I think it will be very difficult to convince clients, which during this period got the same quality services at a lower rate, that they have to increase their budget for external counselling.” Kevin Doolan, visiting professor at Harvard Law School, says lawyers need to understand their clients’ “drivers of value” and get a price increase because they give more value. “This leads to sustainable increases,” he adds.
According to Fernando Ortega, general counsel at Siemens in Spain, law firm should only increase fees if the “legal value added is increased”. He adds: “I don´t share the idea that the enhancement of the economic situation is, per se, a reason for increasing fees.”
Iberian Lawyer law firm-client relationships survey: Key findings
Said they were planning to put their fees up
Said fees will become less of an issue
Agreed that clients are more likely to get a better service if they give their legal advisers the “security of ongoing work”
• Methodology: A total of 254 partners, associates and business development professionals completed a ten-question online survey in September and October 2014. A total of 183 of the respondents were based in Spain, 67 were based in Portugal, with 4 based in other countries.