Many law firms are using fixed-fee billing, despite a suspicion that fixed-fee work is risky and unprofitable. Nigel Haddon provides some techniques for doing it profitably.
Without question, the legal sector is seeing an ever-greater use of fixed fees. This isn’t something we lawyers should take pride in – it’s come about almost entirely as a result of pressure from the client side. Time and again, clients have expressed dissatisfaction with hourly rates, which can border on distrust of lawyers charging in this way. And it’s not difficult to understand why our clients feel like that.
First, what kind of ‘experts’ do we think we are if we don’t know how much something is going to cost? Second, there is a conflict of interest inherent in time-billing: we don’t mind how long the job takes – it’s all grist to our mill – but the client wants us to spend the least amount of time possible on the matter, commensurate with doing an acceptably good job.
But how can you fix fees in a way that ensures profitability is enhanced and not impaired? How do you price sometimes complex work where there are both variables and unknowns (and not just of the ‘how many bank accounts do you think your mother had?’ variety)?
I have a friend who heads the commercial litigation team of a top-100 firm. I was surprised to learn from him that his team now prices 95 per cent of their work on a fixed-fee basis. Once again, this was client-led, to the effect of ‘If you can’t give me a fixed price, then I’ll find someone who can.’ His team is now only time-recording for the sake of the courts’ costs budgeting regime and internal management purposes. Now, if you can price litigation on a fixed-fee basis, surely it might be possible to price private client services in the same way?
Airlines don’t say ‘it depends’ or ‘there are too many unknowns’ when we try and buy tickets from them. Yet air traffic control strikes, congestion, delays, bad weather etc can all cause significant overtime and incur costs. But your ticket price won’t change after you’ve bought it. Gyms offer membership at fixed prices, not knowing the precise usage each new member is likely to make of their facilities and equipment. If they can price like that, why can’t law firms?
Jay Shepherd, an American attorney quoted in Ron Baker’s book Implementing Value Pricing (John Wiley & Sons, 2011), suggests asking just one question to find out how good your lawyer is: ‘How much will it cost?’ Five words only, but it’s the whole ballgame. If your lawyer can’t correctly answer it, then you’ve got the wrong lawyer. Now, for the ‘teacher’s guide’:
The argument runs like this: airlines and gyms know their businesses. Does your firm?
It is possible to put a fixed fee on anything, as most readers will know or have some experience of. The Shard, possibly the most innovative and challenging construction project of the past decade, was built using a standard form fixed-price contract.
Many lawyers object that they cannot quote a price at the outset because they simply don’t know how long a job will take. This confuses cost and value. Your client doesn’t care how long the job is going to take. They care about how much it will cost, and whether that ‘feels’ like good value. For that reason, many firms advising clients on probate work will estimate costs billed on a time basis as close to two per cent of the value of the estate, possibly accompanied by a fixed-price offering based on that.
I have seen some very impressive spreadsheets used by firms to help with the pricing of estate administration work. This could include, for example, drop-downs allowing the user to enter the number of pecuniary legacies, savings or bank accounts etc, which, when all added together, gives the firm a reasonable idea of how much the job will cost them to complete. That’s a start, but it leaves value out of the equation, and we can’t afford to do that.
Charging clients a ‘value element’ in probates largely went out of fashion when clients started pushing back during the last global financial crisis. But I know of many firms which price probates almost entirely that way. Don’t overlook it – it’s another tool at your disposal. Many of us forget the basics as our careers progress, and I find it useful to remind practitioners of article 3 of the Solicitors (Non-Contentious Business) Remuneration Order 2009. This is – or should be – the starting point in pricing any non-contentious legal service. If you bill every client using the same hourly rate, then you won’t be capturing the value in the job. You won’t, for example, have recognised in your price the importance of the matter to the client or the novelty or difficulty of any issues which arise. And yet our regulatory framework not only tells us we should do so, but relegates ‘time spent’ on the matter to just one of nine factors to be taken into account when considering whether costs are fair and reasonable.
Value is completely subjective – it is the maximum amount which any client is willing to pay for a service. For example, a bottle of water bought at a major sports event on a hot day may be worth considerably more to someone than a glass of water taken at their kitchen sink (an example used by pricing expert Ed Kless).
The most significant problem we face when pricing on a fixed-fee basis is risk. Under the time-billing model that most of us grew up with, the client took all the risk as to price. There was no incentive for firms to reduce costs or work efficiently. If you ‘nail your colours to the mast’ by fixing a figure, the risk moves entirely onto your firm, and you now have a vested interest in undertaking the work as effectively and cost-efficiently as possible. The trick is to fix your fees at a level that maintains or improves profitability while giving clients what they want: greater transparency and cost certainty.
If we leave ‘price risk’ with our clients, for example by charging on an hourly rate basis, then our prices should to a degree reflect that. Conversely, if we assume all price risk by charging fixed fees, our prices should reflect that assumption of risk. Once we have fixed our price, that’s it (so long as the agreed scope of work doesn’t change). But clients understand that under one model they’re fully exposed to an uncertain final bill which might be much higher than the estimate given, while under the other, they have certainty. And clients will knowingly, willingly and happily pay a premium for that certainty.
There is a perception too amongst law firms that fixed-fee work must be unprofitable. Jobs have a habit of going ‘off piste’ and the firm ends up doing a lot of work for nothing. No wonder clients are so keen on fixed fees!
These objections are understandable – to a point. What is often lost on lawyers is that fixed-fee billing, if handled correctly, can be very profitable – sometimes even more profitable than alternatives such as time-based billing. The problem my firm encounters time and again is that lawyers can see how this works for others, but not in their practice area, or with their own clients – hence the prevalence of fixed fees at the commoditised end of the market (conveyancing, wills, lasting powers of attorney etc). But it is a mistake to think that only such ‘commoditised’ work can be priced in that way.
In the face of more clients wanting certainty around legal pricing, there is an opportunity to gain competitive advantage and set your firm apart from its competitors. If firms can offer fixed fees in commercial litigation, why can’t they offer fixed fees in, say, estate administration? Below, I outline some techniques to manage the fixed-fee process effectively and profitably.
t is fairly common to encounter wills where, while some gifts are expressed to be free of tax, nothing is said about the burden of tax in relation to other gifts. Often it will not be evident whether this is due to carelessness or if the draftsman thought remaining silent would render a gift subject to tax