Fixed fees are favoured by clients, and increasingly seen as a competitive differentiator. But putting them in place and managing them effectively can be complex. Jenny Beck provides a beginner’s guide to managing in a fixed-fee environment
Fixed fees are not new. Property lawyers have been working under them for years, but for a variety of different reasons, other areas are now manipulating their services into fixed fees. We are seeing a considerable shift.
The legacy of charging purely by reference to billable hours is not yet dead, but many firms have already embraced the mentality of treating a client more like a sophisticated consumer with choices, putting themselves in their shoes and giving a clear price with clear expectations.
In this article, I outline the argument for fixed fees and provide a simple guide to some of the major issues around putting them in place, including unbundling, setting the fees, training and supervising staff and managing client expectations. I also look at what monitoring you need to do to ensure that fixed fees are working in practice for your firm.
Does the market really want fixed fees?
The vast majority of legal transactions are not purchases of choice but of necessity. Nobody sets out to divorce or sue, and the legal process is not particularly enjoyable. The end game is the purpose. Clients want to travel from A to B as quickly as possible.
Clients like fixed fees because they provide clarity and transparency. They also provide a sense of joint purpose to achieve the client’s goal as quickly as possible, whereas billing by hourly rates creates a perverse disincentive for lawyers to conclude cases quickly – or at least a perception in the eyes of the client that there is an incentive to drag proceedings out. And this can lead to conflict.
Meanwhile, clients are shopping around to a greater extent and using the internet to find and compare providers. Smaller firms have traditionally relied upon personal recommendations and cross-referrals within their own organisations, but as clients show a propensity to use different firms for different matters, greater pressure has been placed on firms to be competitive.
The growth of price comparison websites and online marketing has the potential to create more market disruption.
And the new alternative business structures and ‘modern law firms’ are looking at the provision of services in different ways, including commoditising traditional services and presenting them as fixed-fee packages.
So, the market is clearly moving towards fixed fees, and solicitors who want to stay in business will need to respond.
How can we unbundle services safely so we can offer fixed fees?
In order to offer fixed fees, you need to understand how to unbundle safely.
Far too often, firms simply scout around on other firms’ websites and try to fix a fee for the service that they wish to deliver which sits competitively, rather than assessing their own costs of delivery and consequential profit margin
In the context of legal services, the term unbundling is used to describe the provision of discrete acts of legal assistance under a limited retainer, rather than a traditional, full retainer, where a solicitor typically deals with all matters from initial instructions until the case is concluded.
Unbundling is sometimes referred to as ‘a la carte’ legal services. It can operate on several different levels, for example:
- providing clients with self-help packs
- providing discrete advice about
- specific steps in a case or an issue on
- one occasion or more
- checking your drafted documents
- providing advocacy.
The essence of unbundling is that the case remains client-led, so that the solicitor does not necessarily accept service of documents, send out correspondence in the firm’s name or otherwise communicate with third parties, incur disbursements or go on the court record. However, there are some limited retainer models that are closer to the traditional retainer in terms of the service offered to the client.
Sounds like a great idea. The client gets their legal advice when they want it, and undertakes the parts of their case that they feel competent to do. The costs are cheaper and the solicitor can therefore get to clients who would not otherwise be able to afford their services. And solicitors work together with their clients, which is increasingly attractive to both parties.
However, unbundling does carry significant potential risks, including:
- professional negligence claims arising from insufficient knowledge of the client’s situation
- professional misconduct claims in relation to client care and duties to the court and third parties
- disgrunted clients and potential contractual issues resulting from a failure to explain to the client the extent and limitations of the unbundled services being offered
- unwitting creation of a full retainer with consequential liabilities
- non-compliance with professional indemnity insurance terms
All solicitors have a duty of care to apply the relevant degree of skill and exercise reasonable care in carrying out their tasks. Although the retainer is an important factor in determining these duties of care, there remains a risk that the scope of this duty may be more widely defined for the purposes of determining professional negligence. It is also important to remember that the duty of care can extend to third parties.
One of the key principles that should guide practitioners is the need to express with clarity what is covered by the retainer, so that there can be no ambiguity or misunderstanding. You have an overriding duty to act in the client’s best interests. If you are concerned that it is not appropriate to limit the retainer in the circumstances, or that your client does not understand the consequences of the limitations, you should not offer an unbundled service.
One professional negligence risk for unbundled services comes from advising the client on the basis of inadequate information. You should firmly resist any temptation to make assumptions about the facts. If you have concerns about insufficient information or the quality of the information provided by the client, obtain the additional information or clarification required from the client before offering any type of legal advice. If the client is unable to provide this information, you should not advise.
If you like a good panic, there is some concerning case law to keep you awake at night: see, for instance, Padden v Bevan Ashford Solicitors  EWCA Civ 1616, or the recent (and slightly more reassuring) Minkin v Lesley Landsberg (Practising As Barnet Family Law)  EWCA Civ 1152.
So how can we protect ourselves? The Law Society’s practice note on unbundling civil legal services (tinyurl.com/unbundling-civilpn) provides key points for providing an unbundled service where you assist the client themselves to conduct the matter and you do not act as a representative. It is essential reading for any firm looking to offer fixed fees.
How do we set our fees?
It is important to get the fixing of your fees correct. Far too often, firms simply scout around on other firms’ websites and try to fix a fee for the service that they wish to deliver which sits competitively, rather than assessing their own costs of delivery and consequential profit margin. You need to stay competitive, and a good assessment of the market is critical to this. Make sure, however, that you are comparing like with like: while other firms may publish their fixed fees online, they may not explain exactly what is included within the limited retainer.
Also, don’t be frightened of others’ prices. The proportion of people selecting on price alone is lower than you think.
So, to set a fixed fee which remains profitable for your business, you need to start by properly defining the limited retainer that sits beneath the fixed fee. You need to know exactly what you are going to do for the fee, and then you need to know, from detailed data analysis, exactly how long such matters take on average. From this, you can calculate the approximate fixed fee, by applying the average length and multiplying it by the underlying hourly rate.
How do we make it work in practice?
All staff working on fixed fees must be fully trained in the concepts behind limiting retainers, and know what is and what is not included within each fixed-fee service. There is a real danger that staff will go beyond the limited retainer and end up doing far more work than was originally anticipated, and by doing so, basically undermine the fixed fee and cause it to run at a loss. Supervision needs to be put in place to ensure that staff are not routinely doing more work than the client is paying for.
Supervision also needs to be in place to address the conflict between the fixed-fee retainer and the advice we are required to give within our underlying regulatory obligation to the client. If a client buys a fixed-fee service and an important associated legal issue comes to light, the solicitor is duty-bound to advise upon it, because failing to do so could be negligent, but the client has not anticipated this and still wishes to pay the fixed fee. The member of staff is in a difficult situation. Our regulator says we need to advise on the ancillary issue, however this would take us outside of the fixed-fee retainer. It is easy to see that the situation can become complicated.
If managing and training staff is difficult, managing clients is even more so. Once on a fixed fee, a client may contact you every day, unfettered by any fear that calling, emailing or writing to you will have any impact on the amount of money they pay.
Putting restrictions in place can be difficult, but you do need to manage clients’ behaviour. You could develop a suite of information leaflets to which the client can refer, covering frequently asked questions, or you could limit the number of calls or amount of time on the phone that the client can have before the case moves out of fixed fee. The difficulty with the latter is that there is an issue of confidence: the client has come to you because they want a fixed fee.
How do we make sure it’s working in practice?
Once you have put all of this in place, you cannot just rest on your laurels: you have to make sure it is working and actually generating a profit. That means measuring progress against the assumptions you have made about how much everything will cost you and how long it will take to do.
There is a real danger that staff will go beyond the limited retainer and end up doing far more work than was originally anticipated, and by doing so, undermine the fixed fee and cause it to run at a loss
There is a strong belief that adopting fixed fees means that time-recording is no longer necessary, and while this might eventually be true, time-recording for the first six to 12 months is critical to ensure that assumptions made when setting the fixed fees were actually accurate. If you estimated that a particular limited retainer service would take five hours on average, and then set a fee based on that estimate, at some point you need to check whether your estimate was correct. The only way to do this is by looking at the time-recording for the work (being aware of the six-minute unit length), and identifying the work associated with that specific fixed-fee service. If analysis shows that matters are actually taking at least six hours on average, then your fixed fee is a fiction, and you are running cases at a loss.
In order to mine the right data so you can assess the effectiveness of the fees you have set and the staff that you have trained, you need an appropriately sophisticated case management system. You may need a completely different set of data from the data providing the dashboard for your non-fixed-fee services.
You also need to ensure that you have absolute clarity over what you are assessing, and clear key performance indicators, and that you build in time and resources for regular and active monitoring activity.
Once you are happy that the fixed fees are generating their anticipated profit (at the right level of input resource), you can scale back the underlying time-recording, thereby shaving off an additional cost and increasing profit. However, from time to time, you may wish to undertake audits to ensure that the fixed fee remains economic.
If your analysis shows that the fixed-fee model is not working for some of your services, then the model may not be for you. There are types of matters in which it is difficult to make them work. Also, averages depend on volume, so for fixed fees to work for you, you need a broad enough spectrum of cases (some short, some long and some just right) to achieve your anticipated average fee.
Are they always the right thing for clients?
So, you have prepared your prices, trained your staff, got your dashboard set up and you’re ready to go to market. But before you do, you need to understand the issues around whether they are actually always right for clients.
While everybody thinks that clients like fixed fees, the truth is that the more complex the service and the higher the fee, the less competitive they look against hourly rates. Take a service where the fixed fee is £1,750 plus VAT. You have worked this out as the average the particular piece of work is likely to cost. However, set against the firm down the road that says they have an hourly rate of £200 and need only a £1,000 on account to get things moving, many people will go for the hourly rate, even though they may eventually end up spending more than the fixed fee.
Also, remember that fixed fees are not fair on everyone. If you have a fixed fee of £500 based on the average costs of a particular matter, you might have a situation where three clients ended up having very different amounts of actual work on their cases. Client 1 got exactly £500-worth of work, and client 2, who had a really complicated case, ended up with £700-worth of work on his case. But client 3 was a dream, and his case progressed incredibly smoothly and quickly. At the hourly rate, you have only done £300-worth of work on his case. All three, of course, paid the fixed fee of £500. Client 2 paid £200 less for the work he actually got, but poor client 3 got shafted and ended up paying an extra £200 to subsidise client 2’s case. Transparency and fairness are not necessarily the same thing.