Fixed Fees: Here Be Dragons!
Let us say at the outset that we are strong proponents of fixed fees, even in areas of work where they have not been particularly prevalent such as dispute resolution. We believe that they should be used much more than they are to the benefit of both firms and clients.
However, two articles hit our inbox recently, which both in their own way reaffirmed the widespread misunderstanding on the part of law firms as to how best to deploy fixed fees, and an equally profound lack of understanding on the part of many clients as to how fixed fees must be structured.
For the sake of clarity, let us also begin with two acknowledgements;
- The premise that fixed fees need to be based on a clear articulation of the clients’ desired outcomes and the corresponding codification of the phases and tasks required to achieve those outcomes by the firm through the mechanism of rigorous scoping, assumptions and exclusions.
- The unhelpful confusion that exacerbates the problem through a lack of nomenclature consistency and clarity. Fixed fees, flat fees and other semantic permutations are often used interchangeably. Let’s just take it as read for now that they are all one and the same thing.
The first article to catch our attention appeared in the Law Society Gazette on 22 May and burst onto our screens with the catchy title “Fixed fees hitting firms in the pocket already, survey finds”.
The thrust of the article was that’ “…fixed fees have been a factor in an income drop in 2017 experienced by …[law] firms. The report said price competition is already a regular occurrence and is forcing firms to reduce quotations to win work.”
The article does not endeavour to explain the apparent correlation between increased use of fixed fees and decline in profitability and one must be careful about what is cause and what is effect lest we fall victim to the logical fallacy – post hoc ergo propter hoc.
However, if indeed there is a nexus, the reason will be fairly obvious to most practitioners. Historically, fixed fees for most lawyers have tended to be synonymous with poor realisation, time write-offs and/or difficult conversations with the client as to why things cost more than anticipated.
The second article to catch our attention came with a rather less exhilarating title from The American Lawyer, ‘General Counsel Need to Seek Flat Fees More, Research Finds’. The article was based on some research that was designed to answer the question of whether fixed fees generate better law firm performance than purely time-based billing.
The research found that, “some general counsel …swear by flat fees, while others are reluctant to take the plunge. Critics note that while flat fees provide budget predictability, firms will price them with a cushion, which raises total cost.”… Read full article