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How Fixed Fees Are Going to Change BigLaw Forever

August 28, 2013

Artwork by Brenda Hall

Artwork by Brenda Hall

This is Part III of “The Future of BigLaw” series.  It could also be seen as Part IV of “The Billable Hour is Dead (to Me)” series.  

BigLaw has big problems.  It’s biggest just may be its pathological reliance on the billable hour.  The fundamental problem with the billable hour – as all reasonable minds now agree – is that the model encourages inefficiencies.  The longer a legal problem goes on (hours), and the more resources thrown at it (hourly billing timekeepers), the more revenue and profit reaped by the law firm.  The financial interests of the law firm are in conflict with interests of the client.  This misalignment of interests helps explain the almost universal feelings of frustration that clients have toward their lawyers.

So why have clients allowed this sad state of affairs to exist?  Because, until recently, they had to – they simply had no viable alternatives – because almost every law firm used the billable hour model.  But the Great Recession of 2008 caused major seismic cracks in the billable hour hegemony.  Companies needed to lower their legal fees to survive, and many great lawyers were handed pink slips with very little chance to ever regain a traditional BigLaw job again.  Desperation (and fear of homelessness) bred creativity, and a brave new world of legal providers scratched and clawed their way into the post-Recession landscape.

Perhaps the most important idea to emerge from the Great Recession was the value-based fixed fee.  The modern fixed fees I’m talking about aren’t those tired, sad excuses for “fixed fees” trotted out by firms in the past, i.e., “billable hours in drag.”  The ones directly tied to billable hours, e.g., discounted, blended and capped hourly fees AFAs, or flat fees based on simple estimates of time multiplied by rate, with some wiggle room.  No, I’m talking about modern fixed fees, which do what the billable hour can’t do, realign the interests of the client and their attorney.  Or, as Kathryn Kirmayer notes “In Support of Flat Fee Pricing for Complex Litigation Matters:”

And that is the real upside of using flat fees in complex cases. They drive us back to relationships, and put client and law firm back in it together for the long haul. Law firms learn and know their clients’ business inside and out, and from year to year. Clients are not afraid to pick up the phone and call on their lawyers for informal advice, even when there is no big case pending. Each wants the other to profit and succeed. In that world, both client and law firm accrue benefits that far exceed the risk posed by negotiating a flat fee for a single case, even a big one.

Name a client who doesn’t agree with the above sentiment.  Who’s against transparency, value and predictability?  No one, right?  After all, doesn’t all of BigLaw profess a deep desire to serve their clients and meet their needs?  Great, so there must be a boatload of AmLaw 100 firms offering to ditch the billable hour and offer value-based fixed pricing?  I may need a little help here readers, because I can’t think of a single one, unless you want to count DLA Piper’s 21% ownership of the UK fixed fee pioneer Riverview Law.

So what gives?  Why hasn’t BigLaw jumped on the value-based fixed fee bandwagon?  Ready?  Because it can’t.  Competitive fixed pricing requires a mastery of budgeting, project management and efficiency. None of those attributes are BigLaw strengths.  Quite the opposite actually, according to Adam Smith, Esq. here:

BigLaw is fantastic at delivering very high end sophisticated strategic counsel, but frankly they are terrible at running processes in an efficient, organised, optimised way. They’ve never been asked to do it, so they’ve never developed that expertise.

Rather than address the ever-increasing demands by clients for “efficient, organised, and optimised” legal services, BigLaw, unbelievably, did quite the opposite, and actually raised it’s hourly rates!  This type of backward thinking actually makes the decision-making on Bachelor Pad look rational.  BigLaw Partner-think:  Hmmm.  If we raise rates, we actually can realize the same revenue when we have to give discounts.  And instead of having to use non-billing legal secretaries (since we just laid most of them off) to do the grunt work, we can now have paralegals, and partners do that work AND bill for it.  That will help with the revenue we lost because of those damn clients who won’t pay for $350 an hour associates to be trained on their dime.  Okay, all good so far.  Now, how do we deal with those annoying demands for value-based pricing?  Who do these clowns think we are?  A real business?  Jeez.  Okay, breathe…whew…just give ’em the same ol’ song and dance that has worked like a charm for the last 50 odd years.

Unfortunately, those dusty arguments, i.e., unpredictability of legal work, inability to provide hard budgets, need for skilled associates to complete all tasks, etc., simply don’t hold water anymore, given the myriad of new legal service providers who are now able to offer exactly those “impossibilities” at an upfront fixed price, with equal or better quality.  More on that from Adam Smith, Esq.:

The founder and head of one of these firms, which is in the business of applying Six Sigma processes to document review, and which has demonstrated consistently and convincingly that their quality is immensely superior to that produced by BigLaw associates working on the same document sets, remarked fairly casually to me not long ago that “for every dollar of revenue we gain, BigLaw loses three.” If you want to reduce what “disruption” means down to a size suitable for a T-shirt, this will do nicely.

Scarier memo to BigLaw.  It’s not just the legal thought leaders who don’t agree with your unholy marriage to the billable hour.  You might want to listen to your clients.  LinkedIn’s GC, Erika Rottenberg, says billable hours are persona non grata for her here:

‘If you get to the core of it, [billing by the hour] actually puts us on opposite sides,’ Rottenberg said. The outside lawyers they use are supposed to create value and maximize efficiencies, she said. ‘While purportedly that’s what you want to do, your law firm requires you to bill hours and increase revenue.’

Michael Caplan, GC of Marsh & McLennan Companies, Inc., is even more succinct here:

The billable hour at companies like ours is dead.

Doesn’t get much clearer than that, does it?

Value-based fixed pricing is now a real option, and a real threat to the billable hour.  Riverview Law just announced plans to double its workforce in the next year.  Quite a different story than the grim reaper news constantly swirling around BigLaw.  Done right, fixed fees provide clients with a win-win-win trifecta:  transparency, value and predictability.  The genius of fixed fees, from the client perspective, is that they solve all of the current problems of the billable hour, without sacrificing quality, because it shifts the burden to the fixed fee provider to deliver at the quoted price.  To realize their full profit, the incentive is on the legal service provider to maximize efficiency, thereby eliminating the primary drawback of the billable hour model.  Yes, clients will still need to do some real work at the beginning of the process, like identifying their real goals and desired outcomes, including the respective costs of those options.  However, once this work is done, it is up to the attorney to figure out the best way to get there. Say goodbye to unpleasant billing surprises and/or endless micromanaging and audits of your legal bills. Not your problem anymore.  Worried about windfalls to the attorney who settles a fixed fee case early? Discuss success bonuses and phased fixed fees.

The continued evolution of value-based fixed pricing is all good for clients.  You can let others argue ad infinitum about whether the billable hour and BigLaw are going the way of the Dodo.  Not your concern anymore, as you now have so many better options.

Feeling the Squeeze – The Future of BigLaw (Part II)

The Future of BigLaw, Part 1 – The Numbers Don’t Lie, or Do They?

10 Comments leave one →
  1. Taylor & Taylor Law Firm permalink
    August 28, 2013 10:22 pm

    Great article–really insightful! We’ve been experimenting some with flat fees. Who else has done this? We’d appreciate any tips from other attorneys on how to handle civil litigation matters this way.

    [Originally posted on Google+ Community “Lawyers on G+”]

  2. John Chisholm permalink
    August 28, 2013 10:42 pm

    good stuff (again) Mike. Biglaw will be the last to change as they have the most to lose.
    I still think there will be a tipping point and then watch all the lemmings jump but in the meantime it will be the smaller, more flexible, innovative,customer oriented firms and external disruptors who will lead the way on this.

    • The Last Honest Lawyer permalink*
      August 28, 2013 10:51 pm

      Agree that the pressure will come from smaller firms like Valorem who are much more open to mutually beneficial outside providers like Novus Law. That duo, when working together can provide great lawyering at half the price of the usual BigLaw shenanigans. I’ll be closely watching you Aussies, who really seem to be leading the charge on value-based fixed fees.

      On a side note, the latest news on Baker MacKenzie’s big growth numbers – almost all international – will likely lead BigLaw to aggressively go after the global market to keep those revenue and PPP rankings up. Just leaves the back door wide open for the nimble innovators.

  3. Robert Ottinger permalink
    August 29, 2013 9:15 am

    Great post but many big firms seem to be thriving on the hourly fee. My firm is a 5 lawyer plaintiff’s employment firm in NYC and we have been doing flat fee deals for years and rarely ever use the hourly fee. The hourly fee is bad for everyone in my view. The best arrangment is the contingency fee because that truly aligns the interests of the firm and client.

    [Originally posted on Google+ Community “Lawyers on G+”]

  4. Josh Gerben permalink
    August 29, 2013 9:18 am

    This is certainly a great article. Thanks for the heads up, Preston Clark. As a lawyer who practices mostly on fixed fees, I believe that they great in certain circumstances. The fixed fee goes a long way to building client relationships, and, to providing transparency for clients. That being said, even I struggle to offer a fixed (or flat) fee when it comes to either enforcing a trademark or defending an attack on a client’s trademark. When you are in a litigation environment, there is simply no way to predict the amount of time it will take to deal with an issue. Since a lawyer’s only product is his/her time it can be very dangerous to offer a fixed fee only to see the litigation take double the time you anticipated.

    [Originally posted on Google+ Community “Lawyers on G+”]

    • The Last Honest Lawyer permalink*
      August 29, 2013 9:20 am

      Josh. Let’s not forget you are selling far more than your time – you are really selling your skill and knowledge. As for complex and unpredictable matters, it is still possible to breakdown those matters into steps that are likely to occur, may occur, and unlikely. Then offer fixed fees for each stage, adding success bonuses. Part of the genius of fixed fees is the transparent communication that goes into developing the fee and scope. This is totally lacking in the billable hour model.

  5. Gavin Nathanson permalink
    August 29, 2013 9:24 am

    Although I agree that fixed fees are preferable to hourly billing, I still find that this model is also not good enough and can only lead to over or under pricing, negatively affecting the firm or the client. A more balanced approach would be hourly billing, with an agreed capped fee; this hybrid model is better on all parties concerned, as the client will be protected against continually increasing exposure and the practitioner builds a better relationship with the client. I use this model and it works well.

    [Originally posted on LinkedIn group “Fizzlaw: small business guide to lawyers”]

  6. Tracy Coyle permalink
    August 29, 2013 11:14 am

    Obviously the focus is on BigLaw because small firms – especially in the consumer realm have been working on fixed fees for years. I serve small fixed fee attorneys but I also know the ‘billable hour’ mentality still exists even with them.

    Some of my clients only send me large, complex cases to work on and keep the ‘simple’ ones in house. My problem is that my fee structure is ‘balanced’ to have some simple, easy – short – cases to balance the longer complex ones, but if all the easy ones never appear, only the complex, then all the ‘fixed fee’ benefit accrues to the client.

    I’ve tried ‘retainer’ plans to encourage all the case work but most firms object to ‘fixed’ fees. I’ve even suggest a % fee: set their fee for their clients, my fee is a % of that. If they charge a client more because of complex issues, my fee goes up a similar % and if they charge less, my fee is also a % less. Whether it is the unusualness of the suggestion or just unwillingness to change, I don’t know. But eventually I see more firms going this way.

    I’ve enjoyed the series even though I am not an attorney.

    [Originally posted on LinkedIn group “e-LEGAL”]

  7. David Vilensky permalink
    August 29, 2013 6:38 pm

    Although preaching to the converted, this is a very good summary of the case for fixed fee pricing. The Perth, Australia firm of which I am the managing partner abandoned the billable hour and introduced a complete fixed fee model across the board 3 years ago and we have never looked back. Our critics (who included many from BigLaw) thought we were crazy and that we would go broke within 6 months. The exact opposite has in fact been the result. It was the best decision we ever made. Thanks to Ron Baker and his seminal work ”The Firm of the Future”. Every new matter that comes into our firm is scoped, priced by a pricing committee and then presented to the client for acceptance–essentially like a quotation. The work only commences on the matter when the client has agreed (and in many cases) paid the fee up front. The clients love the certainty and the efficiencies. What the profession needs to understand is that fixed fee pricing is what clients want. For years they have been asking (in some cases pleading) to their law firms for an alternative billing model to the billable hour. Fixed fee pricing is a client driven concept. Which suggests it must be a good thing. Why should the amount that a client pays be determined by how long it takes to do a job? I agree it is not easy to change in the manner that my firm has–but having done so we couldn’t be happier, and articles like the one above affirm our decsion. For sure its a massive paradigm shift but as Ron Baker famously said ”If you’re afraid of change, you’re really not going to like irrelevance.”

  8. Stanislav Roth permalink
    September 6, 2013 7:49 am

    Excellent article. It’s truly astounding that the undeniably intelligent people in charge of the BigLaw just can’t see the obvious writing on the wall.

    [Originally posted on LinkedIn Updates]

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