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Name your price

16 May 11

With clients increasingly seeking fixed fee quotations, can legal practices respond and still remain profitable? Solicitors and consultants around the country give their views

by Peter Nicholson

In an ideal world, solicitors would be able to tell their clients in advance how much a transaction will cost, there would be no unexpected turns of events along the way and both sides would come away satisfied. Life isn’t like that. But increasingly, clients still want the certainty of knowing in advance what they will have to pay. So how can law firms offer their clients fixed fees without jeopardising profitability?

When the question was posed recently by a solicitor in the LinkedIn group for the Law Society of England & Wales Gazette, a lively debate ensued that attracted over 100 comments from other members. Do the same issues arise in Scotland? We thought it worth asking a cross section of practitioners and consultants.

“Undoubtedly clients are increasingly seeking fixed fees as well as putting pressure on the hourly rates”, commented Ian Turnbull, managing partner of Edinburgh firm Gillespie MacAndrew. “Given this is what they want, I believe we should respond constructively and in many cases it is possible to give the certainty desired based on our experience of the typical job. We make sure that all our lawyers are aware of the fee levels and look to deliver within the quote.”

Ian Smart, sole principal of a Cumbernauld practice, put it this way: “Fixed fees can (and indeed in summary criminal legal aid obviously do) work when you have a bulk supply that allows for the swings and roundabouts. Most solicitors now take a similar view regarding fairly standardised work such as domestic conveyancing, undefended divorces or straightforward wills. The clients like it and the certainty of cost undoubtedly secures business, even when inside knowledge might suggest time and line might potentially have worked out cheaper.”

Although much corporate work is put out to tender, Johnston Clark, managing partner of Blackadders, Dundee, added that “we like them or a collar and cap type arrangement for corporate transactions, where the client typically already has a budget figure in mind”.

Making them pay

Clark also argues that fixed fees don’t mean less profit. “Fixed fees should virtually guarantee you your target margin for the matter concerned, or else you have made a decision to earn less. We usually find that a fixed fee achieves that better than an hourly rate will, because we generally know what is involved and can delegate to the lowest level of economic competence.”

Kim Leslie of reparation practice Digby Brown, and convener of the Society’s Civil Justice Committee, observed that clients value the certainty for budgeting purposes. “However, you should not assume that a fixed fee is necessarily going to be cheaper than an hourly rate account. The fixed fee will be based on a number of assumptions to ensure that the work remains profitable.”

Fiona Westwood, consultant with Westwood Associates, agreed. “Fixed fees do not have to mean cheaper and unprofitable. Charging by the hour does not reward people who are good at their job and work quickly. We need to focus on what clients value and charge on that basis.”

She commented: “Clients complain to me that law firms say that they are ‘experts’ in a certain type of work yet when asked for a fee quote say ‘that depends…’. Clients see this as either disingenuous or a way of trying to milk them, arguing that if the firm has so much expertise then surely they know how much a typical example will cost.”

But to make them profitable, you have to understand the real cost to your business of carrying out the work, which some lawyers still find difficult. A solicitor who asked to remain anonymous responded: “There is a common misconception that fixed fees must mean a drop in profitability. In fact, a rigorous approach to financial modelling and appropriate structuring of the work can mean the opposite. The last thing clients want is for their lawyers to work on an unsustainable business model.”

Discussions with clients should cover value as well as cost, said Westwood. “Solicitors are not good at talking about money. We hid behind scale fees, and when they went, we used the hourly rate to avoid talking about actual likely costs. Solicitors have to get better about talking about fees with clients and to do that, we need to know the value of what we can achieve for clients in relation to direct benefits to them.”

Business models

Not everyone accepts that fixed fees are necessarily the way forward – you should also have a clear idea of where you wish to position yourself in the market, a stance taken by some respondents in the English debate who maintained that there are still enough clients willing to pay for a bespoke service.

Bruce de Wert of Georgesons in Wick made the comparison: “I think the question raised is an agonised one, emanating from England, from those who are being hit by conveyancing competition. The conveyancing market there is dominated by estate agents. The estate agent pockets his commission and, as part of his marketing, offers conveyancing as a cheap ‘extra’. What you learn from that is that the estate agent has done his marketing and the solicitor who accepts low price conveyancing has not.”

He added: “If what I am saying is gobbledygook, then my advice to you is the same as I gave myself: ‘You were never taught anything about business, so go back to university and do a part-time business course.’ For me it was a wonderful revelation.

“Law firms can offer fixed fees without jeopardising profitability, but whether they want to do so is a complicated question. Do they want to be in that market? Should they be the size they are? Should they be in that geographical area? Those are just some of the questions raised. It isn’t easy.”

Westwood commented on the education point: “I wholeheartedly agree with him. Solicitors need to take the management of their businesses seriously if they are move forward positively. Many are doing a great job using their instincts, but getting to grips with the best of management theory and learning how to use proper business tools will make a huge difference to how firms perceive what needs to be done.”

Good information

One of the first to embrace the fixed fee approach was Stephen Gold, who built up a very substantial property practice based on the concept. Now a consultant to others, he believes fixed fees still represent an opportunity waiting to be seized.

“Far from being the death knell of profitability, they are an opportunity for firms prepared to be entrepreneurial, embrace new approaches and invest in the skills and resources to make them work.

“The first step is to map the process, so you have a clear understanding of what is involved, the likely time it will take and the resources, human and other, it will need. If you do not have these skills in-house, it is worth outsourcing, especially for work which is recurring.”

Having done that, he continued, you should ask:

  • Is there a simpler, more efficient way I can do this? Can I use technology to help me do the work more cheaply and efficiently, and perhaps at the same time deliver a quicker, better service to clients?
  • Who should do the work? From partner to paralegal, assigning the right person is crucial to profitability and competitiveness.
  • With corporate/commercial clients, can I use fixed fees as a carrot to extract other benefits from offering competitive fixed fees – for example a long-term arrangement in which the firm is used as a predominant or sole supplier? The more swings and roundabouts, the lower the risk.
  • Can I help my clients be more efficient – something of mutual benefit? In-house legal teams and professional managers are under extraordinary pressure to deliver and will always appreciate constructive, innovative and realistic suggestions.
  • Can insurance help? For example, employers can insure against the risk of being taken to a tribunal, and non-lawyer providers of employment law services have used this to construct fixed annual retainer models for all non-advocacy work.

Turnbull agreed that management information is the key to profitability. “The biggest risk in our experience is the matter which overruns, perhaps because of unexpected delay on the way and perhaps because of unexpected additional work arising or changes in client instructions. We deal with this by scoping the work at the outset and where appropriate take care in explaining to our clients at the earliest opportunity the reasons for any additional costs, and in virtually all cases a satisfactory arrangement can be achieved.”

Scoping the job

Yorkshire based consultant Andrew Otterburn, who analyses the Society’s Cost of Time Survey returns, agreed that these are the matters that pose challenges.

“The problem is that you need different skills when working on a fixed fee basis, skills that many firms lack. In particular, firms need to be good at:

  • scoping the work and understanding what is, and what is not included in the fixed fee;
  • communicating back to the client so the client also understands;
  • identifying when the matter has extended beyond the fixed fee and having the confidence to let the client know, and the cost of the additional work;
  • supervision and identification of appropriate staff to do the fixed fee work, in particular for volume matters.”

He added that particular issues can arise concerning post-completion work that has to be written off.

Others have made the same point regarding matters that do not conclude.

Gold endorsed the scoping point. “The need to adjust the fee upwards in the event of the spec changing must be clearly spelt out at the beginning, not when the problem arises. We can learn much from builders, plumbers and the construction industry generally – as most of us know to our cost, overruns and variations are a significant contributor to their profits.”

Fixed fees of course make it easier for clients to compare quotes from different practices – in which case it is especially important to be clear about whether offers cover the same work.

Contentious matters

Even with these provisos, there are limitations, particularly in contentious business. “The exceptional case provisions of the summary criminal fixed fee regime recognise that”, Smart pointed out. “And no one would be mad enough to do something like a contact action on an open ended basis for a single payment.”

Family law practitioner Liz Welsh is quite at home with fixed fees for, say, an undefended divorce following a minute of agreement – though includes in her letter of engagement a caveat should an unforeseen difficulty arise – but is certain that family law “does not readily lend itself to the use of fixed fees much of the time”.

“In a practice such as mine, where I deal with a great number of contentious cases, a fixed fee is often simply not feasible. The information from my client may indicate that there are no tricky issues to deal with, but the opposite number may have different ideas.”

Citing a case where her client’s repeated offers to settle were refused and the ultimate award was lower than any of them, she continued: “Rather than offer to work on a fixed fee in that sort of case, I will often suggest a capped fee approach. I will agree to take the case as far as possible for a fixed amount. If the matter has not concluded by the time the fee is exhausted, the client has the option of deciding whether or not to proceed. That sometimes helps focus attention on the issues that are worth pursuing and those which are not worth the cost. The fee review can even be a useful tool to bring matters to a conclusion.

“What is really unsatisfactory is having a client throw in the towel on a good case for want of funds. An option when that seems to be a possibility is to agree to take payment of fees from the settlement. To do that you have to be very sure of success and of the costs of achieving it, and obtain a clear mandate, which deals with the possibility of the client transferring to another solicitor. I will also ask that all outlays are met as we go along. Such arrangements are useful but can play havoc with cashflow if used in too many cases at once!”

And even that approach is not an option in a non-financial case, such as contact – where there are also uncapped charges by those appointed to prepare reports for the court. “Clients have to know about the risks of starting a case they may not be able to take to conclusion, particularly liability for expenses. All of this explains why family lawyers use a number of approaches to try to keep clients out of court!”

Clark suggests as respects contentious business: “The best way to deal with that is an agreed budget which can be reviewed and a worst case scenario discussed before actions are raised or defences lodged.”

Variations on a theme

Capped fees, i.e. with an agreed upper limit, have their supporters, as the English debate revealed. Westwood agreed that they go some way towards meeting her point about claims to expertise: “Offering a capped fee at least makes the client feel that the firm is putting its money where its mouth is.”

Whether fixed fees can be adapted to more scenarios, said Smart, “depends on the steadiness and ubiquity of work coming to a firm in any given area. They certainly could be adapted to stages of transactions with the firm reverting to hourly charging in the less predictable bits but, while that might suit the lawyers in terms of ease of feeing and reduced time recording, I’m not sure if the variable element makes the whole thing any more attractive to clients than classic time and line”.

Leslie added: “One of the constraints I can foresee for fixed fees is the reliance on external resources, which the business has no control over. Unless your external resources are prepared to work in the same way, an element would have to be built into the fee structuring to reflect this variable.”

However some English comments did regard hybrid, or alternatively “segmented” arrangements (fixed fees quoted for different potential stages of a case), as offering advantages.

Gold pointed to other ways of using fixed fees to generate business, again with reference to England. “Offering advice online only and in bite-sized chunks for low fixed fees is an accelerating trend. See for example http://clicklaw24.com, which launched last month, a partnership between a law firm and a barristers’ chambers. Not only is the cost of supply kept low, but clearly the hope of the owners is that their initial advice will be a hook which leads to more lucrative conventional instructions. I think this two-stream approach for law firms will become an increasingly common feature of the market, as firms try to compete with ABS providers.”

Or as Leslie summed up: “Flexibility and innovation will undoubtedly be necessary within business to deliver value to the client without diminution of quality or service.”

Do you want to contribute to the debate? Post a comment to the article at www.journalonline.co.uk or email a letter to the editor


VIEWS FROM THE SOUTH

A few more comments from the English discussion:

“Interestingly working on a fixed fee case causes changes in the way my team work. They are much more proactive in trying to bring about a resolution of the case. I put my most senior fee-earners on fixed fee matters as they have the experience and gravitas to really get to grips with the problem and solve it. Surely this has to be a ‘win-win’ situation for both us and our clients?”

[Response to a doubting family lawyer:] “You have two real options I think:

“1. Break down the whole case into those items that you can fix a price on and those that you can’t. This may sound of little value but clients will accept that that some aspects are not really possible to fix a price on in advance.

“2. Keep loads of records of cases and time needed to complete to identify an average, and pitch slightly ahead of this. Some you’ll gain on and some you’ll lose but overall you should be ahead. This is called an aggregated profit model and is quite common in other professions.”

“There are always going to be cases that are not suitable for fixed fees but equally there are many that are. By offering various different methods of funding depending on the circumstances of the case at hand, firms may even enjoy a greater scope of work from clients that otherwise would not have instructed them.”

“For the majority of ‘traditional’ legal practices – don’t compete just on price. Get onto the same planet as clients and make sure that they value everything you do for them… Just push yourselves and your historic information as far as you can. Not many firms do.”

“Because it is fixed rate we bill more or less half the amount more or less halfway through the process and the final bill is issued toward the end of the process. This gives certainty and a structure which is good for us and good for the client.”

“Some of our competitors charge such low fees they have to do three to four times the work we do to earn the same.”

“The real opportunity for lawyers is in being transparent about what you will be providing. Good communicators always do well.”

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