Lawyers discuss making fixed fees work

One question posed by a member of the Gazette’s LinkedIn group hit a nerve with the group’s 3,766 members: ‘How can law firms offer their clients fixed fees without jeopardising profitability?’ Posted two months ago, this topic continues to be a lively debating thread – with more than 15,000 words written over 83 posts to date.

Clients prefer it

Almost all contributors to this discussion accept the enhanced trust that clients have in a ‘fixed fee’, and know this creates huge pressure to work for a fixed fee. But the problems of moving to fixed fees for many instructions are manifold, and the experience of residential conveyancers in this area puts many off.

To begin with there is a fear that the transparency provided by fixed fees wrongly simplifies the service on offer, and leads to a ‘Dutch auction’ among competing firms. As one partner relates: ‘I introduced fixed fees for divorces at my firm at the beginning of this year and saw a surge of new work in response. However, there are some concerns that fixed fees can lead to undercutting by your competitors.’

He continues: ‘We were the first firm in town to offer a fixed-fee divorce and two of our competitors now offer a slightly lower fixed-fee divorce (albeit that they are structured so differently that it is not clear at first sight what the difference is because we did an all-inclusive figure and they gave a lower figure, but then added VAT and disbursements – I think the technical expression is drip selling!) I resisted the temptation to drop my fee to compete.’

For many here the challenge is to move from a situation where the price is not just set by reference to the competition – who may be buying market share or turnover, or quietly excluding some items from their quote – and to gain the client’s acceptance of a fee that is profitable to the firm.

As another partner puts it early on in the discussion: ‘Fixed costs always makes it easier when talking to the client about costs. Clients certainly do prefer fixed costs for obvious reasons. I think we just need to work out how we can make fixed costs sustainable for us as businesses. I am sure this is possible but it is not easy.’

At base, many note that profitability will, of course, depend on making accurate judgements up front. ‘Whether a fixed fee is profitable for the law firm involved is our problem,’ notes one family law partner. ‘It is down to how good we are at (a) making educated guesses and more importantly (b) doing a decent spec for the work included.’ This is possible with a ‘regular’ client, notes another partner: ‘However, if the suggestion is that a fixed fee can operate for different clients, then the consequence would be the overcharging of some, and undercharging of others.’

Blended quotes

The discussion soon makes it clear that many firms are trying, some say experimenting, with hybrid quotes. ‘Some firms,’ notes one contributor, ‘are now able to agree with clients a partly time-based, and partly fixed-fee arrangement for a matter, whereby an hourly rate is charged for the opening phases until the scope is known and then a fixed fee is charged for the final phases of the matter. This works best in an e-billing scenario,’ he adds, ‘where both the client and law firm are comfortable and can agree at what stage in the life of a matter the work is being done.’

Examples are of this approach are evident in work on both wills and ancillary relief. One family lawyer describes a system where several items are set out as ‘fixed’. ‘I’ve developed a fixed-fee ancillary relief package which breaks the case down into component parts and a fixed fee is charged for each one,’ she writes. ‘The fixed fee isn’t necessarily cheaper than charging on a time basis, but clients do very much value the certainty it gives them.’

This isn’t just disguising an hourly rate, she explains, and has positive impacts on her colleagues’ behaviour: ‘Interestingly, working on a fixed-fee case causes changes in the way my team work.

They are much more pro-active 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?’

One matter that firms offering fixed fees have had to deal with is what to agree with the client on matters that do not conclude.

One family lawyer describes his experience: ‘For a divorce fixed fee, it is dependent upon the work being completed (assuming the client allows this), and we were advised that we should not actually be billing and taking the money from client to office account until, say, decree nisi stage when the majority of the work had been done. For clients who decide they don’t wish to proceed, we say that we will charge on an hourly rate basis up to the value of the fixed fee, so if they terminate early on the chances are they’ll get some money back but at a later stage they won’t.’

Presenting the client with a ‘capped’ fee is also favoured by some. One who considered fixed fees for ancillary relief cases recalls wondering: ‘What if the matter settles (which most do)? How much do you charge then? In the end,’ he says, ‘I concluded that capping our fees was a better approach so that we guarantee that the fee will not exceed a certain figure... but it could very well be lower.’

Information capture

Whether matters are fixed, fixed in segments, or capped, the Gazette’s LinkedIn members agree on the importance of capturing good information on the matters they handle as a precursor to any change. One veteran of the fixed-fee environment advises: ‘Having worked as FD/CFO for volume-based law firms for the last ten years, the key to pitching fixed fees with a degree of accuracy lies in the quality of your information systems (IS) and these depend on the accuracy and completeness of your data capture.’

He adds: ‘Sadly, many law firms fail to see the importance of their IS and therefore fail to fully understand their business – where they make money and where they do not. Take the time to make an honest assessment of this part of your business – taking a decision to pitch a fixed fee, or any fee for that matter, based on inaccurate or incomplete data can cost you money.’

Even with good information, though, there is the problem of communicating effectively to clients the responsibilities they have when seeking a fixed fee. A property partner notes: ‘With long experience in commercial property work I have found assessing the right fixed fee for the job relatively easy – where I have come unstuck is when clients do not keep to their side of the bargain and refuse to accept additional fees on changes of instruction, renegotiation of the heads of terms.’

As a result, lawyers need to spend time finding the difficult balance between avoiding open-ended commitments to the client on the one hand, and an agreement on a fee that has so many caveats that the reassurance clients feel with a fixed fee is lost.

Communication skills

The adoption of fixed fees for legal work sends a message to clients that the service is transparent and can be compared with other providers – and that message, as well as being attractive, does imply to some that price competition is the point. There will certainly be consumers who see fixed fees in this way, and, of course, firms which will respond to that perception.

So communication is key to making any change successful. One contributor notes: ‘The real problem is the perception,
(rightly or wrongly), that lawyers are just an open cheque. Consequently, the real opportunity for lawyers is in being transparent about what you will be providing. Good communicators always do well.’

Breaking fees down into segments that are ‘fixed’, or the use of other hybrids such as a mix of fixed and hourly elements, can, it seems, be another opportunity to explain what is being provided. As with all aspects of client care, the emphasis is placed on clear and timely explanations of any changes to expected fees, or the progress of the matter.

As one lawyer puts it: ‘If there are changes to the terms, timescale etc I will inform the client immediately and provide a revised figure. Any increase has to be justified. I have not had a single client yet who has objected to this because I explain that certain things are out of my control, and at the point of giving my “quote” I will make certain assumptions. I believe in treating others as I would expect to be treated – that is my yardstick.’

With good communication, clients should be focusing on what seems to be the most attractive aspect of fixed fees: the predictability. As one lawyer puts it: ‘The fixed fee isn’t necessarily cheaper than charging on a time basis, but clients do very much value the certainty it gives them.’

Finally, it is reassuring to know that some of the challenges law firms are encountering in this area are not unique to the legal sector.

As one LinkedIn group member who works in the construction industry puts it: ‘Many large construction projects are publicly ridiculed for being late and over budget, yet from my experience the feasibility study will have been paired down to a figure which the funders wanted. Many projects proceed on the wrong budget and the wrong timescales.’

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