Daily Dispatch

Five Questions About Fixed Fees You’re Afraid to Ask

By | Mar.21.14 | Daily Dispatch, Fees, Innovation, Law Practice Management, The Friday Five

All it takes is a quick eye-popping view of Riverview Law’s television campaign to understand the disruptive force of this InnovAction Award-winning U.K. firm. For law firms stuck on the billable hour, it’s likely to be indigestion-inducing. Fixed fees. For everything. Every. Thing. In this week’s Friday Five, Andy Daws, responsible for Riverview’s growing footprint in North America, answers the question, “Wait … they can’t do that, can they?” Lead, follow or get out of the way.

1. How on earth can you make money with fixed fees?

It’s easy! At least, it is if you’re one of the many firms that calculate their fixed fees by multiplying the estimated number of hours by their hourly billing rate and doubling it just in case! (Click here to watch “Cometh the Hour” on YouTube).

New Math New Money DownloadThere’s a better way, of course, but it’s not for the fainthearted or those suffering an entitlement complex. It turns the traditional model on its head and transfers the emphasis from inputs (hours) and overheads to outputs and value. Do you see the difference? One puts the law firm at the center of the equation, the other puts the client there. In one, efficiency is the enemy; in the other, it’s a key driver. This approach redresses the power imbalance and replaces it with client value and shared risk. Many professional service industries have been successfully operating in this environment for years and, provided you’re prepared to put the work in, there’s no reason why it can’t be profitable.

2. Aren’t clients suspicious about it?

For years, clients have been held ransom to the billable hour by traditional law firms, many of whom have treated it as a license to print money. Often, clients’ early experience of fixed fees from these same firms hasn’t been terribly positive either. Cynicism abounds and for good reason. But as we’re discovering, if you align your business model to clients’ best interests and then offer fixed fees, that same suspicion doesn’t exist because they can see that the entire enterprise is all about putting the customer first, delivering maximum value and establishing long-term business relationships. It’s not just a veneer to make it look like you’re customer-focused. Traditional law firms offering fixed fees is a bit like splashing a coat of shiny new paint on the exterior of a condemned building — you can call it modernization if you like, but it doesn’t change the fact that the underlying structure is still not fit for its purpose! This is the key — running a fixed fee structure completely changes your business model, operating philosophy and reward and incentive structure.

3. What happens if you miscalculate?

You don’t go back to the client and ask for more money! Nor do you shortchange them by taking shortcuts to reduce your cost base. You take it on the chin, in the context of a long-term business relationship, figure out what you can learn from the experience and move on. Lawyers are typically risk averse and like to see things in black and white. These can be valuable qualities for the practice of law, but they conflict with the fixed fee paradigm, in which there’s often at least a hint of gray. The fragile financial ecosystem most firms inhabit only adds to the problem. But with experience and data, the process becomes more science and less art, and the risk is properly managed. A friend of mine with a solo practice wrestled with these very issues but decided to go out on a limb and offer his services at a fixed fee to one of the largest Internet companies in the world — he landed a sizeable ongoing contract as a result. Fortune favors the brave!

4. How can you possibly know if you’re making or losing money if you don’t have billable hours to track?

Although much revolves around the billable hour within traditional law firms, it’s worth remembering that much of the rest of the world is getting by just fine without it. This is a non-question pretty much everywhere else. Admittedly, once you’ve evolved your business model around the billable hour and chosen to measure and reward success largely by this yard stick, it requires some fundamental changes to reverse out of that cul-de-sac. Such a maneuver will likely be much easier for smaller firms that don’t have the same level of entrenchment. However, it still requires a bold decision and nothing short of reinvention in most cases. At Riverview, our teams do not record their time in the traditional manner, but that doesn’t mean we don’t have a tight handle on all the costs associated with our fixed-fee contracts, because we do. We’re simply looking at the teams’ activities from an entirely different perspective — a business perspective, focused on outputs and value.

5. Can you do this for litigation, too?

Yes, although as you’d expect, it’s sometimes a much more challenging exercise. We do a lot of litigation and we offer fixed fees for all of it — even the major cross-border cases. We just launched a fixed fee M&A offering, too, and are already engaged in our first transatlantic M&A deal. It all comes back to the business model and the data. If you’re caught up in the inputs (hours) and overheads, it’ll drive you crazy trying to figure it out. But when you’re configured for efficiency and have the relevant data at your fingertips, the focus shifts to outputs and value and it’s a different conversation — in fact, a different world. But as long as you’re not looking for a world in which money grows on trees (you won’t find BigLaw here) and don’t mind living with a little ambiguity at times, it can be a great place to be. Clients certainly seem to think so.

Andy Daws is Vice President, North America for Riverview Law (@riverviewlawus), a “new model” firm seeking to change the way businesses use, measure and buy legal services, and widely acknowledged as one of the most innovative law firms in the world. He is a regular speaker on innovation and disruption in the industry, and a guest lecturer at several leading U.S. law schools. Andy is also an adjunct member of the New York City Bar’s Special Committee on International Legal Practice.

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5 Responses to “Five Questions About Fixed Fees You’re Afraid to Ask”

  1. Judie Bronsther
    21 March 2014 at 1:54 pm #

    Almost twenty years ago I wrote an article entitled “Alternative Billing Methods: Proceed With Caution,” wherein I warned that every billing effort is subject to abuse if not monitored. In essence, all billing arrangements are based in whole or in part on hours. For instance, Fixed Fee arrangements (with or without a bonus) are predicated on the amount of hours anticipated to be spent by the various billers at their then current billing rates. Unfortunately, firms have been known to skimp on hours, ignore subtle or complex problems and give work to attorneys with insufficient experience or knowledge to handle the matter.

    I have always maintained that there is nothing more expensive than a cheap lawyer. The answer to cost effective legal representation is not fixed fees. Rather, it is traditional management techniques such as RFP’s, billing policies and compliance monitoring. If done correctly, legal auditing can actually improve a client’s relationship with its outside counsel. The goal should be to prevent problems, not to catch them.

  2. Raj Jha
    21 March 2014 at 2:27 pm #

    Andy,

    Great article. My firm (prior from my retirement from practice) ran entirely on flat fees – a fixed amount monthly for unlimited service. It was an incredibly successful model, and despite being a small boutique we routinely won business without competing on price. In fact, we were a premium priced provider.

    The #1 question from attorneys intrigued by our model was “can I see your engagement letter?” A question that misses the mark entirely, as if there’s some magic language that makes flat fees work.

    The key, as you point out above, isn’t the fee model alone. It’s the operational and marketing components that make it work well or result in a profit-eating disaster. Too many lawyers pick numbers out of a hat or use billable hour estimates, and get their lunch eaten because they confuse a billing method with a business model.

    Simply put, trying to use fixed fees with a billable hour business model is a recipe for disaster. Doing it right, everyone (including the client) wins.

    A few months back I ran a workshop with 44 attorneys to get them off the billable hour and onto fixed fees. Their biggest hurdle wasn’t the concept of fixed fees, it was changing their mindset about their business – the relationship with their clients, providing huge value above and beyond commodity work, and turning their operations from inherent inefficiency (billable hour) to effective and valuable (fixed fee).

    Again, good article. Hopefully lawyers considering this will look for models of practitioners who are doing this successfully, and be able to get there quicker.

    -Raj Jha

  3. Paul Harricks
    28 March 2014 at 2:15 pm #

    I am old enough to remember an era before the billable hour when law firms charged clients what they thought their work was worth, usually after discussion with the client. The number of hours was only one element of the billing decision. It was, in fact, clients, back in the late 1970′s and early 1980′s, who pushed firms to bill by the hour because they wanted more transparency.


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