How Fixed Fees Are Going to Change BigLaw Forever
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.