Fee arrangement plays a critical role in client relations. Legal fee arrangement is not always an easy task due to conflicts of interest. Lawyers have almost always favoured hourly rates. However, in recent times, with the limitations of the billable hour model, there has been a shift to a more customised fixed fee model. An increasing number of clients, both small and large businesses alike request reliable, predictable prices for the legal services.
Section 3 of the code of conduct for European lawyers set out by the CCBE explicitly states that “a fee charged by a lawyer shall be fully disclosed to the client, shall be fair and reasonable.” In December 2014, the Court of Appeal for Ontario upheld the decision to reduce legal fees in the case of Nova Scotia v. Diemer. The court maintained that a person seeking legal assistance does not intend to buy time but the service itself.
Pitfalls of the billable hour model
- It considers the time provided rather than the value provided to deliver a certain outcome.
- It makes legal professionals less accountable when they quote prices.
- It encourages inefficiency.
- It decreases productivity.
- It is a hindrance for innovation and technology.
- Tasks requiring the same quality and outcome will be billed at different rates depending on the lawyer’s experience and seniority as these determine the hourly rate.
- There can be hidden costs depending on how billing increments work, and the pressure legal professionals have, to reach their billable hour quotas.
- It is fallacious as the performance is determined by the ability to meet hourly goals.
- The model disregards client satisfaction, the outcome achieved, the value generated and other parameters that can be used to evaluate performance.
- It can deteriorate lawyer client relationship. The model assumes all the risk on client and discourages long term relationships.
The billable hour model places your firm at a potential competitive disadvantage. Therefore, it is important that your firm adopt alternative fee arrangements with one such being the fixed fee model.
Fixed fee model and its benefits
A low price doesn’t necessarily imply a desirable price. Clients value the reliability and predictability of the price quoted for a legal service as or more important. Hence, more and more clients push for a billing system based on a fixed fee basis when negotiating the price for legal services. Clients can better plan and manage their expenses with fixed rate billing systems.
- Predictability: the costs of the project are known in advance. A clearly structured budget means that the client won’t have any surprises at the end, and they can familiarise themselves with the items in the purchase order more quickly.
- Speed and perception: it can improve the client’s perception in cases where it is essential for you to work quickly. There is no need to be concerned about the hours ascribed to items on the project or to ask whether the hours are presented in an entirely consolidated form.
- Focus on content: an agreed price means fewer discussions about how the hours should be structured or broken down, and it doesn’t cause problems if there are more hours than the client expected. As a result, time is saved that can be spent on other projects.
- Strategic use: quoting a fixed fee forces the lawyer to think more carefully about the strategy they should employ and about the complexities that may be involved in the project right from the start.
Overcoming the limitations of the fixed fee model
- Lower profit margin: an incorrect estimate of projected hours mean that the lawyer might take longer on a project and might therefore miss hours that could otherwise be billed for.
- A potential quality issue: any sharply reduced fixed fee may lead to a project being completed faster than with an hourly rate, so that things may be missed.
- Projects difficult to estimate: not all types of cases are suitable for fixed fees. In addition, there is also the complexity of each project, as some projects are more prone to unexpected developments that may require more hours.
- Loss of transparency: if a client is billed in hours, they have a clear overview of how many hours were spent on each activity.
Implementing a practice management software can easily solve the problems associated with a fixed fee.
- It can help you estimate the hours needed to complete a project.
- It enables you to do tasks efficiently without affecting the quality of the work.
- It gives you greater clarity. You can easily analyse projects based on the time taken to complete the related tasks. This will allow you to provide your client with a better estimate of the hours spent and quote prices with minimal variability.
- It records the number of hours spent on each activity.
A systematic cost estimation process can greatly help you achieve price stability, which will help you gain the confidence of your clients. Catering to their needs will not only help you improve customer satisfaction but will also generate more leads.