Redwood Analytics

To kick off the "Know Your Alternatives" series we'll begin with the pinnacle of the alternative fee arrangements, the fixed fee.  Today will address high level thoughts on the topic.  There will be more granular follow-up posts on "value versus cost based pricing" and a guide to finding success with the fixed fee arrangement.

I believe the fixed fee arrangement should be used for the majority of legal services.  That statement will raise many an eyebrow, but I think we can get there.  Almost every other professional service sector has made the move.  It makes logical sense if you think about it.  Everyday we purchase services from professionals who have years of experience in estimating and pricing their work.  Why should it be different for the legal industry?

If done correctly the fixed fee arrangement provides cost predictability with results for the client, and revenue predictability with efficiency gains for the firm.  This is the "win-win" scenario I have read about in several other blogs.  It is a feel good term, but misleading.  If analyzing an individual fixed fee engagement you will find one party came out on the positive than if they had used an hourly rate arrangement.  General Counsels have asked how to make sure they are not being overcharged in a fixed fee arrangement.    Law firms have asked how to secure a high profit margin and eliminate risk in a fixed fee arrangement.  Unfortunately the answer for both queries is you can't.  You can however, mitigate these concerns with experience and training.

Patrick Lamb wrote an excellent post titled "The Problem with Most Fixed Fee Proposals."  It describes a key flaw in the cost based approach to pricing fixed fees.  Most firms price fixed fee arrangements by taking estimated hours times hourly rate plus a safety margin to mitigate their risk.  This method creates the opposite effect that general counsels are looking for.  Firms are likely to be very conservative in their hours estimate so there is a strong likelihood that the client will be charged more than a typical hourly arrangement.  The firm walks away with higher profits and has taken on no risk. 

I recently spoke with a managing partner who I have come to trust and respect.  He noted that although his firm has been proactive in producing fixed fee proposals, most clients do not accept them.  I feel the distrust of fixed fee arrangements is playing the role of spoiler.

A successful fixed fee arrangement is one that has a lower quote than the end fee from an hourly arrangement.  The client pays less, the firm is more effective in their work, and both parties walk away happy.  An interesting side note is that the aforementioned managing partner did produce several fixed fee proposals that were priced appropriately and the client still passed on them.  This speaks to a knowledge gap that spans all parties within the legal industry.  Both firms and clients feel value is measured by time.  It is a product of years of billable hour domination.  Yet as in most aspects of life, change is inevitable.  If clients want cost predictability and firms want to accommodate client needs while maintaining acceptable profit levels, both parties need a change in thinking.

Ask key partners in one practice group to price a set matter with all assumptions provided and you will receive a wide array of answers.  I have yet to do this exercise and receive acceptable deviations in response to claim a uniform agreement.  Lawyers are not necessarily businessman and have not had the incentive to use their experience to track what it would take to price a matter or litigation phase.  Technology is available to help with the tracking of these arrangements but until recently use of these tools has not been an initiative.  I encourage all firms to start using what they have at their disposal as it will only help with the education process.  Unfortunately since many have not made these moves there is a concern around data reliability.  This leaves us with the need to go back in time with the each responsible attorney and analyze matters to address proper pricing.  We have history on our side. If we look at our books of business for common matters with similar characteristics we should be able to create post mortem what if scenarios.  That will allow us to hone in on eliminating inefficiencies and move toward fixed fee pricing.

The goal of the education process is not complete accuracy.  There is no perfect answer.  What you are looking for is a reasonable price that meets the needs of both the client and firm.  As a firm your goal should be to win the work, provide quality service, and to have acceptable profit margins.  Proper fixed fee pricing can allow this.     

Experience and tracking are the keys for long term success.  As law firms transition to fixed fee arrangements their will be difficulties and mistakes.  It is a cliché, but firms must learn from those mistakes and develop management skills that will help them become more effective.  I mentioned the knowledge gap on fixed fee arrangements for firms and clients alike.  If performance on these matters decline, the client will clearly recognize it.  The sooner firms can show efficiency and success in their fixed fee arrangements to their clients, the fear around the pricing technique will diminish.

Up next - the debate around cost versus value based pricing