In an article entitled “Alternative Fees for Litigation: Improved Control and Higher Value,” James D. Shomper and Gardner G. Courson argue that “If properly structured, an alternative fee arrangement should result in a win-win scenario for client and law firm.”
That is an excellent goal, and it is certainly possible in some cases, especially for litigators. But I must say that in my personal experience with hundreds of fixed fee contracts for consulting projects over more than 23 years, the vast majority were a zero-sum game. In the short run, when the project was over, one party did better than they would have on an hourly basis, and the other party did worse.
Fixed price projects generally begin with planning a budget upfront, and then managing the work to keep within that budget as the project proceeds. When my company was billing by the hour, I found it relatively easy to manage employees to maximize profitability. But during periods with lots of fixed price work, it became extremely difficult to juggle dozens of projects with ever changing deadlines in such a way that everyone remained productive, while projects stayed within budget. And during mixed periods, when some of our projects were fixed price and some were billed hourly, it was an absolute nightmare, because employees had to turn their efficiency on or off, depending on the project.
So I believe that as law firms transition to do more fixed fee work, they will find it difficult and expensive. Meanwhile, clients want to pay less. Put all this together, and it makes it hard to imagine that alternative fees will consistently lead to “win-wins.”
On the positive side, as you get more experience, you will be more and more likely to do well. And that will allow you to get more business as you serve the growing number of clients who are demanding lower costs and predictable legal budgets.
If you find yourself in a situation where a fixed fee is the best way to get a particular bit of business, here is a step by step process to maximize success, based on best practices from other law firms and other professions.
Step 1 - Identify the matters that are most suitable for a fixed fee
Some legal matters are much easier to handle on a fixed price basis than others. In the Shomper and Courson article, the authors note:
“It makes sense to start with fairly predictable, repetitive cases; for example, slip-and-fall cases for a retail store chain. Outside counsel should evaluate the cases it has handled in the past and gather pertinent data that will be needed to structure the alternative fee arrangement, such as average case cycle time, amount spent in the discovery phase, success in dismissing cases or obtaining summary judgment, frequency of trial, and cost of trial.”
Step 2 – If necessary, break down large matters into smaller ones
If it is too risky to quote a single price for a large matter, consider whether a fixed price could be charged for sub-stages, such as separate fixed fees for interrogatories, pretrial motions and/or summary judgment motions.
Step 3 –Select the best clients for this approach
From a marketing perspective, there is only one good reason to offer a fixed fee: because the client wants it.
Business development is all about advancing relationships with the right people. So it may be useful to ultimately raise the subject of fixed fees with each of your clients. At an absolute minimum, a discussion of alternative fees is a great excuse to spend time with clients understanding what they truly want and need.
However, there are also reasons for caution. Do not open the discussion if you are not willing to proceed. You can’t put the genie back in the bottle, and once you get a client thinking about fixed fees, it may be difficult to continue on an hourly basis.
If you are just starting to experiment with this approach, you may want to start first with your B and C clients, to work the kinks out of the system. Approach your A clients only when you have a proven track record of success.
Despite the benefits of predictability, some clients will not be interested in this approach. They may be risk averse by nature, comfortable with hourly billing, and unwilling to take a chance on lawyers cutting corners to stay within budget. But every client will appreciate an offer to discuss fixed fees, even if it’s only because it shows that you are looking for better ways to meet their needs.
Step 4. Identify factors that drive cost up, and consider how you might control them
Shomper and Courson note that in fixed fee work it is important for all parties to be aware of the factors that:
“...make one case more costly to litigate than another. It may be motions practice in a class of cases in which motions to dismiss or for summary judgment are frequently used. It may be depositions in a class of cases in which gathering the testimony of numerous witnesses is necessary. Whatever the cost driver, inside and outside counsel need to consider it carefully and think creatively about ways to achieve the desired result at a reduced cost.
If depositions are driving the cost of litigation, inside and outside counsel might consider whether fewer depositions can be taken. For example, some third-party witnesses could be interviewed, if willing, instead of deposed, with a resulting lower cost. The cost of depositions can be reduced by making an intelligent and informed analysis of the risk involved in not taking depositions of certain witnesses. Rather than turning over every stone in an effort to find every possible piece of relevant information, the client may be willing to take a small risk of an unpleasant surprise later in the litigation in exchange for cost savings now.”
If simple specification of key cost factors can be added to the definition of a fixed fee, it will dramatically increase the chances of a mutually satisfactory outcome. In addition, a clause as simple as requiring in-house counsel to identify a single decision-maker can avoid an enormous amount of inefficiency and waste.
Step 5. Define the price
Now the moment of truth: What will you charge for this work?
This can be very difficult, or not, depending on your attitude and experience. Details were described in last week’s post.
It’s time to come up with your best guess, and move on. Keep the agreement as simple as possible, because fixed price agreements work best in an atmosphere of trust.
Step 6. Protect yourself with a “safety valve” clause or change order
Sometimes, things happen, and costs go up.
The traditional approach to this in most fields is to issue a change order in which both parties agree that the work went beyond the original scope and the client agrees to pay additional costs. Needless to say, this often requires some negotiation.
A better way to go, in my opinion, is to start by setting an upper boundary “safety valve” that defines the maximum amount of work that will be delivered within the price.
For example, suppose a small firm defines a fixed price of $30,000 for a matter that you predict will require 100 hours of work at an average rate of $300. Add a clause that says both parties agree that no more than 150 hours will be delivered for the $30,000. If the hours exceed 150, both parties agree to renegotiate the price.
That protects the firm from charging less than $200 per hour ($30,000 for 150 hours) in the absolute worst case, and also gives the client motivation to avoid unreasonable requests. When a project is bid, it also has a powerful psychological effect, in that some clients will do the worst case math, and perceive the $200 per hour limit as the true cost.
As the project proceeds, it also takes most of the arguing out of change orders. Both the client and the law firm can review actual hours spent in each phase of the project, compare them to budgeted hours, and discuss what might be changed BEFORE a project goes over budget.
Step 7. Manage the work to a successful conclusion
With hourly billing, there is little need for efficient management. In fact, the less efficient you are, the more money you will make in the short run, as long as the client is willing to pay. But in fixed price work, it is absolutely urgent that matters be completed within budget. This is a totally different mindset, which has the potential to change everything about the way law firms operate, and how lawyers are compensated.
A discussion of the best ways to apply project management principles to legal matters could be the basis for another ten part series in this blog. For now, the most important advice is to keep records of the hours worked on each matter, and where you stand in relation to the original budget.
Step 8. Review the results
The best way to learn how to do better in the future is to study the past. When you close each file, conduct what Ron Baker calls an “after action review”. Meet with all the lawyers who worked on the matter, and discuss how to do better the next time.
If you want a detailed “Checklist for closing a file” see page 93 of the book Winning Alternatives to the Billable Hour.
When you do a financial review, you may find you’ve done better than you would have with hourly billing. But even if the revenue is lower than it would have been with hourly billing, you still may be better off in the long term. If alternative fees help you to keep clients loyal in a very tough economic environment, you are already winning.
Next week’s post will discuss hybrid approaches, which combine fixed fees with hourly billing.