Fixed Fee Arrangements for Law Firms

In the immediate prior post, I covered flat fee arrangements on a case or project basis. This post will deal with the fixed fee arrangement for continuing services to business clients of the law firm.

Specifically, I am addressing the day-in-and-day-out needs for businesses and corporations for legal services. In the case of smaller businesses, this usually covers the gambit—leases, employment agreements, customer agreements, vendor agreements and disputes, employment related claims, collection issues, customer injury incidents, etc. For large corporate arrangements, these fixed fee arrangements usually are more narrowly defined services for a particular area such as, for example, employee and employment issues, etc. Generally the scope of services is defined to exclude matters that spiral into significant individual cases. Those are priced independently of the fixed fee arrangement.

It is in this area of routine day-to-day legal needs that the billable hour often drives the biggest wedge between the client and legal service provider. The billable hour becomes an obstacle to preventive consultation that would have reduced the need for more significant services later. It follows that the preservation of long-term client relations can be best served by a fixed fee arrangement for such services.

Here again the success of such an approach will depend on the attitude of law firms in proposing such an arrangement. If the approach is a defensive one with excessive attention to minimizing risk to the law firm, it will eventually fall under the weight of extra charges billed to the client. The purpose of such an arrangement is not to lower cost to the client. The purpose is to remove uncertainty from the client. Thus, the law firm should build its price allowing for a reasonable level of contingencies to avoid frequent billing for extras.

Law firms often fail to understand the pressure on the corporate general council to deliver the expected numbers. Legal department heads are accountable to the CFO and/or CEO. Both of those corporate leaders are focused on delivering promised quarterly earnings. When legal department surprises result in the corporation as a whole missing its targets, the corporate council isn’t spared from critics just because they are subject to the "billable hour." They are held accountable just as any other cost or profit center manager. A successful partnering with a business’ legal department has to involve tailoring law firm billing practices to accommodate reality in the corporate environment.

If you are dealing with a smaller business, your client may not have a legal department or in-house general council. But with growth of the client, the law firm usually loses a direct relationship with the owner and eventually works with a key player in the next level of management. That individual, controller, general manager, chief operating officer, etc., like the general council in larger organizations, is accountable to the owner or president. Just like in the larger corporations, your contact does not want to have to explain surprises due to legal fees.

The risk to the law firm of a properly negotiated fixed fee arrangement for continuing services is not that great.

• First, build your prices to include contingencies with an objective of avoiding billing for extras. The exception, of course, is that your agreement should provide for separately pricing for issues that spiral into significant individual engagements.
• Second, you should price for a quarter at a time. Make sure the quarter corresponds to the fiscal period of the client. As activity volume changes, modify your per-quarter fixed fee for upcoming quarters.
• Third, communicate completely and regularly with your client so that the volume of services being delivered and the value derived from those services are clearly understood.

When communicating activity volume, stay away from the billing hours as the unit of measure. Instead measure activity in terms of what is meaningful to the client¾number of preventative phone consultations, complaints handled, past due accounts recovered, etc. Billable hour measurements should be limited to internal use in a fixed fee arrangement. They are important for determining cost and for comparing profitability in terms of effective rate and realization as compared to other opportunities available to the firm.

The law firm’s objective in a fixed fee for services arrangement is to handle more transactions with fewer hours and with lower cost talent. Likewise, the client's concern should be cost related to activity and transaction volume rather than cost per hour.

Fixed fee arrangements for continuing services should reduce long-term cost for the client as a result of improved preventative measurements and through the benefit of unimpeded efforts of the law firm to implement efficiencies through technology, knowledge management and training of lower cost supervised talent. It will benefit the law firm in terms of preservation of the client relationship and it gives law firms the opportunity to benefit from its own efficiency and effectiveness.

How does the above fixed fee alternative differ from the prevailing models for fixed fees? It differs by degree and attitude. It supposes that the law firm is using the alternative arrangement offensively rather than defensively. It supposes that law firms assume a higher degree of short-term risk for scope variances in order to deliver quarter-to-quarter certainty of cost to the client.

It is a difference of degree but that degree of difference makes the above approach a win/win relationship for both client and law firm.

 

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• The Missing Alternative Fee Arrangement for Law Firms
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• Blended Rate as an Alternative Fee Arrangement for Law Firms
• Alternative Fee Arrangements for Law Firms
• You May Not Know Your Law Firm Has Been Fired