Law Institute Journal - Fixed fees of Value

The following article appeared in the August, 2012 Edition of the Law Institute Journal. (Click here to view original)

Fixed fees of value

A shift away from time-based billing is allowing lawyers to solve their clients problems more creatively.

There’s a new way of doing business at Moores Legal and it’s called agreed pricing. The mid-tier firm of 54 lawyers has adopted the model, which turns time-based billing on its head.

No longer do Moores lawyers fill in time sheets and meet individual billable hour goals. Instead, working in teams, they agree on a price with the client up-front, before any work is done. If a variation in the scope of work occurs as the matter progresses, the price is updated at stages by mutual consent to reflect this.

Managing principal David Wells said the result was a greater say and certainty for clients and further efficiencies for Moores. “Most people crave certainty and that’s what they get with Moores’ agreed pricing,” he said. “It’s a case-by-case scenario. We get a sense of a client’s budget and consider a whole range of factors, such as urgency and complexity. From that, we discern what would be a reasonable price from both parties’ perspective.

“The fundamental shift is that lawyers are sharing the risk with clients. We don’t know whether the price we arrive at is necessarily going to be profitable for the firm but clients appreciate us sharing the risk. It’s about partnership in the long term.

“Lawyers and clients have reacted well to it. Lawyers are pretty smart and creative people. They want to help people solve their problems, not justify their existence every six minutes. It’s a distraction.”

Moores Legal is one of a number of Victorian law firms to switch from the traditional billable hours model to value pricing – or at least include it in a suite of pricing options.

Push back from lawyers against the billable hour, pressure on pricing from GFC- affected clients, price disputes and seeking a competitive advantage have all combined to prompt the shift.

Critics of time-based billing believe charging clients by time creates a fundamental conflict of interest for lawyers. Acting in the best interests of clients might interfere with billable hour targets by which lawyers are assessed. The pressure on lawyers to meet time-based targets, then be assessed on these, is the key black mark against the age-old system.

There is the suggestion billable hours are driving some of the best and brightest young lawyers away from large law firms and even the profession.

LIV Young Lawyers Section manager Anna Alexander said, anecdotally, the major concern for young lawyers was the pressure of satisfying daily targets.

Consultant and former Maddocks managing partner John Chisolm said lawyers come for three to five years and leave. “I can’t help but think it’s partly because they are fed up filling out time sheets,” he said. “It’s like a factory production line but lawyers are not widgets, they are creative intellectuals”.

A director of new fixed fee law firm Switch Legal, Andrew Meldrum, does not have fond memories of working under time-based billing regimes. “There is so much focus on the number of hours you put down. If you bill a lot, you will be thought of very highly. There was a lot of angst at the end of the month,” Mr Meldrum said. “You had to speak to clients to make sure they were happy. It was never a pleasant thing to do.

“A lot of that just goes away [with fixed fees] because you both have certainty at the start. There is no pressure or stress.”

Slater & Gordon introduced fixed fees in its Victorian family law practice in September 2011, with other states soon following. The firm’s family law practice head Ian Shann doesn’t mince his words. “If your measure of profitability is billings and billings are related to time spent, [it] puts all sorts of pressures on lawyers,” he said.

“It’s a conflict of interest which ignores the responsibility we have to represent the client’s best interests. With fixed fee, we are removing that inherent conflict where it’s better for a lawyer to spend more time on a matter because they get paid more. Clients are interested in outcome, not time. They are paying us for our intellectual capability.

“Lawyers not filling in time sheets love it. Once you free yourself from the handcuffs of time and have a fixed fee contract, you have more flexibility with your hours as long as you are achieving the outcomes. Your focus is on what you achieve for the client. It gives lawyers greater flexibility around how and when they work.”

Flexibility for lawyers is one of the key benefits of value pricing.

Mr Shann couldn’t be more enthusiastic about fixed fees. “Some people think I’m almost evangelical about it . . . I seriously think it’s a no-brainer.

“I am absolutely blown away by how responsive the clients are to a known fee. You can see the relief on their faces. They say: ‘Great, I am in control of the price of this’. There’s no more finding out at the end of the day. There are so many stories where costs blow out of control.”

He also believes agreed pricing is an access to justice issue. “I think providing a known price for legal services is much fairer for the client because the client doesn’t bear the whole of the risk as to what happens in a legal matter.

“It’s a big change for us, quite radical. Since we introduced fixed fees, there has been a significant increase in the number of family law firms to offer it. People are putting their toe in the water, they are buying some insurance to cover themselves in the event fixed fee firms start to take away from their client base.”

Harwood Andrews, with 74 fee-earners, is another mid-tier Victorian law firm to embrace agreed pricing.

The firm’s managing principal Dan Simmonds said: “Having price certainty is beneficial for clients. We are in a time of increasing cost pressures and giving clients price certainty is one way to hold the client relationship.

“We started with agreed pricing about two years ago. It was part of our crystal balling about where the legal profession was heading, what was in the bests interests of the firm and keeping one step ahead of the game.

“As a firm we are passionate about it. We have a resolution to move the firm so the billable hour is not the predominant form of pricing,” Mr Simmonds said. “It is not for everybody and probably never will be. Some clients like the billable hour. It’s a matter by matter concept . . . we take a hybrid approach.”

So does Switch Legal but the goal is to flexibly work out a value-for-money fixed fee in advance of work done.

“It’s throwing away the cookie cutter and treating every matter and client as unique. Once you work [the fee] out, it takes the pressure off and you can get back to the practice of law and your life,” Mr Meldrum said.

“It’s been frenetic . . . there’s definitely an appetite for it. Clients appreciate the control we give them. They are very happy with this flexible approach because they can make it work for them, inside their budget.”

The business model for value pricing commonly used by Australian law firms is the brainchild of Ron Baker, a US accountant and founder of the Verasage Institute, an international think tank devoted to professional firm pricing, leadership and strategy. The value pricing guru personally addressed staff at Moores Legal and Harwood Andrews, among others.

Take-up of the concept, including its team approach, by all staff in a firm is key to its success, according to Mr Chisolm, a leader in the area of value pricing.

“It’s a much more team-based environment, with team goals. It’s happier and more creative,” Mr Chisolm said.

“I’m like a reformed smoker on the subject of value pricing. When you buy something in a shop you know the price up front. Why not a legal service? You cannot price intellectual capital by time. It’s measuring the wrong thing. It’s like sticking a ruler in an oven to take the temperature.

“When you take the time factor out of it, lawyers become more creative and efficient in solving their clients’ problems. With time billing, if I solve your problem quickly because I am a brilliant tax lawyer, I am penalised. So I need to slow down or lie on my time sheet. It’s dumb when you think about it. But with agreed pricing, if I do something in less time, without having to pad my time sheet, I can play golf or see my family or whatever, which is great.”

Mr Chisolm said feedback from members of the judiciary and legal services commissioners around the country had been overwhelmingly in favour of agreed pricing. He said 80 per cent of complaints to legal services commissioners are about legal fees and they welcome value pricing as preventative action.

“A lot of judges see time-billing as clogging up the system. There are rumblings everywhere.”

If it’s a ‘no-brainer’ as Mr Shann suggested, and there is support for it from sole practitioners to the judiciary, why the cautious uptake by the profession? Aside from the self-confessed conservative nature of the profession, in which change comes slowly, practically speaking it is a challenge. It requires enormous time and resources to recalibrate a firm’s pricing policy.

It also requires law firms to assume some of the risk in a matter. As well, there are concerns that it will spark a pricing war and drive profits down. Another perceived stumbling block is how to price intellectual capital in different areas of law. There is no price template.

Most practitioners say value pricing is best suited to specialist, transactional, contractual, commercial work and not litigation or, for example, bitterly fought, highly complex financial matters in family law.

There is no question value pricing is gaining traction, albeit slowly. It is believed it will grow more common as law firms become more comfortable – or perhaps less fearful – of the concept, but also more acquainted with the benefits.

“I think the legal profession has a long way to go before it can wean itself off the time sheet,” Mr Simmonds said. For the time being, Harwood Andrews is maintaining time sheets and doing after-action analysis to make sure it is getting the price right.

Mr Shann said: “In the foreseeable future I think client demand but also lawyers wanting work-life balance, which is not driven by the time sheet imperative, will drive more firms towards value pricing. The killer for time billing will be the new breed of lawyers who are interested in outcomes and a work-life balance that doesn’t tie them down to doing seven to eight billable hours a day.

“When the penny drops, we’ll hear a tinkling. Then we’ll hear a crashing sound as the new generation of lawyers starts doing it.”

Cite as: August 2012 86 (08) LIJ, p.22