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How Can We Move from Hourly Rates to Fixed Fees? The Law Firm Perspective

By Brian Balistreri posted 04-03-2023 10:52


Please enjoy this blog posted on behalf of the author, Eduardo Flores, Partner, White & Case LLP (Mexico Office). 

The hourly rate is one of the pillars upon which modern law firms are built. It has served as the primary unit to measure productivity and budgeting legal work. In a way, the main inventory of law firms are lawyer’s hours, and the value of such inventory is measured by the hourly rate.

While the use of the hourly rate has been a years-long tradition, we live a new era where clients are not willing to just pay as many hours as lawyers see fit to bill. This new dynamic begs the question “how can lawyers meet clients’ request to accurately budget legal work?”

First, there are different types of deals that more easily allow for a fixed fee (i.e., corporate secretary work), while some deals have proven to be very hard to forecast due to complexities that are impossible to prevent (i.e., insolvency litigation).

Second, the adoption of technology and data analysis for budget purposes should be a great progress for more accurate fee arrangements. More sophisticated models prevent the firm’s risk of under-budgeting work, which would affect its P&L, while also preventing the risk of over-budgeting and increasing clients’ expense unnecessarily and affecting its general satisfaction about the work received.

Third, creativity and innovation should also be a driver to reach alternative fee arrangements. Every type of work could lead to different type of arrangements that make all parties feel that the value they receive from a client-lawyer relationship is adequate.

In certain instances, having a fixed discount on hourly fees for matters that require regular consults, like in regulatory work, normally helps clients feel comfortable that they will not get unjustified bills. In other cases, like certain litigations, a mix of fixed fees and a success bonus could prove to be an efficient way to align interests and make clients feel that their lawyers share on the pros and cons of every strategy.

However, one should keep in mind that the benefit that legal advice provides sometimes is not reflected in an hourly rate. For example, an urgent call to the go-to outside counsel for a complex question that leads to a defining business decision, could last less than an hour. The only way that counsel could have answered the question, is because of years of legal and business experience, which gave an edge to the client that is hard to value, let along in the fraction of an hourly rate.

On the other hand, there is mechanical legal work that require hundreds of hours and could left clients feeling like there was little value in the amounts billed, like litigation discovery and legal due diligence. However, lawyers around the world have had little success in finding ways to reduce legal expense in that front, as it is the type of work that is always expected to be flawless, but less expensive every time.

At the end of the day, there is no “one-size-fits-all” for legal fee arrangements. Every jurisdiction and every type of work is different, but what matters most is that clients should feel that they are paying the fair amount for the type of work that they requested and that they get. Some types of work might not need the most sophisticated top-tier firm (and its prices), while certain transactions require the best legal advice that money can buy.

Lawyers should always ask themselves “would I pay my fees for the work I delivered to the client?”, and not assume that clients will pay whatever they bill them. The ability of law firms to evolve and adopt innovative ways to charge legal work will give them a competitive advantage over more traditional firms. As with every other market, clients will always have the final word on legal market trends, and fee arrangements is not an exemption.