Hourly billing by lawyers has been coming under scrutiny for a long time now and it’s no great surprise given the world we live in where the price of most things (if not always the value) is known. I don’t like committing myself to open ended financial commitments any more than the next person, yet we expect our clients to do so. An article in The Economist drew on this: hourly rates benefit no one but the lawyer and promote inefficiency. I was talking to some friends of mine at the weekend who successfully sued their Local Education Authority at the Education and Special Needs Tribunal for not providing the additional learning support prescribed in the Statement of Needs on their young daughter. They used an expert solicitor, who only does education law, and retained him on a fixed fee basis. My friends said this gave them the comfort of knowing the bills wouldn’t get out of hand and that they could talk to him freely without worrying about the clock ticking.
That’s all fine from the client’s point of view, but how does it work from the other side of the desk? In non-contentious work I can see this can work, especially if you make good use of IT solutions – such as the type of solution offered by DirectLaw – document creation software. Indeed, for bog standard contracts you can probably take the lawyer out of the equation altogether – for example see PJH Law’s “document wizard”, which allows the client to input their own details and get a complete contract out at the other end. In effect this becomes like the “execution only” service offered by many brokers: we won’t advise you on whether you should buy 1000 shares in BP, but we’ll do the transaction for you. I can see that for a wide variety of situations this solution could be very attractive.
But what about litigation? Document production can help make firms more efficient but most have software packages that allow document creation anyway. What can change the game in contentious work? Fixed Fee pricing in litigation is difficult: at the outset do you know whether you’re faced with a one day case in the Employment Tribunal or a 14 day marathon with 20 witnesses? In my friends’ case I would imagine that their case, which went all the way to a final hearing, was probably subsidised by the other cases that settled at some point short of that. But get the sums wrong and the lawyer will be out of pocket: get it wrong too often and you’ll be out of business.
One answer, as was put to me succinctly at a recent Legal Services Act lecture I gave in Manchester, is to caveat the quote. So, on the basis that the case will proceed to a one day ET hearing “our fees will be £x” and if it becomes a 14 day slog, then £y. Sensible and prudent maybe, but how will that compare with the much bigger operations (e.g the Co-Op) who may be able to say the fee is £x full stop. No ifs, no buts, no caveats. The problem is made worse if the Co-Op et al really push Before The Event insurance (BTE) as I think they will.
How can smaller firms compete with that? Having a reputation for doing a particular type of work and being highly specialised is one answer. I doubt my friends above would have gone to the Co-Op had the option been available. They wanted a specialist and one to one service and that is what they received. Reputation, or “brand”, is going to be key. But getting clients through the door is only one part of the puzzle (albeit probably the hardest): you’ve got to be able to offer a competitively priced service when they come in or log on, or text, or tweet, or …
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Good read Michael.
In a similar vein, a recent post on my own blog entitled “Solicitors Charges: Act or Actor” concluded that if the fee earner’s qualifications and experience etc. add real value, hourly rates are still relevant, otherwise constant fixed fees across the board, coupled with standardisation and delegation, are the answer.
However, I agree with you that even if hourly billing can still be justified, law firms may, nevertheless, be forced by ABS/Tesco law to adopt fixed pricing. Perhaps Solicitors should consider re-training as Actuaries/Underwriters now!
Or set up as an ABS with Actuaries/Underwriters in an MDP?!
Thanks for the comment. I agree with you – it all comes back to the same thing – solicitors need to demonstrate they can add value to a transaction/dispute. Standardisation with IT will include increasingly sophisticated systems that won’t just be glorified wordprocessors. I hadn’t come across your article previously – http://bit.ly/dpJ1z8 – and have just enjoyed reading it. I think I’ll have the words “added value” tattooed on my forehead! I suspect the amount of work needing “added value” is going to diminish.
Even an estimate or fixed takes into account how much likely time will be spent. Matters that are subject to being contentious are sometime very difficult to predict for but some matters which are straightforward I charge fixed fee and quickly the matter done and billed. As a business man first then solicitors you must assess the risk with great thought before agreeing to something which becomes a loss making exercise.
Michael, I agree with your sentiments but I don’t think litigation is the exception. There’s no reason why it shouldn’t come under fixed fee billing. Any good lawyer ought to be able to estimate the time needed for a case and agree a fee accordingly. There are plenty of other situations where this is done. In medical insurance there is the use of diagnostic related groups in which operations are banded within particular price ranges. The insurer pays that price regardless of the time taken. Do it in shorter time and you are in profit; take longer and the loss is yours. There is no reason why the client should be the only risk-bearer in litigation. Lawyers must participate also.
Another method would be to use a form of value billing as investment banks do or architects. Agree a fee as a percentage of the matter in dispute. Again very simple and with a knowable outcome.
Hourly billing is an anachronism and here the Economist is right. It leads to inefficiency. When Scotland introduced fixed fees for criminal legal aid cases, the number of lawyers doing them didn’t drop, but the time for each case did–dramatically. The conclusion is evident.
John
Thanks for the feedback Michael.
You may have already seen this, but I’ve just read an interesting post about “price conditioning”: http://tinyurl.com/3xa3j6y. However, would such an approach not “scare off” potential Clients and into the arms of ABS?
Picking up on a point made by John, MJ Hudson has recently created a new pricing model based on a success fee/equity investment: http://tinyurl.com/32k2kk7.
I guess the upshot is that, given the very real challenges facing the profession, Solicitors need to be imaginative/creative in order to meet Clients’ needs. Whether regulatory constraints keep pace remains to be seen!
Martin
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John
Thanks for this. I’m particularly interested in the “value billing” concept. Presumably the difference between that and a contingency fee is that the “value billed amount” is paid by the client win or lose? Is it in use in any other jurisdictions do you know? I wonder how it would work where costs shifting applies? I can see difficulties where the client doesn’t recover the initial amount he/she envisaged but it could also be very advantageous in that it could help to restrain clients expectations! That could be a more powerful aid to settlement than mediation ever could!
Mike
Martin
Agreed re your last paragraph. The SRA consultation on “Freedom in Practice” is addressing this very issue. I must admit to having started to read it and then found something slightly more pressing in the meantime.