Fixed fees gain acceptance

Buying legal services is generally compensated, still, by the hour. But, according to Wall Street Journal writer, Ashby Jones, on May 2, 2007 (Marketplace Section) says that technology now permits law firms to gather cost information in greater detail than ever … and thus permits them to determine what it cost to deliver those services.  With this, law firms are more willing to enter into fixed fee arrangements.

Some General Counsel, responsible for their company’s legal expenses, are interested in fixing the fees in order to be able to budget for their department’s expenses. Cisco, for example, has more than 70% of its annual $125 million legal budget under fixed fee arrangements.

One law firm says that it no longer does memoranda or other work that is unlikely to be meaningful for the client … and work which it used to do under the guise of malpractice prevention. And some General Counsel say that fixed fee arrangements result in savings of 15% or more in their legal budgets.  Without pressuring outside counsel to lower their fees, savings result when the client accepts responsibility for not doing things that the law firm would otherwise do … But, of course, another cause of lowered fees is the pressure felt from General Counsel. And this is one of the possible consequences of fixed fees: An easy target!

With a static number to shoot at, it’s easy to find other law firms that will do the same work at a lower fee.  And the downward price spiral begins! Whereas, with hourly fees, the hourly rate is known, but the actual cost of services is not until completed. This scenario is more difficult to displace a current attorney-client relationship. In the competitive environment, the "out" law firm doesn’t know what the target number is that they have to beat in order to get the prospect’s future business.

Still, there is much to be said for creative alternative fee arrangements. And much pressure from major clients and insurance companies for outside counsel to move in that direction.

Categorized in: Cash Flow - Finances