Cost Certainty Should Not Be Confused With Efficiency
I read with interest a law.com story, New Approaches, New Firms on Corporate Clients' Shopping Lists. The story reports on recent findings from a BTI Consulting survey. Here's the key finding:
Clients need new approaches to fees, staffing and billing -- including a shift from hourly to flat rates, he said, but when they've reached out to the largest Am Law firms for solutions, they are told "We're not sure we know how to do that. What kind of volume guarantees can you give us?" The Am Law 100 and 200 are a ranking of the highest-grossing U.S. law firms by The American Lawyer, an affiliate of the Daily Report.
This finding is consistent with discussions I have had with friends in management at AmLaw 200 firms. And it consistent with my experience--one does not start pricing "flat fee" (more on that in a moment) work all that easily. The tendency is to guess the number of hours a piece of litigation or other work will take, multiply by the hourly rates of people who will be doing the work, build in some cushion (10-15% seems to be the norm) and, voila, a fixed fee! Sorry, but it doesn't work that way. One of the key benefits of a flat fee (more on those later) is that they generate efficiency on the part of the lawyers. But if the firm uses the calculation methodology some have confessed to using, none of the efficiency benefits are shared with the client.
Put aside the lack of experience in calculating a fair fixed fee. Put aside the cultural obstacles to doing fixed fee pricing effectively. A flat fee, by itself, does not incentivize success. It leaves in place the fear clients have that firms will push down work to the lowest levels while the partners keep working for clients who pay their high hourly rates. Flat fees leave in place clients' fears that firms will simply stop doing work once the fee is concerned. Flat fees provide no incentive for the firm to tell the client not to do something. The essential element to making flat fees work is for firms to have skin in the game. Whether by way of significant holdback or results-based premium, skin in the game is the answer to the kinds of concerns expressed above. It also will force the firm to do a candid evaluation of the matter at the outset and share the outcome of the evaluation with the client. Clients benefit early from a candid evaluation of the matter even if the evaluation is that the matter is not worth the firm's risk.
Back to the law.com article, clients need to educated consumers so they don't accomplish budget certainty by paying a higher total fee than they should.
After seeing the BTI info, I came to the same conclusion. Especially having been involved in conversations with clients - predictability of costs is a side benefit. Perhaps the age of the BTI survey (3rd qtr 08) has something to do with that conclusion. Clients may not use the word "efficiency" but that's what they are pushing when they talk about alternative fee arranegments.
Nice Post!
