Hat-tip to Simon Tupman, consultant to lawyers across New Zealand, for bringing this article from the UK Law Society Gazette to our attention (click here).
A consortium of lawyers called QualitySolicitors have embarked on a radical experiment to measure the effectiveness and popularity of fixed-fee billing. Over the next year, 200 member firms will provide fixed-fee options to their clients.
Why is this radical? Because lawyers are creatures of tradition, and tradition has always dictated that a lawyer's time is billed by the hour (or more specifically, by the 'unit' of time - usually six minute blocks). The paradigm shift from hourly to fixed-fee billing is significant, and many law firms struggle to get their heads around it.
Many of the barriers lawyers have to overcome are related to management structure and risk: when a client pays by the hour then the burden of risk that the matter might take longer than anticipated is transferred from the firm to the client. In contrast, adopting a fixed-fee approach means the firm must be absolutely sure of their fixed and variable costs, and be very sure about how many clients they will be getting over the course of a year.
Our Managing Director, Erin Ebborn, recently delivered a paper with Rohan Cochrane at the 2013 Family Law Conference, in which she gave the metaphor of how an airline might charge on an hourly rate basis:
“Good afternoon and welcome onboard this Air New Zealand flight to Los Angeles. Your Associate Pilot is being assisted today by a Consultant, and as such we’ll require an additional $1,000 from you for the trip. For those private customers seated in economy we will be distributing shoe-shine kits and shower caps, and that will be an additional $50 each. I hope you enjoy your flight. We’ll get back to you later on if the weather turns bad and we need some more money for the extra fuel.”
The point is that hourly-rate billing provides a disincentive to realise and pass on efficiencies to clients. Through avoiding the risk of loss for allowing a case to go too long, or engaging in conversations with clients or counsel that are avoidable or unnecessary, the law firm ends up billing more than might be otherwise required. By charging a fixed-fee rate the law firm is making a very important statement to clients: we're in this together, we have faith in our ability to get the job done, if we stuff things up we'll bear the cost.
This is the way we are headed. New Zealand firms must approach this model head-on rather than actively avoiding the inevitable.
The paper SMART PRACTICE – MAKING FIXED FEES PROFITABLE by Erin Ebborn, Rohan Cochrane & Jarrod Coburn is available for download (click here).