In defence of the billable hour

Fixed fee legal services have had a good press in recent years. It’s a fair reaction by companies looking to limit their downsides and plays well with a narrative of boardrooms looking to redress the balance of power between their legal teams and outside firms.

Capped fees are even more desirable: it feels like a guaranteed win for the client.

However, whilst these strictures on legal fees seem instinctively right and fair, are both sides perhaps missing the issue – and a new opportunity for better commercial engagement, too?

The problem is that fixed and capped fees, whilst they seem fair, are most appropriate for commoditised products and services and become less good value as variability increases.

This is why we are used to paying a fixed price for the products we buy in shops: the variability of the experience covered by the transaction is minuscule. Your local plumber, meanwhile, insulates themselves from increasing variability by charging a call-out fee. And as variability increases, service providers move to a pay-as-you-go model (think: repairing your car at the local garage).

Indeed, this variability is precisely why legal services have been charged on a pay-as-you-go basis since the dawn of the profession.

Today, however, competition - along with the availability of technology - has conspired to make fixed price engagements realistic. And for several transactional, process-oriented legal requirements, it probably is. But as we said at the outset, fixed fees “feel” right, so it’s tempting to apply them where they don’t make so much sense: on the less formulaic pieces of work like litigation, mergers and reputational actions.

It is just about conceivable that both parties will have enough judgement in a matter to home in on a fair price for work performed. Much more likely, though, is that either the client or the law firm will take some sort of bath on the work, sacrificing ‘value from labour performed’ for a more nebulous ‘value of predictable costs’.

And don’t think that law firms always win, either. They might put in a contingency – but since many legal matters are inherently confrontational and therefore unpredictable, there’s no evidence whatsoever that law firms are making greater margins on fixed fee work. Rather, it is a direct trade-off of labour for comfort.

So why – other than a feelgood factor - are fixed fees still attractive?

The reason the practice continues is twofold.

First, over the past 25 years, predictability has become a prized commodity in boardrooms. CFOs are not legal experts and they are not skilled in the nuance of judging today’s legal costs. They are unlikely to be able to discern a great price from a good price. But they are entirely capable of appreciating when legal budgets come in exactly on expectation; and noticing when they don’t.

However, that lack of discernment is also an acceptance of a lack of transparency that has become the norm in legal services.

We used the examples of the plumber and the garage above. Nobody resents their fees for wading through leaks or pulling an engine to pieces, but most of us have had the experience of a stinging callout just for “resetting a switch” or “reading the electronic dashboard”. It leaves a nasty taste in the mouth, because transparency – when a client has the ability to understand what they have been billed for – makes the weaknesses of the flat fee all too visible. We said above that the flat fee is a trade-off, a sacrifice of ‘value from labour performed’ for a more nebulous ‘value of predictable costs’. That sacrifice would make no sense if costs were visible and transparent.

While boards look like they are happy to live in comparative ignorance, the relentless search for value makes this unsustainable in the long run. Law firms can either wait for the stinging shock or take the initiative and use transparency as a business tool – using clarity as a business differentiator. At the heart of this clarity is the billable hour: the new justification for fees will be honesty about the contribution of each paralegal, associate or partner to the resolution of a matter.

Better still, this need not cost the firm. After all, if some 25% of today’s fixed fee is a contingency, the cost of visibility afforded by careful measurement should be more than offset by reduced commercial risk. And that’s before accounting for any commercial benefit from being fast-to-market with game-changing openness.

Transparency also opens up in-house and even out-of-house comparisons, allowing companies to compare similar legal issues and the resources and effort required to resolve them – something which fixed-fee transactions are simply too opaque to warrant.

Fixed fees feel right, but only because the perception is that law firms are incentivised to bump up their fees. The culprit is not cost per se: as with the plumber, a fair service at a fair price is always appreciated. Equally, the billable hour has perhaps been unfairly painted as the villain of the piece, when in fact opacity is the issue. With a focus on transparency, the much-derided billable hour could become a key sales tool for the proactive law firm of the next decade.