Recession sees fixed fees become par for the course
28 September 2009 | By Kit Chellel
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News that hourly rates have fallen by up to a third has reignited the debate about how companies pay for legal services.
The annual rates survey, published in The Lawyer last week, revealed that top firms are engaged in a price war as they compete for work in a shrinking market.
The research also highlighted the increasing pressure to offer alternatives to the hourly rate, and to offer them at a lower price than rival firms. In one case a magic circle firm offered to carry out a piece of corporate work for a £1m fixed fee, only to be undercut by 60 per cent on the same job by a silver circle rival.
A silver circle managing partner says that his firm will now routinely work for important clients at what amounts to a loss, because it is better than paying lawyers to sit around and do nothing.
Earlier this year it was reported that Hammonds had sent out flyers saying it would charge just £5,000 to advise any company wishing to delist from AIM.
“I anticipate fixed fees will continue to fall,” says an Allen & Overy partner. “Firms are more concerned with cashflow than pricing.”
Firms of all sizes have realised that it is easier to convince clients of value when there is a single price for an entire job. But fixed fees do not always mean bargain basement prices. For years elite firm Slaughter and May has used what it calls ‘value billing’, whereby a figure is agreed with the client. If cost is particularly sensitive, practice partner Paul Olney says the firm can provide “complete certainty” on a bill.
More commonly the bill will be within a range agreed previously with the in-house team. The client is given the opportunity to pay more or less, depending on what it feels is the value of Slaughters’ legal work. “We like to approach it based on what’s achieved rather than time spent,” says Olney.
Fellow elite corporate firm Dickson Minto is understood to use a similar system. The firm always allows the client to pay whatever it wants for the advice, although it is understood that if the client goes for too low a fee then the firm would think twice before handling any work for it again.
This approach shows the value of certainty to in-house lawyers, who must answer to the management if it is deemed that legal spend is too high.
In October last year ITV set up what is thought to be the first fixed fee-only panel. Lovells partner Peter Watts leads his firm’s relationship with the broadcaster. “It’s been a gradual change,” he says. “Not all clients want to work in the same way, but a lot want the predictability of hourly rates.”
But can all types of legal work be paid for using this method? Traditionally litigation, where costs can soar depending on the length and complexity of the case, has been seen as too risky for fixed fees.
A senior in-house lawyer at a multinational company says he uses fixed rates for the majority of his legal spend, except when it comes to court disputes. There, he says, “the tendency is to try to manage firms on the hourly rate, and to manage the sort of behaviour that gets the bill to balloon quickly”.
Olney maintains that even litigation is suitable for fixed fees, adding: “I think it can be the same practice for litigation. One can look at how a piece of litigation is structured and break it down into various different elements.”
Whatever the challenges of setting a rigid price for legal advice, the recession means that fixed fees are likely to be the rule rather than the exception over the next few years.
“Fixed rates were once the spawn of the devil,” comments a silver circle partner. “Clients don’t know how much work needs to be done at the beginning of the deal any more than we do. But we’ve had to start doing this. People are clearly very sensitive to cost.”