An article in defence of hourly billing!
Because clients say they want it and because, in this brave new (post-professional) world, the client knows best firms are, in ever increasing numbers, volunteering to work on a fixed fee basis. Like most bad habits this is not immediately damaging; it is however the start of an inevitable slippery slope.
Experience teaches us that when initially offering fixed fees one can properly cost and price the service by reference to a typical transaction on an hourly rate because that is an agreed benchmark based on mutual client / lawyer experience so you might say: “Our experience is that fees for this type of matter range from £8,000 at the most straightforward to £15,000 for the most complex: the average fee is £10,000 and so to provide you with the certainty you want we will fix our fees for this service at £10,000” ; perfectly reasonable until your competitors offer to do the same work for £8,000 then £6,000, then £4,000 and so on. Having lost the hourly rate measure as a basis for setting a fee the benchmark becomes what others will do the work for - the race to the bottom has begun and either you join the race accepting ever lower hourly rates and annual billings and income or you lower quality and give less time and care to the work to preserve income levels. Ultimately you may have to abandon the practice altogether.
Any form of fixed fee structure creates a pressure to commit as little work as possible to generate the fee: this might be balanced to a degree by professional obligations and liabilities but in the face of demanding partners, fee targets and competition standards always drop.
Conveyancing lawyers discovered years ago that fixed fees created a race to the bottom. What was once work done on an hourly rate plus a sliding scale of 0.5-1.5% of the value of the property is now a fixed £500 or so with the work mainly done by secretaries and part trained paralegals with the inevitable errors being paid for by the firm’s insurers.
The introduction of fixed fees has very publicly brought criminal lawyers to their knees - financially the work is not worth the cost of doing it and remuneration levels are so low that in many cases a Barrister would be better off as a Barrista. As for the effect on quality I recommend reading “Stories of The Law and How It’s Broken” by The secret Barrister who can be found at @barristersecret and concludes that the diminishing of standards in the criminal bar due to fixed fee legal aid has led to a critical shortage of appropriate candidates for the bench.
The once highly sophisticated and specialist area of personal injury has been forced into fixed fees by MPs (hoping for non-exec seats at insurance firms in return) and is now so unprofitable that apart from the very largest cases it is uneconomical to run and few firms remain who are willing to take run of the mill work. Even the “Pile them high and sell them cheap” firms struggle to make any money.
Billing by the hour is more amenable to measurement and assessment than subjective measures such as quality of delivery; more adaptive to changing events than fixed fees and the process is readily understood. Hourly rates are also an inevitable and essential consequence of the fact that our lives, careers and finances are structured around units of time: annual pay; monthly direct debits; daily bread and so on.
Hourly rates drive efficiency and quality far more effectively than a fixed fee approach ever could. Rather than the perverse incentive to do as little as possible to get a fixed fee; the commercial imperative is to deliver an excellent service knowing that you will be well remunerated for doing so and the client will come back and refer others. The market says that you can charge £500 an hour because you are very good – if you are a little less good you might get £400 an hour. Switch to fixed fees and “how much” immediately becomes more important than “how good”. The saying “I am too poor to buy a cheap thing” applies here, particularly here! Legal work done badly creates disputes, uncertainty and the additional costs of putting things right: done well the first time you pay fees only once.
The other issue I have with fixed fees is that they take time out of the equation and so clients no longer need fear wasting time; your time specifically. A client that will waste your time is one that has learned that your time is not what they ought to value – because you have told them so. I remember telling a client that his habitual 15-20 minute prelude to substantive discussion on his matter was all "on the clock" and I would not take it amiss if we were to dive right in. I said that I regretted the need to charge him for this time but had to do so. In the event he carried on doing exactly the same thing but was, at least, doubly conscious that he was being charged for it. In a fixed fee world the time he would take to get to the point would come out of my pocket and not his.
Once you accept that the only desirable metric is that the cost of each piece of work is lower you have to accept that the work is done less well, by less qualified people. Accepting fixed fees today may well help win work and please GCs today but will, without a doubt, cost you, your firm and the profession in the long run.
“It's unwise to pay too much, but it's worse to pay too little. When you pay too much, you lose a little money - that's all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot - it can't be done. If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that you will have enough to pay for something better.” ― John Ruskin