Dangers in fixed price legal services – a warning to lawyers
The global client market demand for fixed priced legal services is changing the way legal pricing models are structured. This is a historic shift from a lawyer progressing work and charging for their time as they go, to a model where an accurate quote must be given upfront.
The Law Society of Western Australia (2016)1 when considering the future of education noted, “The introduction of fixed fees, outsourcing of legal work, intelligent systems and the internationalisation of Australia legal practice are beginning to impact on the legal market and how lawyers practice, and the skills lawyers will need in the future”. The answer to fixed fee legal services is in taking a legal project management approach.
Clients are now wanting to better understand their legal costs and limit their own risk of high expenses for legal work that could lead to their financial loss, even when they win the legal case, thereby making better informed decisions about whether to pursue a legal pathway or not.
When examining the changing legal market, Georgetown Law (2015)2 noted, “… it is increasingly clear that the buying habits of business clients have shifted in a couple of significant ways that have adversely impacted the demand for law firm services”. They concluded that, “We now live in a buyers’ market in which all of the key decisions about how legal services are delivered and priced are being made or strongly influenced by clients”.
There are seven key risks that make implementing a fixed pricing model challenging:
- Ambiguity in the Scope – where there is ambiguity in the scope, there can be significant challenges in both delivering the legal projects with profit, and keeping the client happy. Where fixed fee legal services can increase the chargeable fees is when the scope is so well defined, that any additional inclusions is clearly seen as a ‘change’ to the scope. A change therefore legitimately can warrant additional work, and therefore increased charges. The scope definition provides details about the deliverables that are the tangible outputs (products or services) or results that show the legal service has been delivered;
- Undefined Exclusions – where defining what is in scope, it is often just as important to state what is out of scope, otherwise known as ‘exclusions’. This means the client understands the depth and breadth of the legal services being offered and what they are getting for their fixed price. This clarity is a means to show how cheap a service can range from, as well as what will make it more expensive. This is simply providing them a perception of options, however it also allows the law firm to show the risks of going too cheap. This effectively does not lose work to other cheaper legal services, as it can compare a more comparative model, with the aim to match the need and budget to the service to be provided. Using the analogy of buying a new car with accessories, when the salesperson shows you the value in the accessories, the upsell becomes easy, but without an attractive base price, the prospect’s interest may have never got them to the enquiry stage;
- Mismanagement of Client Expectations – managing client expectations is largely about doing the above two points well. Explaining what they are getting and what they are not. People like options, but not too many that they get confused. Consider the complexity of providing a fixed price for a litigation. It is far easier to quote in stages, and the expected reserves that may need to be kept in the event of certain court decisions. In this way, the client is better prepared for a worst-case scenario and can make informed decisions in proceeding ahead at each stage point. There is no use for them to win a case, but then walk away with no financial benefit or too high legal costs, where their intent was to achieve a financial gain. This leaves them with a bitter taste of success and a bad experience with the firm;
- Poor Estimating Methods – estimating techniques vary and need to be selected well. This includes ‘expert judgement’ (or subjective estimating) that is based on an expert’s experience and knowledge, ‘parametric’ (or statistical estimating) that is based on a quantity multiplied by a known time or cost factor such that a well-known activity takes a defined time charged at a set rate, or ‘comparative’ (or analogous estimating) that is based on a previous experience. Remember that each year costs do increase, even if just by the customer price index (CPI), hence using historic data may need to be adjusted accordingly. A lawyer has to select the estimating technique that provides the greatest level of accuracy. If outsourcing or subcontracting legal services, a quotation can be sought that is called taking an ‘empirical’ approach, noting that the service provider would have had to use one of the three techniques noted above themselves;
- Missing Key Tasks – missing key tasks is a risk in defining the scope. This often arises where the lawyer starts with a blank piece of paper over beginning with a template of all the typical activities and tasks for an earlier and similar legal service. In project management, the tool is called a ‘work breakdown structure’. This means that when a legal matter is first completed, each step in the process (the tasks) is captured, and after applying any lessons learnt, an improved list is created as a template to reuse for similar and future legal matters. This will allow a legal service to be refined over time, guide less experienced lawyers in good practices, and ensures no tasks are accidently forgotten when quoting;
- Poor Legal Project Management Process – when a firm commits to fixed priced legal services, they have to have the right legal project management practices in place to succeed and retain maximum profits. The work should be guided by a well-defined plan and all the activities and tasks set out to enable accurate tracking in the form of recording the percentage completed of each task. This extends to identifying and managing risks up front to avoid fire-fighting that is lost time in managing poor processes, earned value-based performance tracking that gives absolute insight as to where the legal project is at, issues management that allows early identification and remedial action to manages challenges (resulting in lost time) and the ability to manage any deviations in the planned tasks through good change management. Legal project management covers the process, the systems, and the people dynamics aspects of managing legal matters; and.
- Lack of Change Management – when scope is well defined and a change is required, it becomes clear that the scope needs to vary, and the process in project management is referred to as either ‘change management’ or ‘variation management’. This means as soon as the client says ‘while you are there…’, ‘I have been thinking to add…’, or ‘I have been considering the change…’, or anything similar, the lawyer pulls out the change request and has the opportunity to alter the schedule, quality and / or fee. This can also manage the frustrating client that keeps changing their mind, as they see there is a consequence to any changes. Without such a process, the scope can increase in size and a lawyer may find themselves putting in more time and chewing away the profit. This is called ‘scope creep’ and can be totally avoided with a well-defined scope and an adherence to the change management process.
Scope management and selecting the right estimating technique is key to offering a fixed priced legal service offering, but it does come down to the law firm’s ability to identify and timely manage risks, issues, and changes.
Over time, the law firm should create refined work breakdown structures for each core legal matter that guides good future practices. Although some tasks, duration and the human resources will change in each legal matter, the general process tends to stay the same. This in turn provides great documented practices to inform others’ approaches, and speeds up the graduate lawyer’s success by having them follow the firm’s best practices early. It also builds processes that can allow a law firm to expand geographically, enable assured standardised quality of service throughout the firm, and offers more consistent work practices.
About the Author
Adjunct Associate Professor Todd Hutchison is an expert in project management, and resides as the Chairman of the International Institute of Legal Project Management (www.iilpm.com), and a former Board Director of the Project Management Institute. He runs the global Peopleistic consultancy and training organisation, and heads their new Legal PM division.
1 LSWA (2016) What is the College of Law, Brief, The Law Society of Western Australia, Nov 2016, Vol. 43 Number 10, pp14-15.
2 GL (2015) 2015 Report on the State of the Legal Market, Georgetown Law, Center for the Study of the Legal Profession, URL http://www.law.georgetown.edu/academics/centers-institutes/legal-profession/upload/FINAL-Report-1-7-15.pdf.