Tech driven fixed fees are changing the game for law firms

More than 85% of law departments have experimented with fixed fee arrangements. This is an increase from 69% in 2015*. This tech driven trend is here to stay, but law firms are struggling to adapt to this new reality. Here’s why.?

Delivering a service for a fixed fee turns the service into a product. The quality of the product depends on the firm's ability to meet spec on time within budget. How firms pull this off is entirely up to them. If they’ve automated 90% of the work and they can charge €10.000 for it whilst only putting in an hour’s work, good for them.

Now here’s where it gets tricky. Law firms are not in the business of selling products. Their entire organization is designed to sell hours. This has the following implications.?

1. To sell a product, firms need to invest in product development. They need to invest hours that could have been billed to clients (for rates I need not mention here) in the standardization, scoping and automation of legal services. Most law firms are not prepared to make this investment.
2. Selling a product means fee earners need to sell someone else’s work. Lawyers don’t always trust the quality of another lawyer’s work, even if this other lawyer works for the same firm. The bigger the firm, the more this problem prevails.?
3. Now let’s assume they overcome the latter and sell the product. The fee earner spends one hour and bills the client €10.000. Amazing right? Wrong. The firm might win in this transaction, but the fee earner loses on an individual level. Law firms measure success by how many billable hours are generated by each individual. 90% of those billable hours are now lost to a product.
4. Even if fee earners subordinate their own financial goals to those of the firm, which is not very likely to happen, there is still one problem left: invoicing the fixed fee. Most law firms don’t have an accounting system in place that allows for the sales of units.?

And this last point is where the solution to the problem lies. When law firms deploy an accounting system that allows for product sales they are also able to distribute the margin from each product amongst the ones who realized it. This way fee earners are rewarded for selling products, potential marketing costs can be be accounted for and (this is key) fee earners who are brave enough to invest their valuable time in the development of new products are rewarded each time their hard work pays off. See an example below.

Making this change requires leadership to make the strategic decision to move from being a 100% service provider to partially becoming a product leader. It’s only a matter of time before boards of law firms will wake up to this reality.

* Value-based pricing: Aligning the cost and value of legal services