Blawgletter spent half a day this week on a Windy City panel — lawyers and law firm Chief Pricing Officers — that talked about the “Anatomy of a Fixed-Fee Negotiation”.
We learned that firms have funny names for not charging by the hour. Sobriquets ranged from “alternative” fee arrangements to “appropriate”, “tailored”, and “preferred” ones.
We also learned that not many people think about the role of risk when they think about fixing a fee up-front.
Our view: nothing else matters.
The sorts of risk we have in mind fall into two groups — the Risk of Scope Error group and the Risk of Failure group.
Outside lawyers and clients tend to focus on the Scope Error thing. Why? Because they fear that they’ll guess wrong about how many billable hours will need to go into the work that the fixed-fee deal covers. The in-house folks worry about paying for more hours than the law firm will in fact devote to the work, and the law firms live in dread of maybe having to work their fingers to the bone on half-pay or worse.
You can do things to reduce the Risk of Scope Error. (Chief Pricing Officers, we suppose, do little else.) You can, for instance, study “metrics” of the Practice of Law in Our Time (“PLOT”). These measures of PLOT, we hear, include “leverage”, “utilization”, and “realization”.
But the Risk of Scope Error will seldom make or break a law firm or GC. If the client ends up paying more than the same work would have cost on an hourly basis, she can still pat herself on the back for fixing her company’s legal costs. The law firm can point to the money that came in and congratulate itself for at least keeping the lights on.
By far the bigger issue, in our view, concerns the Risk of Failure. What will the client lose if the case or transaction (or portfolio of cases or transactions) turns out badly? Will the client have to file for bankruptcy? Will the GC lose his job? Will the law firm have to dissolve? Will lawyers suffer deep personal embarrassment and loss of professional prestige?
Talks around fixing fees should, in our view, put these Risks at the forefront. Lawyers ought to think and talk with clients about how much Risk of Scope Error they can stand — and how much they should charge for sharing part of that Risk with clients.
Lawyers and clients must also spend think-about-it time on the Risk of Failure. You could sort the work into Low, Medium, or High Risk of Failure slots — or, a la ObamaCare, into Bronze, Silver, Gold, and Platinum. In any event, the pay for sharing the Risk of Failure should go up as the cost of failing rises.
Does the ability to manage both kinds of Risk often reside in the same law firm or lawyer? Does it need to for the PLOT? We’ll take a look at that in another post. Bye for now.