In theory, a fixed fee does make a lot sense: it can be negotiated and agreed up-front before the work commences, legal departments can compare the fixed fee for the matter and select the firm based on the this and the CFO can budget and account for this.
The ugly truth, is that it rarely works this way, and it usually starts to unravel right at the start of this process, in the scoping.
Unfortunately, when briefing a new matter, the legal team does not accurately or thoroughly scope out the legal matter. This might occur from a lack of skill or experience. Sometimes it is lack of time and attention. Or a combination of all of these things. The strategic error that occurs, is that when not sufficiently scoped, it gives the law firms an ‘out’ when it comes to the fixed fee estimate.
For those in the industry, this is known as ‘scope-creep’, and the law firms will argue that the initial scope was not accurate and therefore the work and fee that was initially agreed is no longer valid. Unfortunately, what happens is that both parties through their hands up in the air and revert back to the ‘safe’ option of hourly billing.
This is when we find that companies receive legal bills at many times the initial estimate – this is what is called “bill shock”.
Isn’t it strange that this happens so often that the industry has even coined a term for it!
We consider fixed fees to be the future of the legal services industry, however for it to work for companies in the way that they want (budget control, selection criteria and predictability), process and rigour need to be introduced. With these in place, fixed fees can help give the transparency over pricing and services that will make a step change in how legal services are procured.
If you are interested in finding out about managing legal costs, you might like to read Lawcadia’s Guide to Managing Legal Costs, described as the benchmark in managing legal costs and a must-read for all in the industry.
Download our Guide to Managing Legal Costs for more tips and ideas on how to manage your legal costs and stretch your budget further this year.
“Lawcadia’s Guide is the benchmark for managing legal costs”