Clients are increasingly expecting law firms to offer fixed fees, and some law firms are proactively trying to break the link between the time taken to deliver the work (input) and the value generated for the client (output).
But as a partner looking to introduce fixed fees into their practice, it's important to give serious consideration to 'what should the fixed fee be?'
There's a temptation to either accept whatever the client offers, or to effectively shadow bill at an hourly rate, but this often comes with the risk that the price is ultimately too low - producing an undesirable workstream with poor profitability, and often standing as the poor relation to the hourly billing models the industry is accustomed to.
There is a better way, and whilst there is both science and art to determining price, I'd recommend testing three different approaches to help inform your thinking:
What is the value of this work to the client?
What do our competitors charge?
How much does the work cost to deliver?
Relying on just one approach increases the risk that your work is over-priced compared to the market, or under-priced compared to the cost of delivering the work.
If all three come back to a similar answer, you can likely fix your fee with a high degree of confidence.
If there are wide differences, then you'll likely need to dig a little deeper.
Let's take each of these in turn before looking at how to address potential differences between them.
1. What is the value of the work to the client?
Key here is typically the value of the underlying transaction.
A will for a client with £10m estate is worth more than for one with a £1m estate.
Conveyancing for a £50m property is worth more than for a £250k property.
The recovery of a £300k debt is worth more than recovering a £30k debt
Yes, there is likely additional work in servicing the different clients (and you can test this at 3, below), but this may not be proportionate to the increased value the client perceives.
In addition to the value of the underlying transaction, perceived value of legal advice to the prospective client is also highly relevant. Note it is the client's perception of the value that is important here, not yours.
It's really important here that you resist the urge to perform this as a desktop exercise. I'm sure you know your clients very well.
But do you know who knows your clients better than you?
Your clients themselves. Talk to them.
2. What do our competitors charge?
Resist the temptation to set your price at 'the market rate' by default.
This leads to a race to the bottom on price (hello, residential conveyancing!), as you'll invariably chip the price when asked to secure the work.
However, you absolutely should know what your competitors charge and where your price sits in relation to this.
In B2C markets, you may well be able to pick up competitor pricing from their websites in a quiet afternoon.
But B2B markets tend to be less transparent, and gathering intel can be more time consuming.Â
Consider:
Mystery shopping - pretending to be a potential client and asking them to quote. Works better for simpler transactions. Feels awkward!
Review recent pitches - particularly where you have lost the work on price. What price won the work? Can you establish from the RFP scoring how much more expensive you were?
Ask current and former clients that engage a number of firms for the same type of work. What's the going rate? What's an acceptable/unacceptable price for this type of work? This can work well in more formal panel arrangements and with regular client relationship meetings
I'm not sure I'd recommend asking your peers from other firms what they charge. I'm never convinced you get a straight answer with this approach, and you probably don't want to inadvertently set up an informal cartel at the golf club.
3. How much does the work cost to deliver?
You'll likely have experience delivering this work before, and so now let's turn our attention to the time records from those previous matters.
What you billed previous clients for this may be a useful data point in the context of market rates (see 2, above), but here I want you to look at the total value (at standard rates) recorded to the matter files of the relevant work.
Hours x standard rates should, in most firms, give you the expected value of the work. Standard rates includes the salary costs of the fee earners, the expected contribution to overheads and the required return to partners.
This is the gross value of production charged to the matter files.
Look to understand both the average gross value of production for all the matters, and the spread charged across different files.
If the spread (from the highest, to the lowest value) is narrow, then you've likely got a reliable estimate for a fixed fee.
If it is wide, you may need to drill into the specific files to understand this - are there different scopes of work involved? Were there specific delivery inefficiencies in some of the files that we need to address going forward?
Working through this exercise will likely help you identify the material components of scope that cause the wide spread, and this is an important step in framing your fixed fee.
Remember fixed fee = fixed scope
By understanding the impact of these variations within your historic work, you may then revisit the prices determined at 1 and 2 above - what are your competitors charging for the same scope of work (2)? which clients value which particular bells and whistles within the scope (1)? And so on.
Next, compare the different prices indicated in the steps above
If, at step 1, you've identified a particular client segment that values the piece of work at £10,000, at step 2 your competitors charge between £9,000 and £12,000, and at step 3 you can see that the gross value of production for historic matters is around £11,000, then you know you're in the right ball park with your proposed fixed fee.
You know clients value it, the market prices it, and you can deliver it - all at a similar price point.
However, if one of these areas is either a high outlier at £20,000, or low at £4,000, then you have some work to do.
Address the outlier
If the value of the work to the client is an outlier compared to the other values:
If client perceived value is low - you likely have a client segmentation issue. You need to find the prospective clients that value the work, or target higher value transactions for this workstream
If client perceived value is high - you may be able to achieve a premium price with a clear articulation of how your service differs from your competitors. This needs to meaningfully speak to what the client values, not the thin gruel of 'our people/culture/etc is what makes us different'
If what competitors charge is the outlier:
If their charge is low - you need to differentiate your offering to stand out from the crowd, or lower your cost of delivering the work to meet that market rate with an acceptable profit margin
If their charge is high - you have an opportunity to either capture market share by offering a fixed fee below that prevailing market rate, or otherwise capture elevated profits until someone else captures that market share
If the price indicated by your delivery cost is the outlier:
If your delivery cost is low - you may be able to offer this work to clients at a premium price point, but you need to ensure that the scope of services delivered matches client expectations at that premium price
If your delivery cost is high - you need to reduce the cost to be competitive. This would typically be achieved through greater delegation to more junior resource, greater standardisation of delivery processes and precedents and/or automation
Summary
Fixed fees can be a great way to differentiate your offer from your competitors. Clients value the price certainty, and may pay a premium for it beyond what you'd typically charge with hourly rates.
However, in transitioning to fixed fees, it's important to proceed with caution as a price that's too high may alienate clients, damaging your reputation, and a price that's too low may negatively impact the profitability of your practice group.
By considering the potential fixed fee through the three perspectives of (1) clients, (2) competitors and (3) your own delivery model you can reduce this risk and triangulate towards a price that ticks all three boxes.
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