Barbara Hendrickson was ahead of the pack when she founded BAX Securities Law in Toronto in 2012 and started offering alternative fee structures from day one.
“But I have to say it’s been pretty painful,” admits Hendrickson, a former chair of the CBA’s Business Law Section. “I have this process, especially if it’s a new client. I started off by doing an assessment. I would spend a few hours with the client about what work they had to be done, I would come up with a work plan, give a fee estimate and then I would start. The problem is, that takes a lot of time and sometimes I give a fee estimate and then they might not retain me – but they’ve got a really good roadmap of how to close their transaction. Secondly, invariably, something changes. So it’s been a real skill coming up with an estimate with the appropriate limitations in it so I don’t get stuck.”
She figures alternative fee structures are the way of the law profession’s future.
“This whole concept of how we provide a product is changing because of the economy,” she says. “I personally would rather stick with hourly. I’m hard-wired that way. I manage my whole day around the hour, how much I can bill. But people … see the hourly rate and they think that somehow in the fixed fee they don’t have to pay as much.”
The billable hour may still be the top fee model, but it is definitely in decline, says Mark Crane, who hosted a webinar on alternative fee structures in March for his firm, Gowlings LLP. In his work as a commercial litigator he sees businesses becoming more cost-conscious and putting more pressure on in-house legal departments to live within their budgets.
Alternatives to billing by the hour include discounted hourly rates, fixed fees, capped fees or contingency fees. Then there are blended fees or performance-based fees. Or you could offer a mixture of all of the above, which is what Speigel Nichols Fox LLP in Mississauga does. It gives the firm what Jonathan Speigel calls “skin in the game.”
“Technically, it’s not in our interests to act efficiently if all we’re doing is getting paid by an hourly rate,” says Speigel. “The longer it goes, the better it is for us – assuming we’re going to get paid. The longer it goes the worse it is for the client. We have divergent interests. If I have a flat fee, the shorter it goes the better it is for us and the better it is for the client.”
He agrees that alternative billing requires lots of dialogue before, during and after taking on a client.
“We always look at the value. We cannot bill as much if we are unsuccessful (as we can) if we are successful. We just can’t,” he says. “I look at each one in the end and say, ‘How did we do?’ and, ‘Do I have the right to charge the full amount? Do I have the right to charge more or should I be charging far less?’ And I do it on a case-by-case basis. There is no formula.”
Crane says clients today are more focused on cost predictability, transparency and “risk sharing opportunities.”
“A fixed-fee structure or a capped-fee structure or whatever it may be is possible but it requires work from both sides on the front end,” he says. “But I think it’s an opportunity because it’s adding value to the client, building relationships with the client and you hope that strengthens the relationship and may deliver more work moving forward.”
Hendrickson says another advantage to a fixed fee is that it prevents “over-lawyering.”
“The reason I can do fixed fees is because with a clerk or a couple clerks, I do most of the work myself so I have total control over other people’s time. If you’ve got 10 people working on a file, it’s really hard to control the time. I can control my time. I know what I can produce in what period of time and what I can make money on.
“To me the advantage of a fixed fee is certainty in collections and client satisfaction because people know what they’re getting for their money. People sometimes don’t understand what we do even though they get our bills.”
Ottawa real estate lawyer Elizabeth Maiden, a real estate lawyer with Ottawa’s Soloway Wright, notes that residential purchases and sales and commercial mortgages have been quoted on a flat-fee basis for years, and personal injury litigators regularly work on contingency.
“However we are seeing an increasing demand for flat fee quotes in other areas where we typically would work on an hourly basis, including condominium disclosure documents and registrations,” says Wright. “ We are attempting to accommodate our major clients and provide them with flat fee quotes in order that they can have some certainty for their budget planning purposes.”
Wright sees how this could be challenging for law firm compensation structures, though Crane doesn’t believe much will have to change.
“Firms or sole practitioners will each have their own arrangements … whether your revenue comes from hourly rates or fixed fees or some performance or contingency fee or a blended hourly rate,” he says. “How that gets allocated after a firm’s expenses have been accounted for will be within the discretion of the firm.”
He looks at alternative fee structures as an opportunity for law firms to offer clients something they want – but it can take “significant up-front work” to ensure that everyone is clear about the scope of the mandate.
“Fixed fee is much more complicated because it’s an art to come up with what is an appropriate price for this series of transactions,” says Hendrickson. “What often happens is people don’t tell you everything up front, especially in the securities area. Things can come up that just make everything more complicated. You’re literally talking money with your client on a weekly basis. That never happened before.”
Becky Rynor is a freelance journalist based in Ottawa.