In a fix

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Accountant Nigel Reynolds explains why law firms need to bring back fixed fees in a bid to secure future success in business

Reynolds: fixed fees make work-in-progress concerns redundant

The perception of the public and business owners has always been that the legal profession is immune from the effect of a downturn in the economy. Unfortunately the reality is completely different, as many in the profession are finding.

The one issue that this recession has brought to a head is whether law firms are truly running a business at all. If firms compared their business to any other non-professional business where advice is provided as service, they would realise they are further behind the times than first thought.

It is time for the legal sector to return to a fixed-fee payment basis for the legal services they provide. Prior to the Second World War, all legal work was undertaken on a fixed-fee basis.

It was only after the war, with the development of accounting machines, computers and the pre-occupation with time and motion studies, that law firms moved to charging on an hourly basis. The interesting thing is that business customers are now starting to ask why they accept this from their law firm and so are starting to insist on a fixed fee.

The legal sector is already far behind, as a large number of American and Australian lawyers have already made this change. In a speech in May, the Chief Justice of Australia argued that charging by the hour was “past its use-by date”. This, combined with client attitudes, is a clear death-knell to charging by the billable hour.

End of the timesheet

So where does that leave you? Well, you can stay as you are and go the way of the dodo and dinosaur into extinction or alternatively you can change your business model and move into the future.

Making the change from hourly billing to fixed fees is not an easy task and it will initially require every partner to support it and ultimately every member of staff. In addition you will make mistakes, but these should be viewed as a learning experience, which will allow you to improve your new model and the skills you have in setting fees.

The good news is there are advantages to this new business model: it moves firms away from “how many hours will this job take?” and “how much should I charge?”, towards “how much does the client value the service we are going to provide them with?” and “how much are they prepared to pay for the service?”. This then leads to two distinct advantages: removing the timesheet and knowing up front whether the client is prepared to pay for the service and ultimately whether this is a client you want to act for.

Finding the value

The loss of time sheets does not mean that you lose the basis for measuring the effectiveness or profitability of the practice. So what do you replace time recording with?

This involves taking the next step in the evolution to what is termed an “Added-value firm”. The business model of most firms requires that the partners themselves achieve a certain fee-earning level that is intended to ensure they maintain their productivity and cover their own costs. The reality is that they usually achieve this by writing off the time cost of junior staff.

The change that needs to take place is that partners must recognise they are primarily business owners and managers, which brings us back to why they are in business. Accordingly, what they should be doing is managing the greatest resource that the firm has, which is the intellectual property of its staff, combined with generating additional fees for the firm.

There is another interesting outcome of working on a fixed-fee basis, which is increased profitability. The reason for this is that such firms are more business focused, and if they do low-value work, it is a conscious decision with a clear reason for doing so.

Another outcome of the change is that the team members feel less shackled to the clock and are more relaxed in supporting clients. The clients are then more appreciative of the quality of service and they recommend your firm to other businesses.

In addition, instead of money sitting in client account until you raise a bill, the money goes straight into office account, making escalating work-in-progress a thing of the past. The last argument is that because the fee is agreed up-front, the client cannot argue that they were not aware of the cost or that the cost is too high. Those objections have already been dealt with when the fee was agreed.

So, do you want to change your business model voluntarily and get ahead of the game or do you want to end up like the dodo and the dinosaur?

Nigel Reynolds is founder and principal of West Midlands-based accountancy practice Reynolds & Co, which specialises in accountancy (including Solicitors’ Accounts Rules), taxation and business advisory services