In previous posts, I have referred to my preference to the fixed fee arrangement. In addition I have also commented that as firms are building their repertoire and gaining trust with clients, capped fee arrangements could be the answer, especially those that have shared success incentives. As I was preparing for a presentation I was looking at some old blogs I’ve read over the years and one struck me. In November 2006 the Law Department Management Blog, managed by Rees Morrison, Esq. and his group, wrote about the difference between capped fees and fixed fees:
Law firms dislike capped fees because under them they can charge their normal rates but may not exceed the cap. Much more favorable are fixed fees, because then the law firm receives the agree-to amount regardless of how efficiently it accomplishes the tasks or goal. A capped fee might be “For this Hart-Scott-Rodino submission, our fees will not exceed $200,000.” The preferred arrangement, a fixed fee, would be “For this H-S-R submission, our fees will be $200,000.”
Unlike a fixed fee, a capped fee does not allow the firm to keep the benefits of efficiency, such as if less lawyer time is recorded due to the law firm’s investments in technology and knowledge management. Capped fees have no upside; fixed fees reward productivity and expertise.
For this reason, if requested, some law firms quote capped fees at as much as a 25 percent premium to their quote for a fixed fee. Law departments should take note of this possibility.
I happen to agree that eventually firms and clients can build trust and law firms should benefit from efficiency gains in fixed fee arrangements, but the client should as well. This post is a small example of a mindset that has brought us to the place the industry is in. The quote “capped fees have no upside” as well as the entire last paragraph provide evidence to why there is distrust between firms and clients.
Now, it has been 3 years since this post and I think we all had opinions that have changed in that timeframe, so I do not mean to call out Mr. Morrison. This is just a sample of many blogs that you can find from that era that say roughly the same thing. That being said, there is now, and always has been, an upside to capped fee arrangements. First, you can make your clients look great if the firm comes in below the capped fee which will help in gaining more business for your firm. It is likely that there were inefficiencies beforehand and removing them can provide benefit to both the firm and client. Finally, the shared success factor is an excellent way for the firm to get extra benefit from efficiency. If you work well enough to the point that you come in below the capped fee marker and you have negotiated in advance with your client to share some of those savings, you not only get additional revenue but you again have a happy client.
In an economically challenged environment the capped fee is a great arrangement to build the client/firm relationship. It comes with risks. If time and costs are misjudged or if there is not proper project management, the firm absorbs that loss. On the opposite side it allows firms to hurdle over the mistrust that many clients have about the way pricing on fixed fees are created. Also it will help firms learn the project management and pricing skills they desperately need so that in the future they can quote capped and fixed fees in an appropriate manner.
The capped fee is a viable arrangement that provides many great benefits to the client. If you incorporate some sort of success agreement or simple splitting of savings between client and firm then there is the added benefit to the firm to over realize while still passing along savings to the client. In an economy where demand has changed, firms must take notice and align both client and firm needs.