Friday, 27 December 2013

The great fixed fee debate - the lawyer's argument

debate photo: debate debate.jpg
It has been quite a while since I last blogged and even longer since I blogged about a potentially controversial subject so why not kill two birds with one stone.  2013 has been a year of two halves for the legal profession.  The first half of the year firms had it rough and indeed some did not make it through the whole year as a result.  The second half was much more positive overall – deal volumes were up especially in the real estate market in which I largely operate.  Lending has returned partially from banks but also from alternative sources. However regardless of how much improved things are or indeed how much more they might improve there is one thing that is not going to change – the demands for greater price certainty from clients.

First I would like to dispel some myths that many of those not in private practice seem to believe – lawyers do not love hourly rates; most transactional lawyers I know hate the billable hour.  It is seen as a noose around the neck.  We know clients hate it; believing that it encourages us to be inefficient since the more time we spend on something the more we bill.  However, I have never spent more time on a matter than I believed necessary to achieve the result the client required.  Frankly, I rarely have the spare time to time dump.  Even if I did I recognise that there are more valuable things to be doing than being inefficient.

Therefore I welcome the end of the billable hour – it creates a barrier between client and professional; it creates distrust and an assumption that there is padding in any quote given.  But my welcome comes at a price – I am happy to take on more risk in terms of pricing; I am happy to give my clients price certainty.  But I am also a businessman.  I hate to break it to my clients but I am in business to make a profit.  That really should not come as a surprise to many, if any, of my clients since they are all in business for the same reason.  That being said sometimes it feels like clients do not recognise that ultimately law firms exist to make profit.  We do it by providing a service but if the provision of that service is no longer profitable then the ability to provide it disappears.

So what does this all mean in the context of the end of the billable hour and the demands for greater price certainty?  Well here are, what you might call, my wish list of requests to clients when it comes to agreeing price certainty on a deal.
  1. Fixed not capped
  2. Price the deal
  3. Timing is relevant
  4. If you want extras pay for them
  5. Cash flow quid pro quo

1.  Fixed not capped

capped photo: CAPPED!!!!! PrisonCell2.jpgWhen you ask me for certainty don’t ask for a capped fee.  That is akin to having your cake and eating it.  A capped fee seeks to keep the hourly rate open for your benefit but shut for mine.  It is not risk sharing but rather placing all the risk on the law firm for no upside benefit.  At the end of the day agree a price that you are happy with for the transaction.  If your numbers work at that price don’t look to eat away at the potential benefit to me by effectively denying my ability to use efficiencies where I can so that I can try and increase my margin.  It is important to recognise that time specifically spent on a deal may not be reflective of the cost especially where there are efficiencies that I have introduced.  There is an R&D cost to those efficiencies.  If you truly want lawyers to become more efficient and invest in developing processes then the carrot approach will work far better than the stick.

2.  The fee is for that deal

In order to price things we need to know the scope and then once the scope is agreed don’t expect work outside of the scope for free.  Now I admit that law firms can often be their own worst enemies on this front.  There is the tendency to quote on the basis of assumptions or scope that do not really reflect the likely work involved (e.g. when quoting for a property acquisition assuming there will be one turn only of the sale agreement).  We need to be more honest and use our experience to quote properly for the deal; that is a legitimate expectation of our clients.

Further lawyers are always reticent to raise the fact that something is out of scope and the additional charge for doing it.  Part of the reason for this is the response that is often given when this point is raised – the lawyer is made to feel guilty for seeking an additional fee.  But why should they?  If they have scoped the work honestly and legitimately at the outset and something unusual arises resulting in a whole different work stream why should the lawyer not be able to agree a fee for that new work stream?  If I specifically exclude tax from my fixed fee and then the client seeks tax advice because it thinks there might be a VAT angle it is legitimate that as a firm we can agree an additional fee for that advice – it can still be a fixed fee.
Using a non-law example, I ask a stationer to provide me with headed notepaper for which he provides a quote; then I ask him to provide envelopes in addition I would expect him to charge me more.  No one would argue with this because people physically feel the extra envelopes.  The problem is in the legal context clients don’t necessarily see the ‘benefit’ as they picture the legal advice as a single unit.  Fixed price quotes demand the clients change their perceptions as well as the lawyers changing ours.

3.  Timing is relevant

calendar date photo: Save the date calendar calendar.gifJust because a client is not paying on the basis of hourly rates does not mean that the length of time a deal actually takes is no longer relevant to the quote given.  The longer a deal lasts the more resource it is likely to use up or require to be kept available.  Therefore it is legitimate to quote a price based on the assumption that the deal completes by a given date.  Again the date should be realistic and assume some slippage from the timings given in any agreed heads.  Further the lawyer should seek to agree a fixed fee for each time extension there is not hourly rates for any such extension.  There can be caveats to this such that, for example, a ‘down tools’ period only qualifies for a percentage of the ‘extension fee’.  This needs to form part of the pricing at the outset.

Often time extensions may be associated with or run in parallel with changes in scope.  No one is suggesting you can charge twice for the same thing but the pricing needs to reflect both the resource required and the length of time for which it is required. 

4.  If you want extras pay for them

Clients want pricing certainty and, more often than not, they want the cheapest quote.  To achieve this I need to be able to work in the most efficient manner possible.  Therefore, nothing destroys the pricing relationship more than when a client demands a cheap quote and then insists on the matter being ‘partner-led’.  Partners are more expensive because of seniority.  If you want a ‘partner-led’ transaction you have to be prepared to pay for it.  Again not on an hourly rate basis but rather on a higher fixed price basis.  Clients are entitled to expect their work to be done properly by those qualified to do the job; senior input may be necessary but how much may be a matter of choice rather than need.  If you want the cheapest price this has to come at a cost – you will get less experienced people doing the work.

If you book and pay for a Superior Room at The Dorchester you don’t turn up and demand the Presidential Suite.

5.  Paying the bills

cash photo: $$$$$ cash.jpgMy final point is probably the most important but also likely to be the most controversial.  If clients agree a fixed fee then they should be prepared to pay that fee on, say, a monthly basis during the transaction not merely at completion.  There can still be balloon payments at milestones or at the end of the transaction to avoid a perception of a lack of impetus to get the deal done.  Fundamentally a law firm’s biggest risk is its ability to manage its cash flow (in recent history this has been the biggest cause of law firm failures).  In a transactional department the time taken from matter inception to completion to billing and then payment can be significant.  Law firms need to be able to reduce this time period. 
Even on a transaction that takes two months from inception to completion (about the average expected for a real estate acquisition) then assuming another month for payment of the bill a firm is looking at a minimum of three months before earning a penny for its work carried out three month’s previously; bearing in mind much of the work is front loaded that is a long wait.  In that time it has had to pay all of its overheads.  In the days of hourly billing this was largely accepted as part of the quid pro quo for charging per hour. No pain no gain.  But if law firms are, rightly, to move to fixed fees it is legitimate for them to expect to be able to smooth out the cash flows.  Whilst law firms can be expected to take on the pricing risk they should not also be required effectively to finance their clients’ transactions by being unable to expect payment of anything until completion.  That’s a double-whammy.


So hopefully you have made it through my thoughts on the brave new world lawyers and clients are now entering in the billing arena.  I welcome the need for greater certainty on fees.  I believe it is in both clients’ and lawyers’ best interests.  But if clients truly want to see the end of hourly rates and lawyers to embrace the idea of pricing certainty they need to come to terms with what lawyers need in return.  I do not think that I am asking too much.  I am just a businessman seeking to have an honest and open discussion in the hope that together we can build a new future in the provision of legal services.  As such I would welcome and actively encourage others to express their views.  I openly admit my bias on this subject but do not feel I have been dishonest in my approach; if you disagree then please let me know and why.

Tuesday, 4 June 2013

Sweet Dreams for trade creditors but nightmares for Landlords

The news (Private equity firm pays Dreams' creditors) that Sun European has paid 75p in the £1 to trade creditors of Dreams, which it acquired from the hands of administrators in March is great news for those creditors.  But unfortunately the story for landlords is not so good - no such pay out for them. 

The commercial logic is obvious - in order to continue trading Dreams needs its suppliers to continue to supply.  Whilst there was no legal basis for those debts owed by old Dreams to be paid by new Dreams the ability of those suppliers simply to stop supplying puts them in a strong negotiating position and in this case they have achieved a result which is not bad.  Landlords, on the other hand, don't generally have the ability to stop supplying in a way that can impact the whole of the business.  At best a landlord may have a few sites and thus be able to negotiate a position on lesser performing sites by leveraging the better sites.  But in most cases the negotiating position is pretty much a one way street. 

It is this unlevel playing field that means landlrods consistently feel they are getting a raw deal on administrations.  Unfortunately it is the very nature of Real Estate that creates this unlevel playing field.  I wish I had an easy solution which could level it out but I have to admit I struggle to see a path at this point.  So for now I predict whilst trade creditors may get some sweet dreams most landlords will continue to suffer nightmares!

Tuesday, 6 November 2012

Comet, explosive headlines and blame

There are a number of stories which caught my eye in respect of Comet going into administration.  They appeared in many papers and on-line.  I am linking to the Telegraph versions of two of them simply because there is no pay wall and they are easy to find (thanks to The Telegraph for being so helpful).  The stories are:
"Landlords hit out at Comet for failing to disclose finances"
and
"Comet gift vouchers suspended".
Of course the suspension of gift vouchers was turned into something completely more "offensive" by the telling of how Comet staff snubbed a buy suffering from cerebral palsy by refusing to accept a £500 gift voucher given by a charity to his mother to buy an Apple iPad for her son.  A stranger has now stepped in to buy the iPad instead
The fact is neither of these are real stories and what the newspapers are doing is using human nature and emotions to create a headline and a story.

Landlords did not get tricked

Let's look at the landlord story first.  The story highlights the amount of rent landlords will lose if they cannot re let sites currently let to Comet.  It then goes on to quote how landlords did not give concessions to Comet because management refused to be open book about their business plan and finances.  I don't get it.  Where is the story?  Comet sought concessions; Landlords asked for information; Comet refused; Landlord said "no".   If landlords had been fed misinformation and then agreed concessions now that would be a story.  If there was evidence that OpCapita had taken on the business with the intention of running it into the ground; now that would be a story.

Gift vouchers are just IOUs

Now consider the gift voucher stories.  First of all let's consider what a gift voucher is - it is simply an IOU.  You are a creditor of the business and an unsecured creditor at that.  When a company goes into administration all its unsecured creditors are likely to be wiped out or get very little return.  There is no separate arrangement for private individuals.
Therefore, when Comet went into administration the administrators could not simply ignore their duties as officers of the Court and tell Comet staff to continue to accept gift vouchers.  But let's not allow their legal duties get in the way of a good headline.  Evil administrators are easy targets especially when the other side is a poor child who is already suffering. 
My question is what on earth is a charity doing taking its donations and handing them over to a company in return for nothing better than an IOU?  That is the angle the newspapers should be looking at.  Is that a legitimate use of charitable donations?

It's not my fault

I suppose you could ask why do I care?  Well the main reason is that there are many similar examples where the media creates a story where there is none.  In doing so they ignore so many more important angles which may not be as attractive to the public.  And all this stems from or points to one major failing in society today - the need to blame someone else.  Everywhere we look, every time we see something not to our liking we have to find someone else to blame.  Now we have a list of targets and whenever something happens we look to find a story which allows us to place blame with someone on that list - the bankers, the politicians, the administrators, the private equity people, the media.  We also have a white list of people who tend to be untouchable and never to blame (a much shorter list) - the man on the street, the charities.

Perhaps this is the cause of so many of our problems that we face today.  Perhaps if rather than always looking to find someone to blame we stop and ask ourselves what could I have done differently?  How much of the fault of what has happened to me is because of me?  What could I do to improve the situation?  If everyone did that and changed how they acted as a result then we might find ourselves in a much better place a lot quicker.

In the case of the vouchers the charity could be reconsidering its arrangements (perhaps it is already).  Perhaps the mother would consider that she could have acted quicker when she got the voucher and immediately gone to Comet (of course I don't know when she got the voucher).  As for the stranger who stepped in - well he has done exactly what I suggested.  He didn't look for someone to blame he asked himself what he could do and he did it.  All we need is 50m more people with that kind of attitude in the UK and we might just get ourselves out of this mess.

UPDATE

This evening (6 Nov) the administrators announced that Comet would now accept gift cards but not corporate gift cards.  I have no idea why this decision has been made (or on what legal basis).  It is possible the administrators have secured funding for certain gift cards from the secured creditor which has allowed them to do this.  In any event clearly shows the impact of a particular story being run in the press.  Question is will the nice man who bought the iPad as for his money back?!?