RIP Hourly Rates

Having just recently celebrated the first anniversary of my new independent Hong Kong law firm, I wanted to share my experiences (good and bad - but almost entirely good) of devising and implementing a flat fee billing structure by charging only fixed, staged and retainer fees.

 It is a massive departure from the traditional law firm business model of primarily charging on the basis of time to replace that model with one that totally eliminates all hourly charge-out rates, time-recording and professional fees based on the amount of time spent on performing individual tasks by individual fee earners.

HAPPY LAWYERS/HAPPY CLIENTS

When the performance of lawyers is not primarily measured by the amount of time recorded on their timesheets, the only basis for assessing their performance under a flat fee structure is the quality of the work product which they produce which means that the lawyers can concentrate on their own lawyer skills (rather than worrying about whether they are recording too much or too little time on any particular task) and that they can focus on the work they are doing for their clients, which should, in turn, improve their efficiency as well as the quality of their legal knowledge, skill and advice.

 When lawyers are not concentrating (and wasting too much time) on their individual time-recording, I have noticed that they tend to be more collegiate and supportive of each other in terms of sharing experience, information, precedents and know-how, which again should improve the quality of the legal services being dispensed by the law firm. When lawyers are freed from the extreme pressure, stress and anxiety of recording as many billable hours as they possibly can on any particular task or project, my experience is that the efficiency and quality of the legal work is enhanced and that it is performed in a healthier, happier, calmer, collaborative and more productive working environment with team (firm) trumping individual self-interest. Every lawyer working in this flat fee environment has to buy into the model by putting their hands up when they have spare capacity, otherwise, the model breaks down, but with the team ethos being at the forefront of the flat fee model, this shouldn't be a concern. In my experience, the lawyers working in this environment do put their hands up when they have capacity as not only do they want to help themselves by getting on with producing the next piece of work, they know that by doing so they will be equalizing/decreasing the pressure of work on their colleagues by ensuring a fairer allocation of work.

With the elimination of the traditional time-based charging model (which inevitably tempts law firms into assigning multiple lawyers to a case or transaction, expecting them to record as much time as possible over as long a period as possible), the interests of law firm and client are for once aligned, as with the implementation of the flat fee model it is in the interests of both law firm and client for the legal work to be done as quickly, efficiently and as cost-effectively as possible.

COURT TAXATION OF STAGED LEGAL FEES

Milestone fee arrangements are not uncommon in commercial transactions, but almost unheard of in dispute resolution/litigation, but staged fee arrangements are achievable in the litigation sphere with a well-defined, detailed and thoughtful scope of work for each stage in the conduct of the proceedings, which still allows for taxation (assessment) of a receiving party's costs by the courts. My experience is that the staged fee model remains within the scope of court taxation of legal costs, especially in the case of a summary assessment of costs - a process in which the court adopts a 'broad-brush' approach when assessing the 'reasonableness' of legal fees charged by the law firm for the conduct of a particular interlocutory court application by analyzing a statement of summary assessment of costs produced by the lawyers acting for the successful receiving party. In each summary assessment in which I have been involved as the Solicitor Advocate with my new firm, the staged fees charged for the conduct and hearing of its clients' interlocutory applications have been allowed by the court at about 95% (as opposed to the standard 70%) because the staged fee model (even in litigation) inherently lends itself to cost-efficiency and consequently, 'reasonableness' in terms of the fees charged for the conduct of any particular court application and then allowed by the court on a summary assessment of those costs for payment by the unsuccessful paying party.

There is no good reason that I can see why these same principles should not apply to a full-blown taxation at the end of a trial - although the court taxation process generally takes far too long (up to or over a year if it includes a 'review' of the original taxing decision) and is far too expensive in circumstances where the usual outcome is that a successful receiving party has its actual legal costs of an action taxed down by about 30%, meaning that my advice to clients is invariably to settle claims for costs (whether the receiving or paying party) unless the successful receiving party's claim for costs is obviously exaggerated and it is unwilling to compromise its excessive claim for legal costs - something which is exceedingly unlikely to happen under the staged fee model as the fixed fee for each stage of a court action (or each individual court application) is agreed between law firm and its client before the start of each stage of work, which provides value to the client and by its nature should not be excessive or 'unreasonable' in the eyes of the court, or the client wouldn't agree to pay it in the first place !

The value and certainty which the staged fee model provides to the client is almost by definition reasonable, so a staged fee for the conduct of an application should not usually be taxed down on taxation by the court anywhere near as much as a claim for costs based upon traditional time charges.

VALUE AND CERTAINTY

For clients, the flat fee model means that there are no monthly 'mystery bills' (as I call them) with mystery fee earners and mystery time recorded in a monthly bill narrative and instead, they are able to achieve certainty and value in terms of the fixed, staged or retainer fees which have been agreed with their lawyers before the work is done, meaning in turn that there is far less scope for lawyers and their clients falling out over the monthly or final bills, even after providing a high-quality work product and a great result.

To maximize their effectiveness, fixed, staged or retainer fee arrangements should include the day-to-day "miscellaneous disbursements" usually charged separately by law firms (e.g. photocopying, email printing, local taxi fares/delivery charges and even court filing fees/government registry charges etc) and only the fees of external service providers (or extraordinary disbursements) are charged separately to clients, which again makes the whole billing process far easier, faster, cost-effective, and user (client) friendly.

 Actual recent examples of client complaints about (poor) experiences with the traditional time-based billing model and monthly bills:

  • partner, associate and trainee each recording 6 - 12 minutes for reading a single WhatsApp message from a client to arrange a meeting at a total charge to the client of HK$1,400
  • partner billing a client for a day's air conditioning charges when spending a day working from home
  • associate charging half hourly rate for time spent on a 12-hour flight from Hong Kong to London (whilst watching "Love Actually" before working on another case for a different client, and charging that client as well)
  • partner billing a client for attending its celebratory deal completion lunch
  • 4 lawyers charging for attending a court hearing at which the cost of the attendance of only 1 of them was allowed on taxation by the court
  • partner, associate and paralegal each charging 3 different amounts of time for the 3 of them attending the same meeting with the same client
  • trainee billing 1.75 hours for attending a 3-minute court hearing
  • partner charging for attending a court hearing attended only by an associate
  • partner asking a trainee to repeat a research memo just to be able to bill twice as long for the same memo
  • 4 fee earners (partner, 2 associates and a trainee) all recording time (22 hours combined) for drafting a single 4-page affidavit

These stark examples expose the lack of value provided to clients by the traditional law firm time-based business model. With the flat fee model, there is no need for detailed bill narratives and no ambiguity over where and when the work is done, or who it's done by - so long as the work is done well and on time.

These examples also expose the extreme (almost brutal) pressure placed on individual law firm partners to meet (sometimes impossible) time-recoding / billing targets for their teams - pressure which in many cases is far too high a price to pay (mentally and financially) for the individual responsible partners who cannot possibly do their own jobs to the best of their abilities in such a pressure-cooker environment (I know, I used to be one of them) and who consequently, end up sometimes delivering sub-par legal services to their clients through no fault of their own - it's down to the law firm model, not the individual lawyer.

INCREASED EFFICIENCY IN LAW FIRM ADMINISTRATION

 With fixed, staged or retainer fees paid in advance upon engagement, debtor days (the number of days between the performance of the work/date of the bill and bill payment) are substantially reduced and unpaid bills virtually eliminated - so there's no need for the client to pay funds on account of fees, very little use of the firm's client account, and no need for a credit controller - altogether much less office overheads and administration all round, which frees-up law firm partners from being HR managers, accountants and office administrators, and allows them to do what they do best and love doing - being lawyers and finding legal solutions for their clients!

Although the traditional time-based law firm billing model almost certainly produces higher levels of initial billed fees, those billed fees are often subject to significant percentage discounts to appease client fee concerns - discounts which are often so significant that they render default hourly charge-out rates for individual fee earners artificially high, and negatively impact 'utilization' and productivity rates for individual lawyers, as well as the number of average debtor days for the law firm. None of this is good for the law firm profit and loss account and sends the office finance department (time managers, billing administrators and credit-controllers) into overdrive!

 Time capture software is expensive to buy, license and run. In comparison, a flat-fee billing model means that law firms can operate with off-the-shelf business accountancy software packages, with little or no post-billing administrative work required, all of which obviously significantly reduces office costs and streamlines law firm accounting and billing policies and procedures, all of which require far less office administration in terms of systems, headcount and overall expense to the business.

 Seeing as the scope of the flat fee engagement is precisely defined, there should no ambiguity or misunderstanding about the scope of work in any engagement, which should then significantly reduce the risk and incidence of claims being made on the firm's professional indemnity insurance policies in terms of what legal services the law firm has been engaged to provide to its clients, which in turn should reduce annual premium for excess layer insurance on top of the mandatory insurance coverage layer.

VALUE-ADDED LEGAL SERVICES

The trick (I think) to the success of the entire flat-fee billing model is closely defining the scope of work for each fixed, staged or retainer fee arrangement. For the business model to work and work well, the scope of work must be defined as tightly as possible to minimize ambiguity and to maximize certainty and value for both law firm and client alike. The last 15 months or so have inevitably involved a steep learning curve in terms of drafting the scope of work for different stages of work with some inevitable degree of trial and error, but if experience has taught me anything, it is that openness and transparency are key to the model successfully providing the certainty and value which is the cornerstone of the flat fee arrangement, as well as being the foundation of the lawyer-client relationship which should be one of trust in the law firm by the client which is complimented by a commitment by the law firm to use its legal tools to fiercely protect and enforce the interests of its client and to provide value-added legal services to secure its client's personal or business objectives.

...and best of all, none of my firm's lawyers have to fill in a timesheet covering every 6 minutes of every single hour of every single day - whether in the office, at home, or on the beach (something which they're quite happy about) !

Jurisdictions
Partner, Bowers Law

Kevin is a dual-qualified lawyer in England & Wales and Hong Kong and has practiced as a commercial disputes lawyer and partner with three leading independent Hong Kong law firms over the last twenty years.

Kevin specialises in commercial, insurance and employment litigation and dispute resolution both in Hong Kong and internationally. He handles complex multi-jurisdictional commercial cases involving debt recovery, sale of goods, trade finance, media law, fraud, shareholder, joint venture, employment, property (including land rights disputes and building management / tenancy issues) and franchise disputes, contentious family/probate/trusts, asset tracing, injunction proceedings, jurisdictional challenges, public inquiries and judicial reviews.

Kevin is a Solicitor Advocate in Hong Kong, and an Accredited Mediator with the Hong Kong International Arbitration Centre (HKIAC) and The Law Society of Hong Kong. He has appeared as an expert witness (on Hong Kong corporate law) in the BVI High Court.