Concern over risks to profitability due to demand for fixed fees
City law firms are experiencing mounting concern about clients’ demands for fixed fees rather than hourly rates.
The firms fear the rising number of fixed-fee requests will hit their profitability and force them to make permanent adjustments in pricing practice, according to Thomson Reuters Legal annual research among finance directors at the top 100 UK law firms.
Nearly half the finance directors surveyed considered fixed-fee work a high risk to profitability. Only 12% said the trend posed a low risk.
Fixed fees present a higher risk because work can overrun or unforeseen issues arise with the firm powerless to charge for the extra hours involved. Firms are also under pressure to tender competitively, and may under-estimate the cost of work.
Sam Steer, head of large law for Thomson Reuters UK Legal, says: “Finance directors are well aware that getting pricing right is critical to minimising cost over-runs, but this is still relatively new territory for lawyers. Many are still finding their way in assessing costs accurately, particularly for complex or contentious work and at the same time they are under intense pressure to submit competitively-priced tenders which means pricing has to be very tight.”
The firms ranked downward pressure on fees from clients as their number one threat to profitability—more than three-quarters of those surveyed cited demand for discounted fees as the most significant risk faced by their firm, compared to just over half in 2011.
Just over a quarter of finance directors said they were also very concerned about clients consolidating their legal panels—thus reducing the amount of potential work available and driving down fees for those firms that are retained.
