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Legal Fees

Estimates or Guesstimates?

Every time I phone a call centre for just about any company, it turns out that they are experiencing a higher volume of calls than anticipated, and although my call is important to them, they must keep me on hold for a very long time.  It really makes you wonder why, after all of this time, they have not yet started anticipating a higher volume of calls and hiring more staff. Especially since my call is so important to them. I know that something does not quite add up, even if I have not zeroed in on the exact problem. I suspect that it has something to do with them lying to me and my call not actually being all that important to them.

In law firms, the time spent on just about every transaction ever done since the beginning of time is greater than the partner in charge of the deal originally anticipated when they provided the estimate. For this reason, if the legal work is being billed at hourly rates, the fees are always higher than originally anticipated. Not that the client always gets charged more than the original quote, although that happens plenty. Sometimes the excess time is written off as a cost of doing business, so the lawyer is unhappy.  Sometimes the excess time is billed so the client is unhappy. Often, the answer is somewhere in the middle so that everyone is unhappy.

I don’t think that the explanation for the time required to complete a transaction being more than originally anticipated is quite the same as the explanation for wait times in call centres. Call centres just lie. When it comes to partners quoting legal fees, they actually believe that their original estimates are accurate when they make them. I know that I always did.

There are all sorts of explanations for this phenomenon, but in my experience, they have nothing to do with any intentional malfeasance by lawyers.  The vast majority of the time the problem is that lawyers do not have good project management costing systems. Or any project management costing systems.

Other times, lawyers are overly optimistic that things will go smoothly because they are, consciously or unconsciously, afraid that being more realistic will scare the client off. They are not trying to mislead the clients. They are simply being hopeful.

There are also the times that the clients mislead us by holding back relevant facts. And often, unanticipated things really do come up, although by now you would think that lawyers would have learned to anticipate that something unanticipated always comes up.

Then there are the proponents of fixed fees. In their view, if we could only get rid of hourly rates and quote fixed fees instead, that would solve the problem. I don’t think so. I once had a deal where my client was acquiring a business in the U.K. The law firm there quoted us a fixed fee of 50,000 pounds. (This was quite a few years ago, when 50,000 pounds were much heavier than they are now.) 

Of course, the deal became more complicated than was originally anticipated and took more time than was originally anticipated. No surprise there. It just made me really pleased that we had received a fixed fee quote. What did surprise me was that as the deal stretched on, the senior lawyer who had given the quote became harder and harder to contact until eventually it was clear that he had abandoned the matter to his much more junior associate. His fixed quote was not going to result in him putting in his expensive hours for free. The firm stuck to the quote. We just got inferior service.

Which brings us to a common thread. Nobody likes to work for free, and from a lawyer’s perspective, no matter how much money is charged to complete a transaction, when you get to the point that the lawyer’s hourly rate (whether or not the file is being billed by the hour) multiplied by the number of hours worked, exceeds the amount being billed, the lawyer is working for free. It doesn’t matter if the lawyer’s effective hourly rate is still going to be $500.00. If their ‘posted rate’ is $700.00, the lawyer is working some of this time for free.

In addition to fixed fees, some lawyers quote hourly rates with ‘caps’ so that the fee cannot exceed the cap. Most of the time the fees are higher than anticipated and hit the cap. Same problem as with the fixed fees. The lawyers are now working for free and are not happy about it. As you know, working for free is not a sustainable business model.

Although the problem is widespread, the explanations vary with every law firm, every team of lawyers working on a transaction, the results of the due diligence pertaining to every company involved in a transaction, and the personalities and business practices of every company executive. The examples are too numerous (and boring) to mention here.

Which brings us to the crux of the matter. Until such time as technology, the consistent application of very sophisticated costing systems and the creation of predictable standards and methods of practice across the profession solves the problem (and good luck with that), I only see two ‘solutions,’ neither of which is particularly satisfactory.

The first is that lawyers learn to accept that they have to stick to their quotes, whether or not it is ‘their fault’ that things took longer than anticipated. If they make less money than anticipated on the deal, that is their problem. If they earn less than they thought that they would, that is okay too. Just suck it up, be professional and do the best damn job that they can every time, even if they are working for free. At the same time, get better at this quoting thing. Take more time to learn about the client and the deal before providing a quote. Be prepared to lose some deals because you will be quoting high or be prepared to quote low and work for free.

The second solution is more difficult, although in my experience is quite achievable. Work harder to earn the trust of your clients. Find clients who respect you and honestly believe that every hour of work that you provide is valuable. There are more of those clients out there than you might think.  I certainly found quite a few of them. Which was lucky for me, because I was horrible at estimating my fees.

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