It has been about a year since Brereton J, In the matter of AAA Financial Intelligence Limited (in liquidation) (No. 2)  NSWSC 1270 (17 September 2014), posed the following question.
“I do not doubt that substantially all the work in respect of which remuneration is claimed was performed, and took the time claimed. Nor do I doubt that the … standard rates are within the range of those charged by similar professionals for similar work. ..The real issue is whether the costs of their services, so calculated, is a reasonable fee in all the relevant circumstances – including the nature and value of the property in question. Alternatively put, does the formula of time reasonably spent at standard hourly rates provide the proper measure of reasonable remuneration?.” (at para ).
Most “New Law” practitioners would be quick to say ‘No. We charge fixed fees therefore we offer better value.’
Really? Let’s look under the bonnet.
New Law – small firms with low overheads that fix fees – is a model that has been around as long as I can remember. Fixed and scale fees have been charged since Victoria was on the throne. New Law promotes these as something new. (Lie No. 1.)
As Brereton J. commented later in the judgment: “time spent represents a measure not of the value of the service rendered but of the cost of rendering it.” (para )
No sustainable business can provide its services at less than the cost of rendering it. If the fixed fee is less than the cost of providing the service, New Law is not sustainable. Ah, but ‘it is the new model for solicitors, it is the future’ we are told. Then, if it is to be sustainable, the fixed fee must exceed the cost of providing the service. Perhaps the real value is not in the fixed fee number (Lie No. 2) but in merely knowing the final number. Not if the number represents a Bentley when the item is a VolksWagen. A VolksWagen is fine (unless you are the EPA) but it is not a Bentley.
Which is not to say the Big Law model is sustainable either. It is plainly struggling but I am not here to prognosticate on their imminent demise or dubious value. They have their place, and in some ways it is very nice too.
When most Old Law solicitors like me estimate costs the usual approach is to scope the work and assume, for example, two drafts of a document with the matter to proceed in a ‘standard’ way. A ‘standard’ way assumes competence and knowledge, no long delays from the other side, usual rather than unusual legal issues or unusually lengthy negotiations or trials, that it won’t take too long to locate crucial documents or respond to requests, additional time spent on conferences, delegation and supervision of work and the other background noise level to the work that needs to be done. Delays, for example have a cost consequence because one has to read back in.
So, fixed fee or not, if the number (whether fixed fee or estimate) does not take these into account (pun intended), the number is wrong, particularly if it is incorrect over a number of matters.
Turning to a less simplistic recognition of the cost of production than Brereton J’s, David Maister’s formula is still widely used. Net Profit Per Partner aka NPPP = (1 + Leverage) x blended billing rate x chargeable hours x realisation (ie converting work in progress to debtors) x profit margin. Only a sole practitioner does not delegate to staff and not use leverage, fixed costs tend to increase each year, realisation goes backwards if clients don’t pay on time (that doesn’t happen post GFC), there is massive leakage if New Law doesn’t keep timesheets for every task each day throws to them, if they’re not busy the low equivalent of chargeable hours may be significantly less than an established practice provides so discounting is unsustainable. Everyone needs two good levers to be making money, three to be going well. Just like everyone else.
That’s the Big Lie of New Law
New Law is just like Old Law (just a bit more vocal on social media about their shtick). New Law firms have to have regard to these levers to make money or they will not be sustainable and around in the future. Under the bonnet, I am sure they do.
Let the confected outrage begin.
- 25 Sep, 2015
- Posted by Nicholas Weston
- 0 Comments