Chargeable time vs fixed fees

Nearly all professional firms, whether it be a solicitors practice or a firm of architects, record what is known as chargeable time. This is time spend on a task at hand on behalf of a client. Using that fee earner’s hourly charging rate, which is normally dependent on the grade and experience of the professional, we arrive at a perceived value for the work undertaken. The key then is to ensure that the right person does the right work.

Some within the sector charge time in fine detail, with each 6-minute interval being common practice, others in hourly or even daily rates. There is now a new movement within the professional practices sector away from this minute by minute time recording and on to a fixed fee basis agreed to meet client demands.

Fixed fees – the issues

Fixed fee basis is already commonplace with lawyers undertaking conveyancing work or will writing. Negotiating and securing a fixed fee offers the fee earner the freedom of completing the work without the pressure of detailed time recording and the associated administration. But what impact does this have on the firm’s recovery rates and profitability? Particularly within multidisciplinary practices there would be scope for time recovery to be affected, and it may be difficult to establish whether the work undertaken on a fixed fee basis was profitable.

It may be more difficult for firms operating under fixed fee arrangements to judge their place in the market when comparing their position to competitors who operate under more traditional fee arrangements. Fixed fee arrangements could potentially cause difficulty with performance management in terms of the assessment of an individual fee earner’s recovery rate and efficiency, when pitched against a colleague who works in a different sector who might record, charge and recover all their time. Under a fixed fee arrangement there would be little insight into the actual time spent on non-chargeable work and this can impact on both an individual fee earner and the firm’s key performance indicators.

Fixed fees – the benefits for clients

From a client perspective, fixed fee agreements are attractive and likely to generate an increase in business especially within the increasingly fee conscious market. Fixed fee arrangements do give potential clients added peace of mind, safe in the knowledge of their fee upon completion of work. The hybrid to fixed fee arrangements include value billing which is where a firm prices its services based on an understanding of the client’s goals, expectations and perceived value for achieving those goals. This then commodifies the service provided into a ‘product’ in the eyes of the client.

A necessary step?

In a competitive market, opting for fixed fee arrangements may be the necessary step for many firms towards retaining loyalty whilst remaining competitive. Whilst holding a place in the market is key for any firm, this approach is not taken without considering the impact to output and profitability which may be difficult to quantify and assess under these arrangements. Accordingly, it may not be the best approach for small or growing practices where it is particularly important to accurately monitor performance, or in multi-disciplinary practices where a profitable sector may be ‘carrying’ a sector which is making losses, unbeknownst to management.

For further information please speak with your usual Kreston Reeves contact here.

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