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Three more objections to fixed-fee arrangements

A few days ago I tackled four objections of Rich Baer, Qwest’s general counsel, to fixed fees, and perhaps brought them to the ground (See my post of March 16, 2010: criticisms of billing arrangements that are based on fixed fees.). If he reads my blog and wants to rebut, I welcome his comments and of course those of readers.

But Baer did not mention three other drawbacks that plague fixed fees: does your legal department have enough projected work in an area to justify fixed fees, how do you set the figure, and might the transaction costs and delays snuff out the benefits.

Volume: A rule of thumb I have used as a consultant is that a law department needs to foresee external fees of at least $400,000 a year to justify the hire of a new lawyer to handle that work. It seems plausible to me that a similar volume has to be in prospect over a period of at least two years for a fixed-fee arrangement to make sense to the department and to the firm it selects.

Determine the Figure. As a threshold issue, the department needs to have historical data that is reasonably consistent and clean so that it can describe the scope of work. It and the firm need to understand at some level of clarity which firms handled that work, on what basis, and with what results. Given that framework of facts mixed with qualitative assessment, a basis exists to set a plausible fee.

Transaction Costs. To gather the underlying data, describe it in a clear document, choose firms that can handle the work, and slog through some kind of competitive proposal process takes time, energy, and ultimately money. The return on investment from the fixed fee that might – but does not always – result from the arrangement has to be enough to make the investment pay off. (Actually, the entire legal industry may be a net loser on fixed fees when many firms pour hours into the effort but only one gets the nod; the legal department’s savings and the lucky firm’s additional profit take a longer time, if they ever do, to counterbalance the aggregate losses of the other firms.).