Survival of the Fittest (and the Best Prepared) – Agility in the Face of Costs Upheaval
July marks the deadline for the end of Lord Justice Jackson’s review of Fixed Recoverable Costs. This follows on from the consultation into fixed recoverable costs for clinical negligence claims which closed in May. Given the potential changes that could be imminent as a result, now is the time to examine how we may have to adapt to survive - both to remain profitable in a business context and to ensure access to justice for clients.
The costs challenge
Perhaps the real issue is providing value for money where the relationship between the costs incurred to run a case effectively and the costs recoverable between the parties may become increasingly frustrated.
The issue of value pricing is something we are used to at Burcher Jennings thanks to the work we do on Law Firm pricing, led by Richard Burcher. Fixed Costs is of course one of the very many pricing options in a lawyer’s toolkit. However, many lawyers use hourly rates and their WIP projections as their yardstick for deciding at what level fixed costs should be set. This is unfortunately an undesirable shackle from which every lawyer should be freed, if they are to successfully embrace value pricing.
What about the hourly rate?
There are pros and cons to an hourly rate – and the pros are simpler to set out. For example, hourly rate charging is straightforward and everyone is used to it and comfortable with it. It comes into its own when value is too hard to calculate and there are too may imponderables. And of-course it is, in most cases, a profitable model. The hourly rate works regardless of work-type or volume, yet from a client perspective, it pushes all the risk their way – which brings us to the cons.
The cons for the professional
These are numerous:
• Hiding fee earner abilities
• Rewarding inefficiency
• Penalising efficiency
• Flattening productivity
• Discouraging lawyer-client communication (due to costs fears)
The pressure of recovering an hourly rate can also discourage project management and case planning since this highlights high costings and equally discourages delegation efficiencies.
The cons for the client
From the client’s position, in addition to pushing them to shoulder all the risk, an hourly rate provides no cost predictability or manageability and may not reflect the client’s perception of value. It creates a conflict in that it encourages excessive work, padding of timesheets to meet the demands of chargeable time targets and client scrutiny.
In fact, there are far more compelling reasons to depart from an hourly rate billing structure than to retain one. This was already accepted wisdom as far back as 1970 - “The business of determining a fair and reasonable fee…is an exercise in assessment, an exercise in balanced judgment, not an arithmetical calculation…” said the court in Property & Reversionary Investment Corporation v Secretary of State for the Environment  2 All ER 436.
I accept that in a fixed costs regime applicable to “between the parties’” costs, it is difficult to depart from the requirement to time record with ever increasing granular detail, where there remains uncertainty about the level at which fixed costs apply and as such, which cases should be subject to costs budgeting. There will also be uncertainty surrounding how cases will be dealt with if they subsequently drop out of fixed costs. Plus, there is the obvious advantage of J-Codes or the schedule 1 codes to Practice Direction 51L in preparation for the mandatory new format Bill of Costs, which will apply from this October. However, this is different to how we charge the client and has significant implications for how the client perceives value for money in what – and how - they are being charged. Crucially, there is also the opportunity to deliver an added advantage in the increasingly competitive legal field where pricing innovation will help win new clients and retain existing ones with much more impact than before.
This article was written by Richard Allen brings 30 years of unique commercial experience to Burcher Jennings. He was one of the first professionals to achieve Costs Lawyer status, and is one of a select group of Costs Lawyers to have made partner in a solicitor’s practice. Richard is Practice Manager for the Cambridge office.