The Fixed Cost Problem of Law Firms and How Clients Can Avoid It

"The Fixed Cost Problem"

In a previous post, I posited why we are now seeing some US law firms modify their processes using Lean Six Sigma or other, less formal processes, in recent years. In this post, I will demonstrate why I believe that clients seeking business advice should engage lawyers who can provide service to allow avoidance of "the fixed cost problem," which exists at law firms as much, or more than, at other types of business.  Lawyers who live lean can provide high quality legal services without needing to reinvent themselves by going lean.

Large law firms feeling push-back from clients over high legal fees have become increasingly adept at offering "alternative fees."  These lawyers are able to do this more confidently because they have learned in recent years how to squeeze efficiencies out of their legal practice models.  However, regardless of the discounts from prevailing hourly rates clients are able to obtain from these law firms, the fixed costs associated with establishing and maintaining a large law firm business means that even the "alternative" fee arrangements charged by these law firms must always be sufficient to provide the desired profit level only after the fixed costs have been exceeded.  Clients must question whether their issues merit payment of fixed costs that pay for things  that may not, in fact, add to the quality of their legal service.  If these fixed costs sustain people, technology and amenities that do not directly add to the quality of the legal services for which a client has engaged the attorney, they should be considered as "waste" as applied to the client.


As one example, a patent attorney friend of mine recently joined a law Atlanta-area law firm from a smaller boutique patent firm.  His lowest hourly rate today is $500, which means that many clients that can benefit from his skills are priced out of the market.  Notably, his new partners wanted his hourly rate to exceed $600 an hour, but he took a lower yearly salary in order to keep his hourly rate lower, but this was the floor at which he was allowed to set his rate.  Does he think he is worth $500 an hour?  Does he pocket anywhere near $500 an hour for his services? Of course not.  However, in order to practice in the gorgeous Midtown Atlanta office with all services available to clients provided by a huge--albeit highly efficient--staff costs money and these fixed costs must necessarily be tacked onto each $500 hour billed to his clients.  Most of the people, technology and amenities that comprise the fixed costs of this law firm have absolutely nothing to do with the quality of my friend's patent work, but each and every one of her clients must pay the added freight of her law firm's fixed costs.

A law firm like my friend's must be able to provide a comprehensive scope of services to be called a "full service law firm."  This is very expensive, of course.  Clients not needing this full list of services must understand that a good portion of the fees they pay go to supporting the infrastructure that makes "full service" possible.  Certainly, such law firms can be made more efficient by applying Lean Six Sigma, but a good portion of the fees paid by my friend's clients are waste as related to the fees paid for his patent work. Some clients have legal issues that can only be handled properly by large law firms and, if this is the case, they should make sure that their law firm is as cost effective as the large law firm model can allow.

Many, if not most, clients do not need large law firms at all because their legal issues do not rise to the level of complexity best handled by a sophisticated practice.  Those clients who do on occasion experience complex legal issues, generally need help with fairly standard matters.  In fact, some clients might be surprised to find out that, for experienced lawyers, most matter that clients bring to them are routine and can be handled effectively and efficiently without need for assistants, expensive technology and free doughnuts and coffee in the breakroom.

The Lean Legal Team of Michael / Hutter has a foundation built on Lean, which means that we require only those resources needed to provide high quality service to a select type of business client.  Our virtual offices and outsourced, as-needed staff means that our fixed costs are a fraction of those at more traditional law firms, even the ones that have built efficient processes in recent year.  This means that experienced lawyers like Ephraim Michael and myself can efficiently and effectively handle these clients issues at a much lower hourly rate than my friend can at his well-appointed and highly staffed Midtown law firm. In other words, we don't need to go lean, we live lean.