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PIC_Logo_June-2015There are increasing calls to move away from charging clients on an hourly rates basis; some even suggest that hourly charging will soon be a thing of the past. This has been borne out of a perception from many of those outside the legal profession that there is a lack of transparency and control when it comes to legal costs.

This perception has led to changes in legislation, driven by insurance companies with their significant lobbying power, and by the Government in order to reduce the legal bill for the NHS and other Government organisations.

However the calls for change haven’t come solely from two entities that are so commonly footing the legal bill. Large companies with a sizeable legal spend are constantly reviewing their panels; their reasons are more likely to do with reviewing spend than with underperformance.

The introduction of budgeting has attempted to introduce some certainty by setting fees within a range of reasonable and proportionate costs before they are allowed to spiral out of control. Courts have been at pains not to concern themselves with looking at hourly rates and the amount of time spent. What is all too often overlooked, however, is that the prescribed form for preparing budgets requires you to calculate the amount claimed by reference to an hourly rate, which makes for uncertainty within the judiciary as to how to go about dealing with budgets. In very basic terms, a lawyer’s most valuable commodities are experience – which heavily influences hourly rate – and their time.

All of which begs the obvious question: if the Government and judiciary do not want costs to be calculated by reference to time spent by an hourly rate, how else can they be calculated?

Technology will have a huge impact in the manner and amount that clients are charged gong forwards. Although we don’t as yet have a confirmed date for when Skynet will be fully operational, it’s difficult to escape the fact that huge strides are being made here. It is estimated that by 2020 most major car manufacturers will have saleable driverless cars in production, with 75% of all cars being driverless by 2035. Deloitte recently estimated that 114,000 jobs in the legal sector will become automated by 2036. This will no doubt reduce the amount of lawyer’s time required, but in turn it will increase the need for individuals with a broader skill set to work on cases.

What is clear is that a higher degree of legal project management is required, and that requirement will only become greater with the changes already planned. Firms pitching for new work will still need to start with hourly rate x time calculations to ensure they remain profitable given that time is a lawyer’s primary commodity. In larger cases, internal budgets, if prepared properly and monitored through the case, can be extremely useful for both the law firm and client alike to ensure everyone has an adequate bottom line.

If the word on the grapevine is true, the introduction of fixed costs across all civil litigation is a question of ‘when’ not ‘if’. But what advocates of fixed costs do not appreciate is that you cannot simply fix how much a case is going to charge and say that it will balance itself out in the long run. Sir Rupert Jackson’s comparison with the German legal system is misguided due to the fact here in the UK we have an adversarial system whilst the German model is a more cooperative (or perhaps ‘European’) inquisitorial system. In the former, you only need one party to cause costs to escalate, and there is no fixed costs system in the world that can put in enough algorithms to accommodate for all the unknowns. A charging structure that does not account for this is destined to fail, and likely to have catastrophic consequences for the legal profession as a whole.

Regardless of the changes imposed, whether by market forces or by legislation, it is vital to prepare forecasts early on so that your firm remains profitable and isn’t priced out of the market. There will need to be flexibility for uncertainty in contentious work because of the number of factors outside the control of any law firm.

Joe Rose is a Costs Lawyer based in the London office of Partners in Costs Ltd.

He can be contacted on 0203 823 9971 or by email at joe.rose@pic.legal

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