INSIGHT: Who’s Afraid of Flat Fees? Not the GC of Panasonic

Like many general counsel of large companies, my career has wound through BigLaw and a few legal departments before becoming GC myself. I have experienced frustration and delight from both sides of the law firm-client relationship, and have opinions about what works and doesn’t.

But those opinions reflect only my experience, a dataset of one. That is why we are part of the GC Thought Leaders Experiment to learn what truly drives the best client-firm relationships, and why I’m among the 250 GCs using AdvanceLaw to help select top outside counsel.

As findings from the experiment have been published, I was excited to read General Counsel Need to Seek Flat Fees More. For the first time, we’re assessing flat fees through objective data from dozens of companies, hundreds of law firms, and thousands of legal matters.

And the data reveals that flat fees work. As the chart below illustrates, flat fees consistently outperform hourly rates on cost-effectiveness:

Cost Certainty Is as Important as Savings

And from my perspective, cost certainty is as important as cost savings. Not just for me, but also for our internal clients, who want a clean, flat number from us. They need the predictability that flat and other non-hourly billing can provide.

Flat fees also force lawyers to think hard about budgets, and how to deliver on commitments. Firms become responsible for their costs, learn to use resources efficiently, and apply project management techniques—a perfect environment to drive law firm innovation. (Incidentally, that’s something we like about AdvanceLaw’s approach, it’s a key principle to recommend firms that excel at innovation.)

Perhaps even more exciting, the data from the Thought Leaders Experiment shows there is no statistical difference in the quality of work or the service delivered by law firms whether working under a flat or hourly fee.

While that’s been my experience, it is not the conventional wisdom. Many of my peers and commentators in the legal press worry that setting a fixed total price means trading off quality. Law firms look to maximize profit under that flat fee, the thinking goes, and staff those matters with the B-team providing B-level service, so that better (read: more expensive) lawyers can turn their attention elsewhere.

What I’ve seen is that this isn’t how it works in practice—especially where we’ve established meaningful connections with firms that are invested in their relationships with us. In fact, I view their flexibility in offering and building out alternative fees as emblematic of how they see their commitment and partnership with us.

Even more interesting, though, is that a true commitment to flat fees by clients is what is most critical. Data from the Thought Leaders Experiment show that clients receive even better performance and service on flat fees when they use them more often:

I should note that with repetition, even the hardest aspect of flat fees gets better: the “money talk.” I believe a big barrier to flat fees is social. That is, we don’t like talking about money. Hourly billing is the default and we are used to discussing rates. Flat fees, however, require us to address money and pricing up front, and in detail.

Another observation about repetition is that some in-house lawyers try flat fees once and never again. So they don’t have enough information to find a way to make them succeed for both the firm and the client. It’s probably a big reason why flat fees are used less than 20% of the time, according to AdvanceLaw’s data in that same article mentioned above.

Look at the Bigger Picture

That said, even with experience (and data analytics), we’re bound to get this wrong sometimes, but that is OK. My view on flat fees is that it’s about looking at the bigger picture rather than judging each outing with a law firm as a win or a loss. I tend to think of it like a diversified portfolio of stocks—not every one will be a winner, and average performance is what counts. And thinking of it as a portfolio motivates clients and firms to be more cooperative.

I think, for example, of a preliminary injunction we had under a pre-arranged flat fee. The dispute didn’t go too far, and the firm could have pocketed the fee. Instead, they returned some of it. It made it that much easier soon after when the firm was again working on a flat fee for another litigation matter, but which unexpectedly went off the rails despite best efforts and intentions. Given their approach on the first matter, I had no problem deviating from the fee on the second matter.

As an industry, we’re not doing ourselves any favors by clinging to the hourly fee, especially where it doesn’t make sense. Change may be uncomfortable at first, and it won’t be perfect, but it will get easier, more accurate, and more advantageous to both sides over time.

I’m a bit surprised that finally, after all this time and debate, we have compelling statistical evidence on flat fees—that they save money, don’t hurt quality, and get better with practice—but we’re not really seeing much change yet. That’s why I wanted to shine a light on this important finding. And I anticipate more will come of this when AdvanceLaw’s report on all the key findings from their Thought Leaders Experiment comes out later this year. In my view, it’s about time we help turn the tide on the value billing debate and move to a world of predictability, efficiency, and innovation.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Jessica Hodkinson serves as vice president, general counsel and secretary of Panasonic Corporation of North America (PNA), the principal North American subsidiary of Panasonic Corporation and the hub of its branding, marketing, sales, service, product development and R&D operations based in Newark, N.J.; and vice president and general counsel of US Company. In her role, Jessica leads and manages all aspects of PNA’s and US Company’s legal functions and services, including compliance, litigation, labor and employment, corporate governance and mergers and acquisitions.