In these high inflationary times, the cost-of-living crisis has hit households and businesses alike, and law firms have not been immune to the cost pressures that have seen accountants scramble for their calculators, and politicians dig deep into their magic bag of handouts.

For law firms, whose single highest cost is inevitably the employee expense line, the conflict is real – naturally, they want to do the best they can by their team, but they are ever mindful of the need to remain competitive.

For those behind the helm of law firms, historically, the easiest way to balance the books has been to simply increase the prices charged to clients. And, in recent times, given that supermarkets, insurers, and those in the building sector have been able to get away with price rises on steroids, why would they expect any pushback to “just another price increase” among all the others?

To my mind, increasing prices is certainly one lever that can be used to help balance firm budgets, but I’d argue that law firms that simply turn that one dial are out of step with the times and are being selfish, fat and lazy!

The limit on charge-out rates

It’s well established that as legal practitioners, we are duty-bound to ensure that the fees we charge to our clients are fair and reasonable (and I would argue, proportionate as well).

As per s238 of the Legal Profession Act 2007, a cost agreement that is found to be neither fair nor reasonable is liable to be set aside. The Australian Solicitors’ Conduct Rules 2022 set out the fundamental ethical duties of legal practitioners. A solicitor’s own interests must not be preferred over those of their client. It’s always open to a law firm to increase their charges, but just because a firm charges strictly in accordance with a cost agreement that a client has signed, doesn’t necessarily protect the solicitor from being found to have charged rapaciously.

In Council of the Queensland Law Society Inc v Roche, De Jersey CJ said (in dealing with a case involving overcharging by a practitioner):

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“The circumstance that a solicitor’s right to exact certain charges is enshrined in an executed client agreement will not necessarily protect the solicitor from a finding of gross overcharging. For example, as here, the client may not have given his or her ‘fully informed consent’ to the agreement; or the very extent of the particular charges may itself evidence inexcusable rapacity. It is repugnant to think of a solicitor withholding detail from a client, precedent to an agreement, to the solicitor’s advantage and the client’s disadvantage.”

Later, His Honour went on to consider a circumstance in which a law firm had attempted to exact higher fees by charging both legal and non-legal staff at the same hourly rate. His Honour observed:

“In the broadly comparable case of Re Law Society of the Australian Capital Territory and Roche (2002) 171 FLR 138, the Full Court of the Supreme Court of the Australian Capital Territory dealt with two solicitors who practised in that Territory, specialising in personal injuries claims, under the name Watling Roche. They are in fact the respondent’s brothers. It was found that pursuant to client agreements drawn on a ‘no win no fee’ basis, they charged grossly excessive fees, which were, additionally, ‘arbitrary when compared with the work actually done and the degree of difficulty of it’.”

It seems that the courts will call out “creative” attempts to recover higher fees. In Queensland, a court or QCAT can set aside a lawyer’s cost agreement where the fees charged are not fair and reasonable. Section 328(7) of the Legal Profession Act sets out the matters that a court may have regard to in considering whether a cost agreement should be set aside, considerations that include the complexity and quality of the work done and the skill and responsibility of the practitioner.

Recently, I received instructions to challenge a law firm on behalf of a client where the firm had sought to charge (excluding GST):

• $300 for a law clerk to peruse 15 pages of documents;
• $320 for a legal practice manager to peruse 16 pages of records;
• $500 for a solicitor to peruse 25 pages of medical records;
• $450 to peruse nine pages of records from a medical centre;
• $837.50 to peruse 50 pages of WorkCover records; and
• $500 to peruse a further 25 pages of WorkCover records!

The cultural cost of rapaciousness

However, quite apart from the ethical issues that such billing practices raise, there is an enormous cultural cost.

In an article published in the University of New South Wales Law Journal, “The Ethical Infrastructure of Legal Practice in Larger Firms: Values, Policy and Behaviour”, the authors considered a 2005 study of US law firms, which had hypothesised that firms that imposed minimum billing targets would likely encourage a culture of overcharging. An observation was made that where lawyers surveyed felt that their prospects of annual bonuses and promotion were directly linked to the extent to which they exceeded minimum billing targets, it encouraged overcharging. They pointed out that, in the US study, the author had suggested that ethical lawyers who work at large law firms but refuse to pad timesheets, will find themselves at a competitive disadvantage when compared to associates who inflate their time.

The same study also found that this might lead to an exodus of ethical associates who would rather simply leave private practice than try to rationalise questionable billing practices. In these current times, when there is a war going on for talent and firms are doing their very best to attract and retain, surely regard needs to be had for the charging models they require their professional staff to use.

In interviews, I’ve often had young lawyers cite as one of their reasons for wanting to move on, the internal turmoil they suffer in either having to sell to prospective new clients a fee structure they feel is extraordinarily high, or simply because they feel that their values are misaligned with those of their current employer when it comes to fees.

Value creation

Contrary to the views of many firms, clients rarely see “value” in an hourly rate. From their perspective, true value lies in considerations of outcome, timeliness, service delivery and expertise. I like what was said by Stephen Mayson in his article, “Is the BigLaw Business Model Sustainable”. He wrote:

“The BigLaw Business Model at its core still tends to equate value with the cost of time plus a mark-up. But value for the client cannot be found in time-based billing. Client value can only be assessed by reference to the outcomes for the client; time is simply a reflection of the input of a lawyer. Only very rarely will the two ever equate – and even then, never as a matter of correlation.”

Now, more than ever, law firms need to apply a laser-like focus on value creation. Where, from a client’s perspective, value has been increased, then they will generally be open to paying higher fees. Increasing value is not only in the client’s interest, but also those of the firm. By offering greater value, it also creates a competitive advantage over peers. Law firms that both increase value and find efficiencies will continue to thrive despite challenging times.

The suite of options

Advances in technology have put modern-day law firms in a privileged position to increase value, boost productivity and find efficiencies. There are now plenty of ways to maintain margins without succumbing to the temptation to do the same they always have but charge more. Among the arrows in the quiver include:

• Automate administrative tasks and standardise processes – a study by McKinsey found that 23 per cent of a lawyer’s work and 69 per cent of a paralegal/legal assistant’s work could be automated. Generative AI has exponentially increased automation opportunities and will continue to do so.
• Consider alternate fee arrangements other than the billable hour – a study by legal technology provider Litera found that over half of law firms in Australia (51 per cent) have already altered their pricing models in response to economic challenges, and 88 per cent have embraced alternate fee arrangements. This is critical in the quest for client-centric value creation.
• Invest in training and development – I’d argue that training and development should be the last expense line to be trimmed. Highly trained legal and non-legal staff inherently perform better and drive more value. Training and professional development is also an effective risk management strategy.
• Use data – modern practice management systems enable wide-ranging data to be harvested, and it can be enlightening. Firms that invest in technology that generates data reports to fully inform decisions will inevitably do better.
• Collaboration – many minds are always better than one. Teams that genuinely collaborate, share ideas and experiences, and work together will always outperform. Remote work and telecommuting are here to stay, so firms need to find ways to facilitate mentoring to ensure that their teams continue to share experiences and expertise.
• Improve utilisation of resources – law firms that continually review their utilisation rates of resources, including space, and are alert to the opportunity cost of not receiving a return on investment on sunk capital will fare better.
• Invest in risk management strategies, particularly for key risks – cyber security is perhaps now the biggest risk to professional services firms across Australia. Firms that don’t spend enough to manage that risk are betting the farm.
• Retain high performers – your high-performing team members will not just outperform by 10 or 20 per cent on their peers – they will outperform by 50 to 100 per cent. Firms need to identify their key person risks and ensure that remuneration systems and promotional pathways retain high achievers because they create the most value for the organisation and its clients.
• Win the culture war – firms that recognise that all their staff are culture carriers and that ensure that a positive culture is embedded across the entire organisation are better placed to deliver on strategy. As Peter Drucker is thought to have famously said, “Culture eats strategy for breakfast!”

Travis Schultz is the managing partner of Travis Schultz & Partners.