August 21, 2014
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August 18, 2014
Does Fixed Fee Pricing Fix Market Pricing Inefficiency, but Cost More than Is Saved?
In reading this article about recently deceased Ronald Coase, Nobel Prize-winning economist, it struck me that the following proposition from Mr. Coase explains why the practice of bidding out legal projects has been largely a failure: “The free market can be a huge hassle, and letting the market set prices for everything is not always the most efficient approach.” This market inefficiency means that many types of volume legal projects (like patent applications or simple contracts) are priced using a fixed fee approach, even though the actual cost of any one of these fixed fee projects (measured on the basis of time and materials) can vary considerably from the fixed fee. While this pricing mechanism is typically the most efficient for both client and attorney, it also has the natural tendency to attenuate the effort expended on projects that are the most difficult, and therefore cost considerably more than the fixed fee. Unfortunately, in certain cases, these difficult projects may also hold the most potential value for the client, so appreciable attenuation of effort to fully exploit the value opportunity may cost far more in lost advantage than is saved through the pricing efficiency. In other words, it is possible that projects with potential values differing by an order of magnitude end up getting roughly the same allocation of resources. This is clearly not a wise use of resources. Perhaps Mr. Coase would have recommended a more nuanced approach to fixed fee pricing that took into account the economic potential of a project.
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