Fee Undercutting

Recently the complaint of fee undercutting arose amidst the ongoing mutual recriminations between a section of the senior and junior members of the bar; a complaint that emanated from the senior lawyers are that junior members with newly set up their firms were responsible for the undercutting of fees.

An understandable concern by the senior lawyers is when competition is fought mainly on price, quality inevitably takes a hit because it ceases to be a primary factor for appointment. Significantly, since lawyers are competing on a single factor – price – it will result in a fee race to the bottom, which in the long run hurts the entire profession. In short, it is the classic situation of prioritizing the short term interest of the individual/group over the wider interest of the public/community.

Or is it? I used to think that way. But now, I think undercutting occurs generally across all legal work but it operates with special intensity in regards to standardized legal work. Standardized work: work where the process of expected inputs and outputs are clear, repeatable and limited in variability, work which depends on a standardized process instead of discernment – this work is inherently vulnerable to undercutting. Examples of such work in the corporate and conveyancing side of practice would be sale and purchase agreements, shareholders agreements, share sale agreements, tenancies, and anything that deals with standardized information with low variability. Examples of such work in the litigation side would be debt claims, such as credit cards, loan defaults, good sold and delivered, orders for sale i.e. standardized documentary based claims.

Standardized work is easier and quicker to produce once a process is in place; and a process is easier to build with standardized information. A process allows for a reduction in cost of production because the process is predictable and repeatable; the cost to add another case to that process is marginal. There is little need for discernment in doing standardized work; it more an issue of logistics and error reduction.

Work that requires discernment, however, are not amenable to a standardized process because of the factual disputes, lack of legal clarity, or complexity an arrangement, which demands customized solutions or approaches. For this reason “discerned work” requires deeper consideration of the facts or deal, an analysis of the law and its interaction to the case or deal, and a range of potential arguments to support a claim or potential options to structure a deal, at least. Although discerned work may have a standardized methodology, the work itself resists standardization because the factual complexity and legal ambiguity of the claim or deal.

Because discerned work cannot be standardized, it is less vulnerable to fee undercutting and even if undercutting happens, it is less severe compared to standardized work. Furthermore, since discerned work requires actual deployment of their skill, knowledge and experience, lawyers are less likely to discount their work so severely.

The fees for standardized work are always vulnerable to severe undercutting because of the nature of the work, the competitive nature of our offerings, and the fact that the simplest way of starting a business is by offering the same quality of work at a lower fee. To insist on a standardized fee for standardized work is not the solution, especially if there is no corresponding enforcement of standards. I would argue further that even with proper enforcement of standards, the standardized fee will be vulnerable to undercutting because it is ultimately subject to market forces; not legal ones.

A ready example of this is the standard conveyancing fee list in the Solicitor’s Remuneration Order 2005 (“SRO 2005”), which regulates the legal fees for non-contentious work. Until the SRO 2005 was amended in 2017, law firms were prohibited from giving a discount for fees for non-contentious work, such as sale and purchase agreements. However, that did not stop firms from giving discounts in breach of the SRO 2005. Competition for sale and purchase transactions was so rife it drove down the fee rate for sale and purchase agreements to the point I heard that law firms located outside Klang Valley had to give fee discounts of up to 75% of the fees to get appointed. Although post-2017, lawyers are allowed to give up to a 25% discount on fees for preparing the sale and purchase agreements and financing documents, my sense of it is the actual discount rate is still far higher than 25% because the Bar Council’s enforcement of this rule has been half-hearted, at best, and impossible to perform, at worst.

What I think the SRO 2005 experience shows is that it is difficult to impose and maintain a standard fee rate for standard work when the public understand that the work to be done is also standard and demands a fee reflecting the standard work. That, for me, explains why there is a perpetual downward pressure on the fee for preparing sale and purchase agreements and financing documents, and why it will constantly be forced below the official discount rate permissible.

So fee undercutting is not solely a question of competition or an issue of senior versus young lawyers but an inevitable and natural consequence of the standardized work. To blame competition as the source of fee undercutting is to put the cart before the horse. If there is a complaint by senior lawyers that fresh, young lawyers and law firms are undercutting their fees, I think their complaint is misplaced and reveals more about their attitude towards easy work than a young lawyer’s aspirations.

An area of legal practice that is vulnerable to undercutting is a sunset area – it won’t be around for much longer. It is also a red-flag that that area of legal practice will eventually be taken over by technology because that is where technology is best deployed – standardized work.

What lawyers, whether senior or old, in areas of standardized work should be doing is developing competency to get out of that legal practice area where undercutting is rife; in the future the computers will be doing the work, not them. With the advent of technology, our legal practice will be constantly reshaped to accommodate it and lawyers can no longer bank on a sustainable practice based on standardized work. The coming decades will force each and everyone of us to innovate, adapt and evolve to remain relevant to legal practice. The only place that I see a continuing role for us to play at the moment is in the area of discerned work, where our learning, experience, creativity, and judgment are required and cannot yet be mimicked or replicated by artificial intelligence and machine learning.

But even then, I don’t know for how long.

2 thoughts on “Fee Undercutting”

  1. A contributory factor to undercutting is some clients’ practice of “tendering” for legal services, and awarding the brief to the firm with the lowest fee quote. This practice is absolutely senseless to me because it equates services with an item that has a market/retail price.

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