There are signs that 2010 will be the year fixed fees begin to dominate the pricing of legal services. For practices such as real estate that already involve flat-fee pricing, this won’t have too much effect. For lawyers and law firms whose work traditionally has been calculated and sold by the hour, it will be a thunderbolt.

Under immense pressure to control expenses, corporate law clients are driving the trend towards predictable pricing. For years, in-house lawyers had refused to flex their muscle with outside counsel, tolerating annual rate increases and the continued hegemony of hourly billing. But the recession has forced CEOs and CFOs to finally read the riot act to general counsel, whose spending has continued to rise while every other corporate department maintains or lowers its costs. General counsels, in turn, are relaying that riot act to their firms.

Most law firms would prefer to shrug off this pressure as they have so many times before. But firms themselves are hurting in the recession, and few believe the boom times of the mid-2000s will soon return: they can’t afford to risk good business. At the same time, clients have a growing array of new options at their disposal: lawyers in low-cost or offshore locations, increasingly sophisticated software, and even virtual lawyers who operate flexible, affordable practices at competitive prices. These and other changes are revolutionizing the lawyer-client dynamic, and clients will be the primary beneficiaries of the emerging playing field.

The fixed-fee revolution is already underway in the U.S., where the recession was harder and price sensitivity is now greater; many of the largest law firms are developing fixed-fee systems as we speak. The demand for and supply of predictable fee figures will spread to other jurisdictions and to non-commercial clients in short order. Canadian firms might have a few more months’ respite, but lawyers here are reporting serious fee pressure from clients and are casting about for ways to satisfy these demands while maintaining current partner profit levels. That will prove very difficult to pull off without a fundamental reassessment of how firms conduct their business.

Unlike most corporate environments, in which profit emerges in large part from efficiency and cost control, law firms have traditionally profited from inefficiency: the more hours spent by more lawyers on a task, the better for the firm’s profitability (at the client’s expense). That era is ending. Law firms will very soon have to adjust to a system whereby generating more bills by working more hours won’t generate more profit — lower costs and more efficient processes will. That’s a development with fatal implications for the traditional law firm business model. Here are just three examples of the impact of fixed fees:

In order to reduce costs, firms will encourage lawyers to work more efficiently, spending only as much time on a task as is necessary — a major cultural change that will render billable-hour targets largely irrelevant.

Firms will also be compelled to invest in software and other resources that can routinely perform the most basic elements of many legal assignments, work that is now inefficiently (and profitably) handled in many firms by articling students and junior associates.

Cost containment will also lead to the disaggregation and unbundling of legal work into discrete tasks and the delegation of each task to a provider with the best combination of competence and cost-efficiency for that component.

Fixed fees will require law firms to finally decouple the external price of their services from their internal cost. Many lawyers have grown accustomed to matching price to cost by directly billing their costs (hours worked) to clients, and to growing their revenue principally by encouraging the continuous generation of more hours at higher rates. That simply won’t work in a fixed-fee environment. Firms must learn to monitor and precisely calculate their internal costs of doing business and find ways to reduce those costs by sourcing their work more efficiently.

Fixed fees don’t look like a fad — more clients expect to know (within reason) the price of a given legal task when they hire a lawyer. Lawyers, in turn, cannot make a profit in a fixed-fee system with the traditional business model. Get ready for the fixed-price era of legal services, and get ready to overhaul your business practices to survive it.

Jordan Furlong is a partner with Edge International who specializes in analyzing the extraordinary changes now underway in the legal profession worldwide. He is also a senior consultant with Stem Legal and head of its Media Strategy Service. He authors the award-winning blog Law21: Dispatches from a Legal Profession on the Brink, http://law21.ca.