When I opened my law firm in 2008 I only had one rule: no hourly billing whatsoever. I’d hourly billing at a few of the firms I’d worked at and I’d come to hate it for 3 reasons:
- It creates an air of distrust between attorney and client;
- It means you can only make money when you are “on the clock”; and
- It doesn’t account for the value you actually provide to your client.
But we all know that already. We know hourly billing sucks. Flat fees are much better.
Why charge flat fees?
Are flat fees right for you and your client base? Here are some reasons you should consider making the shift.
1. Flat fees promote efficiency
Efficiency is something we all strive for—unless you bill by the hour. When you’re earning a premium for each hour you spend on a task, why would you be compelled to work faster? Billing by the hour rewards the inefficient by inflating earnings for those who take the longest to get things done.
2. Flat fees reward your investment in technology
Lawyers are constantly investing in technology that makes them more productive. Document automation, practice management software, and E-discovery are all examples of this. But investing in technology that makes you more productive can have a negative impact on your bottom line when you bill by the hour. Sure, you can use that extra time to take on additional matters, but you can still only bill for 24 hours in a day (unless you’re this guy).
3. Flat fees reduce administrative work
Call it the ‘bureaucracy of billing’: billing by the hour necessitates an army of bookkeepers, and the effort required to meticulously pore over Work In Progress reports and invest in contemporaneous time tracking. Even though technology exists to make this easier, why would you want to create additional work for yourself? Flat fee billing can ease the strain on your firm with simple, up-front payments from your clients.
4. Flat fees are a competitive advantage
In a world where everyone is billing hourly, distinguishing yourself from your competitors by offering the peace of mind and cost assurance of flat fees can be a huge benefit to your firm—so much so that clients are even willing to pay a premium on top of what they’d normally pay hourly.
5. Flat fees establish attorney-client trust
If clients know that they’re paying for every phone call, email, or meeting, or minute of your time, they’re likely to be a lot more apprehensive about contacting you to share information. If there’s no surcharge for a client reaching out to you and giving you what you need to do your job, it makes them more likely to engage—and makes you a better lawyer.
The right billing solution depends on your practice and the needs (demands) of your clients, but don’t be afraid to drive a wooden stake through the heart of the billable hour or chase that monster off the cliff. There are alternatives and being flexible to the ones that are right for your practice will make you a better lawyer and keep your clients very satisfied.
How to implement flat fees the right way
Even though we know it sucks it is tremendously hard to get away from because all we can see is the downside. I can already hear what you are saying right now:
“What if the matter becomes more complicated than it seems on the surface?”
“What if additional research is required to complete the job?”
“What if I work 100 hours on this case, my fee was only 30 hours if calculated hourly, and I’ve now lost all that money that I could have made?”
If you are asking those questions, it’s your lucky day, because I’m going to give you five ways to protect your downside.
1. Stop thinking in six minute increments: Start thinking in terms of flat fees
There once was a cruise ship that had broken down at sea. The engines were broken and none of the ship engineers could figure out what was wrong.
To fix the ship they called in the foremost expert on cruise ship engines. When he arrived, he took a look around and said “I can fix this but it’s going to cost you $10,000.”
“No problem,” said the ship’s captain. He knew what the cost would be if they had to refund all of the passengers’ fees.
The expert then began feeling around on the outside of the engine, listening here and there for about 5 minutes, and then he stuck his hand out and said “give me a hammer.”
The ship’s engineer gave him a hammer and the expert pinpointed a spot with his finger and hit that spot three times as hard as he could. By the time the the third blow struck the engine roared back to life.
“Thank you!” cried the captain.
“No problem,” said the expert. “That will be $10,000.”
“But why should I pay you $10,000?” the captain said. “You only did five minutes worth of work.”
“It cost you $50 for the labor, $9,950 to know where to hit the engine.”
Our work isn’t time sensitive, it’s expertise sensitive. When you start thinking in terms of value provided it’s much easier to set a price that reflects the true value to the client, even if it only takes you five minutes.
2. Be clear on scope
You can flat fee any legal work, it’s just important to be clear on scope.
Let’s take litigation, for example, as that’s probably the area people think is the hardest area to produce flat fee arrangements.
Assuming you’ve done the type of case presented to you before (business dispute, personal injury, divorce, bankruptcy, etc.) and you have a good idea what’s going to be involved, one way to set the fee is assign one big fee and set out everything it entails.
You might, for example, propose a $50,000 fee that includes up to 5 depositions, 1 motion for summary judgment, and one trial, with the understanding that if the scope is increased the fee is increased.
You could also a la carte the case. A deposition is going to cost $1500. Motion for summary judgment is going to cost $7500. And on and on.
The key to protecting your downside is to be cognizant of scope creep, when the work begins to get outside of the agreement, and either stop that work or execute a change order to incorporate the new work.
3. Do what’s necessary, and no more
I don’t care who you are, if you tell me you haven’t padded the billable hours on a case from time to time, you are lying.
The great thing about flat fee agreements is that it allows you to eliminate the fluff and just do what’s necessary to get the job done.
Already have a motion for summary judgment with very similar issues in your form bank? Use it to write your new motion and save yourself four hours.
Have a hearing a junior associate can handle? Send them out to do the work.
Know a phone call to opposing counsel will get the case resolved in 10 minutes? Make the phone call.
In our cruise ship example, it would have been very easy for our expert to run 20 diagnostic checks to make sure what he thought was the problem was actually the problem, but he didn’t need to. He just fixed the problem.
You could do the same.
4. Track your work
You know how much time you have to work in a day. If you are working on a bunch of flat fee cases that take up all of your time, and you can’t pay the bills, then you aren’t charging enough.
This doesn’t need to be done in six-minute increments, but should be done generally to make sure the work you are doing is profitable.
Furthermore, when it comes to staff and associate attorneys, you should require them to track, generally, what they are working on and for how long. This will prevent them from overworking a case when it’s not necessary (it will take everyone time to get used to actually just doing the work required on a case and no more).
5. See the forest
In a perfect world your fee projections will be right on every time.
But the world isn’t perfect, and every once in a while you are going to get a case that you price out incorrectly.
For many attorneys, one bad fee projection is the end of flat fee billing. All they see is that one case where $50,000 of work was done for $30,000.
But, if you see the forest through the trees you’ll come to find that for every case you have that loses you money you’ll have 9 or 10 or 20 that make you a significant profit.
At the end of the day, flat fees in law firms make the most sense for both attorney and client. They will make you more money, untie you from your desk, and create happier clients.
I want to challenge you to commit to presenting a flat fee option to the next potential client that walks through your door. I think you’ll be surprised by the results.
We published this blog post in August 2015. Last updated: .
Categorized in: Business