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Make More With Flat Fees

by Carolyn Elefant on October 25, 2006 · 14 comments

in Business Models, Setting and Collecting Fees

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Here’s a story from CNNMoney.com/Fortune Small Business (10/25/06) on how one Portland, Oregon law firm, Ambrose Law Group bolstered its revenues by a whopping 85 percent, after participating in Fortune Small Business’ Money Makeover Program and converting from the billable hour to flat fee arrangements.  From the article:

“Flat-fee billing is better for clients and better for us,” he says. “Clients value the certainty of knowing up-front what their legal work will cost…For common items like document preparation and filings, there’s been very little resistance to the idea.” The firm still bills by the hour for most of its complex litigation work. “It’s hard to predict how much time a big case will take,” says Ambrose.

But the firm has started charging flat fees for tasks such as taking depositions and filing complaints. Revenues at the firm were up 85 percent over the first eight months of this year vs. 2005, according to Ambrose COO Jan Alexander. Staff turnover allowed Ambrose to hire more productive attorneys. But Alexander says that flat-fee pricing deserves a lot of the credit.

I wish that the article had provided more detail on the difference in cost between flat fees and billable hours.  It’s not clear whether the flat fees enabled the firm to attract more business (thus accounting for more revenues) or whether flat fees in essence, enabled lawyers to collect more per hour (e.g., instead of charging $250 an hour for a 2 hour deposition or $500 total, lawyers would charge a flat fee of $1000 for every deposition regardless of length).  Or does the flat fee encourage lawyers to work more efficiently, so that work cycles through more quickly?

I use flat fees wherever possible, since my clients don’t ever dispute the amount owed and always have enough budgeted for the flat fee, since it’s a fixed, rather than moving target.  For that reason, solos ought to consider using flat fees, even if your flat fee is nothing more than a firm prediction of your hourly costs.

What’s your experience with flat fees?  And how do you set them?  Do you pick a number out of the air – or do you tie the fee to your predicted costs?  Please enlighten me and my readers, below.

  • http://www.lawbiz.com Ed Poll

    Alternative billing is being talked about by more lawyers, though many cynics don’t believe changes will be made. Flat fee billing is perhaps the first step in the direction of change. It is more easily understood and embraced.
    The challenge with any alternative fee approach is that lawyers, generally, don’t know their costs of operation. Thus, the fee figure chosen often is a “by guess, by golly” fee, not one based on a cost benefit analysis.
    For any such system to work best, the client must be involved in the fee setting process. This means that the client must understand the economic value to him/her of the work to be done.
    Experience tells me that flat fees are becoming more popular;I was just asked, for example, to facilitate a law firm retreat on the subject. This would not have happened 5 years ago.
    As more firms get into the process, they will realize the need to understand their business – and they will then better understand how to be more efficient in the delivery of services. They just might then be sensitive to the issue of lowering the legal costs for clients, a reason hardly ever given for going to a different pricing model. Jeffrey Carr of FMIC Technologies was quoted yesterday in the Wall Street Journal in another context (the merger of Dewey & Orrick) that lawyers seldom think about lowering the costs of legal services, only about increasing their revenue.
    Alternative billing may be a way to do both.

  • http://www.lawbiz.com Ed Poll

    Alternative billing is being talked about by more lawyers, though many cynics don’t believe changes will be made. Flat fee billing is perhaps the first step in the direction of change. It is more easily understood and embraced.
    The challenge with any alternative fee approach is that lawyers, generally, don’t know their costs of operation. Thus, the fee figure chosen often is a “by guess, by golly” fee, not one based on a cost benefit analysis.
    For any such system to work best, the client must be involved in the fee setting process. This means that the client must understand the economic value to him/her of the work to be done.
    Experience tells me that flat fees are becoming more popular;I was just asked, for example, to facilitate a law firm retreat on the subject. This would not have happened 5 years ago.
    As more firms get into the process, they will realize the need to understand their business – and they will then better understand how to be more efficient in the delivery of services. They just might then be sensitive to the issue of lowering the legal costs for clients, a reason hardly ever given for going to a different pricing model. Jeffrey Carr of FMIC Technologies was quoted yesterday in the Wall Street Journal in another context (the merger of Dewey & Orrick) that lawyers seldom think about lowering the costs of legal services, only about increasing their revenue.
    Alternative billing may be a way to do both.

  • http://www.traverselegal.com Enrico Schaefer

    Because clients sometimes worry about paying too much on a flat fee arrangement, we use the hybrid approach. We charge a ‘max budget or hourly rate’, whichever is less. It is an easy decision for the client. They know what their maximum fee exposure is on the matter. But they never have to worry about overpaying. Clients love this arrangement. It makes the retention discussion easy and straight forward. Far more clients are willing to retain us knowing what their fee exposure is up-front.

  • http://www.traverselegal.com Enrico Schaefer

    Because clients sometimes worry about paying too much on a flat fee arrangement, we use the hybrid approach. We charge a ‘max budget or hourly rate’, whichever is less. It is an easy decision for the client. They know what their maximum fee exposure is on the matter. But they never have to worry about overpaying. Clients love this arrangement. It makes the retention discussion easy and straight forward. Far more clients are willing to retain us knowing what their fee exposure is up-front.

  • http://www.HowToMakeItRain.com RJON@HowToMakeItRain.com

    From a recent e-zine article I sent to all my subscribers. . .
    So many lawyers have written to me for coaching regarding the same problem about what went wrong in their sales calls with prospective clients that I just decided to convert my answers into an article for everyone’s benefit. The questions all revolve around what went wrong and how to best quote or estimate the price of legal services to prospective clients.
    The conversation goes something like this:
    Prospective client: “How much do you think this will cost?”
    Lawyer: “It’s hard to tell. We’ll work hard to be as efficient as we can.”
    P.C.: “That’s great, but how much do you think we’re looking at?”
    Lawyer: “My rate is $250 and hour, but for you, I’ll cut that to $200.”
    P.C.: “I appreciate that, but how much do you think we should be budgeting?”
    Lawyer (knowing that if every single thing goes right, and nothing goes wrong, the case can probably be handled for $15,000): “Well, you should figure between ten and fifteen thousand dollars.”
    I generally prefer to focus on what went right, instead of the negatives. But in this case, it’s instructive to focus on what went wrong in the all-too-common example above
    IT’S A FACT THAT MANY LAWYERS ARE UNCOMFORTABLE CHARGING FOR THEIR SERVICES
    In the first part of the exchange we see an example of a lawyer who may be uncomfortable charging for his or her services, perhaps out of a misguided (and common) misconception that lawyers should be above such pettiness as money.
    Click HERE for a fuller discussion on why you deserve to be happy and should feel no reluctance to charge for your services.
    It’s also possible however that the lawyer in this example is oblivious to the budgetary process of the client who simply needs a number to put into the budget for the upcoming period(s) and/or to conduct a cost/benefit analysis.
    Not to suggest that any client looks forward to paying for legal services, but I hope you’ll take comfort knowing that an overwhelming amount of anectdotal evidence gathered from thousands of lawyers supports the proposition that most clients, are much more comfortable talking about the price of the services they buy, than are the lawyers.
    DON’T NEGOTIATE AGAINST YOURSELF
    In the second part of the exchange we see how 20% of many lawyers’ revenue disappears when they fail to listen to the question about fees and so they negotiate against themselves. Note that the client didn’t ask for a lower rate, only what the price would be.
    Too many lawyers substitute their own assumptions and hear what they are afraid a prospective client might ask, instead of what is actually being said. Be aware that, especially when it comes to “bet the ranch” type cases, most clients are not nearly as price-sensitive as many lawyers fear or assume.
    And for those who are, there are many safe and predictable ways to give them better value, while earning a premium fee for yourself over & above what you’d otherwise earn strictly by-the-hour.
    “It Will Probably Cost Between. . .” Sows The Seeds Of Discontent!
    In the third part of the exchange the lawyer sets him or herself up for ultimate failure. No matter what price range a lawyer gives. No matter how many different disclaimers accompany the estimated price range. Every single time, with no exception in the history of the world, the client will always leave the meeting with hopes that they’ll end-up only having to pay “around ten thousand”, while the lawyer will leave with hopes that they can “bring it in under twenty.” And if by some miracle everything does go right and the final bill ends up being $15,000, the lawyer will expect a hero’s welcome for saving the client $5,000, but the client will inevitably feel they paid 50% more than expected.
    SIMPLE SOLUTION: If you can’t figure-out how much a case is likely to cost on-the-spot, ask for time to analyze the facts and get back to the client the next day with a real number that builds-in a margin of error. It’s also a good idea to estimate the price in terms of controllable steps for which you can charge a series of flat fees, and then keep the client informed as to which step you’re on and how close to budget the case is.
    I realize this is a rather long post, but it’s an important topic. If anyone’s interested in learning more, send me an e-mail from my blog and I’ll either reply to you directly or else let you know when the topic is more fully discussed in my e-zine or on my blog.
    Respectfully,
    RJON ROBINS
    http://www.HowToMakeItRain.com/blog
    Helping Lawyers In Small Firms Make ALOT More Money.

  • http://www.HowToMakeItRain.com RJON@HowToMakeItRain.com

    From a recent e-zine article I sent to all my subscribers. . .
    So many lawyers have written to me for coaching regarding the same problem about what went wrong in their sales calls with prospective clients that I just decided to convert my answers into an article for everyone’s benefit. The questions all revolve around what went wrong and how to best quote or estimate the price of legal services to prospective clients.
    The conversation goes something like this:
    Prospective client: “How much do you think this will cost?”
    Lawyer: “It’s hard to tell. We’ll work hard to be as efficient as we can.”
    P.C.: “That’s great, but how much do you think we’re looking at?”
    Lawyer: “My rate is $250 and hour, but for you, I’ll cut that to $200.”
    P.C.: “I appreciate that, but how much do you think we should be budgeting?”
    Lawyer (knowing that if every single thing goes right, and nothing goes wrong, the case can probably be handled for $15,000): “Well, you should figure between ten and fifteen thousand dollars.”
    I generally prefer to focus on what went right, instead of the negatives. But in this case, it’s instructive to focus on what went wrong in the all-too-common example above
    IT’S A FACT THAT MANY LAWYERS ARE UNCOMFORTABLE CHARGING FOR THEIR SERVICES
    In the first part of the exchange we see an example of a lawyer who may be uncomfortable charging for his or her services, perhaps out of a misguided (and common) misconception that lawyers should be above such pettiness as money.
    Click HERE for a fuller discussion on why you deserve to be happy and should feel no reluctance to charge for your services.
    It’s also possible however that the lawyer in this example is oblivious to the budgetary process of the client who simply needs a number to put into the budget for the upcoming period(s) and/or to conduct a cost/benefit analysis.
    Not to suggest that any client looks forward to paying for legal services, but I hope you’ll take comfort knowing that an overwhelming amount of anectdotal evidence gathered from thousands of lawyers supports the proposition that most clients, are much more comfortable talking about the price of the services they buy, than are the lawyers.
    DON’T NEGOTIATE AGAINST YOURSELF
    In the second part of the exchange we see how 20% of many lawyers’ revenue disappears when they fail to listen to the question about fees and so they negotiate against themselves. Note that the client didn’t ask for a lower rate, only what the price would be.
    Too many lawyers substitute their own assumptions and hear what they are afraid a prospective client might ask, instead of what is actually being said. Be aware that, especially when it comes to “bet the ranch” type cases, most clients are not nearly as price-sensitive as many lawyers fear or assume.
    And for those who are, there are many safe and predictable ways to give them better value, while earning a premium fee for yourself over & above what you’d otherwise earn strictly by-the-hour.
    “It Will Probably Cost Between. . .” Sows The Seeds Of Discontent!
    In the third part of the exchange the lawyer sets him or herself up for ultimate failure. No matter what price range a lawyer gives. No matter how many different disclaimers accompany the estimated price range. Every single time, with no exception in the history of the world, the client will always leave the meeting with hopes that they’ll end-up only having to pay “around ten thousand”, while the lawyer will leave with hopes that they can “bring it in under twenty.” And if by some miracle everything does go right and the final bill ends up being $15,000, the lawyer will expect a hero’s welcome for saving the client $5,000, but the client will inevitably feel they paid 50% more than expected.
    SIMPLE SOLUTION: If you can’t figure-out how much a case is likely to cost on-the-spot, ask for time to analyze the facts and get back to the client the next day with a real number that builds-in a margin of error. It’s also a good idea to estimate the price in terms of controllable steps for which you can charge a series of flat fees, and then keep the client informed as to which step you’re on and how close to budget the case is.
    I realize this is a rather long post, but it’s an important topic. If anyone’s interested in learning more, send me an e-mail from my blog and I’ll either reply to you directly or else let you know when the topic is more fully discussed in my e-zine or on my blog.
    Respectfully,
    RJON ROBINS
    http://www.HowToMakeItRain.com/blog
    Helping Lawyers In Small Firms Make ALOT More Money.

  • http://jamestownlawyer.blogspot.com Todd

    I like flat fee arrangements and tend to use them whenever I can. In a large part, this is due to my client base who usually wouldn’t even hire a lawyer if they didn’t have a certainty of costs.
    However, I have had it create issues as well. I’ve had cases where the issue has almost resolved itself or required less work than anticipated and then the client has wanted to renegotiate from scratch, even after I offered a discount on the original price.

  • http://jamestownlawyer.blogspot.com Todd

    I like flat fee arrangements and tend to use them whenever I can. In a large part, this is due to my client base who usually wouldn’t even hire a lawyer if they didn’t have a certainty of costs.
    However, I have had it create issues as well. I’ve had cases where the issue has almost resolved itself or required less work than anticipated and then the client has wanted to renegotiate from scratch, even after I offered a discount on the original price.

  • http://soloinchicago.blogspot.com Peter Olson

    We’re in the camp similar to Mr. Schaefer above. Doing a lot of work in the family law area, we do a ton of child support modifications and collection, visitation disputes, ect. In these areas in which we do enough, I feel like we can fairly estimate up front a reasonable cap on fees. To be frank, once in a while I think we undercut ourselves. We may need to build in some out if the litigation just gets “wacky” and totally unforeseen stuff happens.

  • http://soloinchicago.blogspot.com Peter Olson

    We’re in the camp similar to Mr. Schaefer above. Doing a lot of work in the family law area, we do a ton of child support modifications and collection, visitation disputes, ect. In these areas in which we do enough, I feel like we can fairly estimate up front a reasonable cap on fees. To be frank, once in a while I think we undercut ourselves. We may need to build in some out if the litigation just gets “wacky” and totally unforeseen stuff happens.

  • http://stayviolation.typepad.com/chucknewton/ Chuck Newton

    As much as I like this idea and promote this idea where I can, I practice in a federal fee-shifting environment in which the violator of various federal injunctions or laws is required to pay my client’s fees. The law requires us to prove up our fees using the Lodestar method (prevailing hourly rate x number of hours reasonably expended = award). The main two things that flat fee or unit billing allows are (1) a large reduction in administrative time in posting and maintaining accurate time; and (2) if the flat fee is property set, to allow you to spread your risk over a number of like cases. The problem becomes when flat fees are used as a tool to compete with other law firms or lawyers in the area. (e.g., the $150.00 divorce, or the $350.00 Chapter 7 bankruptcy). When this happens not only does the attorney doing this lose, but so does the market.

  • http://stayviolation.typepad.com/chucknewton/ Chuck Newton

    As much as I like this idea and promote this idea where I can, I practice in a federal fee-shifting environment in which the violator of various federal injunctions or laws is required to pay my client’s fees. The law requires us to prove up our fees using the Lodestar method (prevailing hourly rate x number of hours reasonably expended = award). The main two things that flat fee or unit billing allows are (1) a large reduction in administrative time in posting and maintaining accurate time; and (2) if the flat fee is property set, to allow you to spread your risk over a number of like cases. The problem becomes when flat fees are used as a tool to compete with other law firms or lawyers in the area. (e.g., the $150.00 divorce, or the $350.00 Chapter 7 bankruptcy). When this happens not only does the attorney doing this lose, but so does the market.

  • http://www.rubinemploymentlaw.com James Rubin

    I have adopted flat fee billing for certain cases in my practice area. I have found that being untethered from the billable hour is an extremely liberating feeling which serves me and the client.

  • http://www.rubinemploymentlaw.com James Rubin

    I have adopted flat fee billing for certain cases in my practice area. I have found that being untethered from the billable hour is an extremely liberating feeling which serves me and the client.

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