Your Realization Rates May Make You Realize That Flat Fees Often Make More “Cents”

As a solo or small firm lawyer, you’ve probably heard the term “involuntary pro bono.” That’s what happens when you sign up to take a case, collect a retainer, exceed the retainer and the client stops paying the bill on the eve of trial when it’s too late to pull out.
Well, turns out that big law has the same problem, different name. As bloggers Tom Kane and Patrick Lamb discuss, large firm realization rates have dropped to an all time low, with big firms collecting just 85.4 percent of revenues billed. As Allison Shields astutely observes:

When lawyers write off or write down their fees – or when clients pay only a portion of the lawyer’s bill, aren’t both lawyer and client saying that the hourly fee really doesn’t mean anything, and that there is a particular (fixed) fee that is ‘fair’ for the work?

Ironically, the reason that lawyers resist flat fees is because they’re afraid that they’ll be shortchanged – for example, that they’ll charge $10,000 for a matter that ultimately takes thousands of hours. And while that’s a risk, so too is the possibility that clients won’t pay their bills in spite of the best precautions . And while some clients simply won’t pay because they’re cheap, others run out of money because their lawyer never offered an honest evaluation at the outset of how much the case might cost.

Somewhat counter-intuitively, flat fees give lawyers more control – not so much over the duration of a case, but rather, over the amount of work that the lawyer will perform. Let’s say for example, that a lawyer agrees to represent a client in a divorce proceeding. The lawyer could assess a fee that would specify that it covers the hearing and up to three contested disputes that might arise in the course of the case. If the opposing counsel (or your own client for that matter) decide to pursue a scorched earth policy and litigate every single discovery response or issue arising under the separation agreement, that activity would fall outside the scope of the fee arrangement and would cost extra. By contrast, if the matter is resolved with just one hearing, the lawyer would come out ahead. And if the matter involves three hearings, the lawyer will at least recover a fee that he or she was willing to accept under the agreement.

Now, imagine how this scenario would play out without deliverables and price specified up front. The lawyer would (in many instances at the client’s direction, no less!) file five or six motions, the client would run out of cash after the fourth and the lawyer would be stuck. Or, the lawyer would file a third motion but the client didn’t realize at the beginning that the case would involve so much time and still runs out of money. Or – even in a best case scenario where a client can keep pace with payments, the lawyer would find himself nagging the client on a monthly basis to replenish the retainer.

I’m not suggesting that flat fees work for all cases because they don’t (one of my colleagues who handles complex and unpredictable litigation matters experimented with phase fee billing with mixed results). In my own case, I’ve had problems with fixed fees where I’ve quoted a certain rate and but then outsource work to a freelancer or paralegal who works hourly and whose rates don’t necessarily align with my budget. Still over all, I favor the flat fee as do my clients because it gives them certainty while it forces me to puzzle through the intricacies of a case at the beginning so that the case funs more smoothly.

For those of you who have written off the idea of flat fees, take a look at your realization rate. You may just realize that you won’t fare any worse – and at times, may come out ahead – with a flat fee rather than hourly billing.

What’s your experience with flat fees and hourly billing? In particular, I’d be interested in hearing how solo/small firm realization rates compare to the 85.4% rate reported by larger firms. Please post comments below