The CBA's Code of Professional Conduct says fees charged for legal services should be "fair and reasonable." Clients increasingly say that traditional legal billing by the hour for services is not particularly reasonable, because such billing does not convey either the specifics or the value of what their lawyer did for them.
There are ways to structure a bill so that clients better understand what was done for them, as explained in my recent article, "The Perfect Legal Bill", which explored the interrelated issues of reasonableness and value. But this fails to answer the broader question—‘can lawyers find an understandable alternative to hourly rate billing?’
There is nothing magical about hourly rate alternatives—they all seek to achieve the same thing. Rather than setting price by a standard unit or result, billing alternatives focus on actions taken to benefit the client, beyond the time of how that value is applied.
Choosing the right alternative is ultimately a business matter for both the firm and the client. There is no universal best billing alternative. Client preferences and each firm's operations differ, and each project or case has a multitude of factors that could accommodate billing options.
The Flat Fee Model
One of the simplest such options, and one that has increasingly received a great deal of attention in both Canada and the U.S., is billing for legal services at a flat rate. In this billing method, the fee is determined and stipulated in the engagement letter, before the assignment even begins. It will not vary no matter how much time the lawyer expends, or what the result.
Flat fees are especially useful for routine legal services, and encourage the use of technology to streamline the provision of those services. At its most extreme, this is embodied in "do-it-yourself" websites purporting to charge a fixed fee for advice, research and forms in such areas as family law, probate, real estate closing, even filing a patent. However, there are other, more sophisticated examples of the same concept.
General Electric, for example, has created a "toolkit" of clauses available on its secure intranet for use by its sales force to change terms and words of standard contracts when requested by customers. In such instances, the GE sales force used to send the contract back to GE lawyers for review and change—a costly and time-consuming process. Now, providing standard term alternatives online saves GE and its clients a substantial amount of legal fees. Most important, however, is the speed of contract changes leading to faster "closing" and increased sales of GE products. In short, this method leads to lower costs and increased revenues.
The "Productizing" Approach
Fixed, commodity pricing as typified by flat fees is generally synonymous with “low price.” When we provide legal services, we want them to be seen as unique because of the attorney-client relationship, because of the special skills required to deal with the challenge or because the client has some constraint that only a few lawyers can accept. Yet, when clients increasingly want to see the dynamic shift toward the commodity model, the momentum can be hard to resist.
One way to do it is to consider "productizing" your practice, by providing a tangible product that opens the door to the intangible, value-added services you want to offer.
For example, an estate planning lawyer might combat do-it-yourself websites and software by establishing a section of his or her firm website that is password-protected and that has authoritative forms and research that the lawyer has prepared or evaluated. For a flat fee of $100 a "client" could access this material and draw from it at will. However, if the client has a question or problem that the materials do not answer, the lawyer is available to provide personalized counsel, perhaps at a special rate that recognizes the relationship established through the website.
Another example might be a blog that, for a subscription fee, combines the lawyer's observations on breaking legal or regulatory issues with specialized content and research—again with the option of asking specific questions outside of the access fee.
Understand Your Costs
The point here is that a flat fee is only an acceptable billing alternative if the attorney knows the cost structure behind it, and if the client accepts the value that the fee represents. Unfortunately, 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.
Your firm cannot aspire to set an accurate flat fee unless you understand the operation of the firm as a business (budget, collections, profit, loss), the firm's billing structure, and how each attorney determines firm profitability.
Consider the example of a contract attorney, doing work for a large law firm, who proposed a new, higher fee schedule that included a volume discount based on a scaled number of hours per month. The client firm's managing partner asked that the number of hours and the discount to be applied be reviewed retroactively at the end of each three months cycle. A volume discount at a flat fee should be based on a prospective, rather than a retrospective, guarantee of work. For the contract attorney, a retrospective review is a disaster, fails to offer any security and makes planning impossible. Without the prospective assurance of volume, there is little or no benefit to the contract lawyer and every benefit to the client.
Don’t Negotiate Against Yourself
Flat fees are often considered to be a form of discount, but lawyers can negotiate against themselves by accepting them. Take, for example, an intellectual property lawyer who is approached by a prospective client for a discounted rate in return for a fixed volume of work. To avoid setting a troubling precedent for rate cutting, the lawyer should consider three alternatives that meet the client's request but protect the lawyer's interests:
- First, state that your billing rate is $X; you do not talk about discounts, reduction in fee, or any other modification of your hourly rate. To do so would be to negotiate against yourself and against your self-interest. If in the same breath you quote your fee, then start talking about discounts, you are saying that you are not serious about your own fee.
- Second, if the client asks whether $X is the least expensive rate you can charge, raise the idea of a volume discount. You are prepared to discount your rate from $X to, for example, $X - Y if, and only if, the client is prepared to guarantee 20 hours of work per month for a minimum period of time, say six or nine months. This is essentially a flat fee arrangement.
- Third, if the client will commit to the amount of hours and the time period, they should pay the discounted fee (20 hours at $X/hour) at the beginning of each month. In other words they have to pre-pay that amount. If the client needs more than 20 hours of work in any given month, the additional work will be billed at the discounted $X rate under billing terms the attorney typically uses (for example, payable within 30 days of the billing).
Approaching the idea of discounting this way says that you are willing to treat clients fairly when they treat you well. In other words, the quid pro quo for a discount is a guarantee with payment up front. It makes no sense to do business with a client who will not agree to do that.
Are Flat Fees Refundable?
Charging a flat fee can raise a related issue of whether that fee can and should be refundable. Consider the example of a lawyer who has an estate planning practice and provides for flat fees that are non-refundable. In one instance, a client requested an estate plan. The lawyer completed the documents and sent them to the client for signature. The client then informed him that she had changed her mind and did not want the type of trust that had been created and, worse, now wanted the fee refunded. As a matter of professional courtesy, the lawyer made an adjustment that was accepted by the client. Months later, the client filed a complaint, charging that the adjustment involved no set, defined standard.
Painful as it may be, the alternative to charging a flat fee may be charging no fee. If the client doesn't receive value, there is no charge; if the client does receive value, the lawyer's fee is paid as stipulated.
Another approach is to provide in the fee agreement (e.g., estate planning) that delivery of draft documents is the benchmark for payment of 75 per cent of the fee with the balance due on signing of the documents. Having said this, however, the lawyer must still show that the fee is reasonable. Whether the lawyer exceeds the standard is a matter of individual review.
Don't Be a Commodity
Ultimately, assessing whether flat fees are a good billing strategy comes down to deciding what makes you different as a lawyer. Clients expect lawyers to be competent, so the phrase, "I'm a good lawyer" no longer holds the same cache as before.
Service is still the one factor that clients want from lawyers more than anything else. No matter how you charge for it, can you offer something that your competitors don't or can't, or create something new that your clients need or want? If you can't think of what makes you unique, you're really nothing more than a commodity to your clients.
There will always be someone who will be willing to charge less. Once on this slippery slope, it is hard to get off ... and there is no winner.
Edward Poll (firstname.lastname@example.org) is a certified management consultant and coach in Los Angeles who coaches attorneys and law firms on how to deliver their services more profitably. He is the author of Attorney and Law Firm Guide to the Business of Law: Planning and Operating for Survival and Growth, 2nd ed. (ABA, 2002), Collecting Your Fee: Getting Paid from Intake to Invoice (ABA, 2003) and, most recently, Selling Your Law Practice: The Profitable Exit Strategy (LawBiz, 2005).