How do you use flat fees?

How do you use flat fees, other than basing them on estimated hours?

I find it interesting that lawyers seem to have such a hard time wrapping their minds around the concept of setting flat fees for their services, but seem to have no difficulty with the idea of an hourly billing rate. After all, how is the lawyer determining what the hourly rate should be? Some lawyers charge $150 an hour, and some charge $400 an hour. What are those rates based on?

Lawyers think that under an hourly system we’re charging only based upon something that's easy to quantify - the number of hours required to complete a task, but that’s an illusion, because the hourly rate must be set first - and that rate must be based on something else.

Presumably, the lawyer’s experience, results and training all factor into the equation when setting an hourly rate. Lawyers that are in higher demand can command higher rates. Lawyers that establish a reputation for themselves and their firms can command higher rates. Lawyers that practice in specific geographic areas may be able to command higher rates. But the only reason that any of these factors affects the ability to charge a particular fee is because the client believes that they add value to the engagement. Therefore, MOST importantly, lawyers that can articulate the benefit to their client can command higher rates.

The big problem with hourly billing is that the length of time it takes to complete a task isn’t related in any way to the value of the service that’s provided. Indeed, it can reliably be argued that most clients would prefer that their legal matters be completed in less time – and therefore that a lawyer who can complete the matter in less time should be paid more.

The same variables that go into determining an hourly rate will factor into a flat fee scheme - although they may be weighed differently for different clients. One of the biggest differences between using flat fees or value-based billing and hourly billing is that the fee isn’t dependent upon the length of time it takes to complete a certain matter or task. As others have said, under an hourly system, the perception is that you're selling time. Using alternative billing is one way to return the focus to where it should be - selling your expertise.

Pricing is a skill - learn to articulate value
Pricing, or setting fees, is a skill that takes time to develop. There is no one ‘right’ way to price your services, and there are many variables that will affect how you price your services. In order to price effectively, you must be able to articulate the unique value your firm brings to its clients – what does your firm provide that no one else does? What benefits is the client receiving, and how important are those benefits to the client?

Once you can articulate the value your firm provides and the benefit the client will receive as a result of your legal representation, you’re on your way. But you’ve still got a lot of work to do before you can quote a fee to a client.

Getting detailed information and setting expectations
Much of the reason lawyers still charge by the hour is because they don’t like change, and because billing in any other way requires a lot more thinking and a lot more work up front. It requires more of a conversation with clients about their expectations than most lawyers are used to.

Often lawyers take on a case without fully investigating or exploring not only the facts surrounding the matter, but the client's specific expectations and values. One advantage of changing the pricing structure is that these longer and more detailed conversations will likely help lawyers pre-qualify clients better, alert them to potential problems earlier, and help them weed out ‘nightmare’ clients before they become a headache.

If you’re experienced in handling a particular type of matter with a particular type of client, you should have a good idea which variables will make an engagement more complicated, more stressful for you and for the client, which ones require specific skills or expertise, etc. You should also have a good idea which variables are important to which types of clients. All of those variables will be reflected in the price you quote for those services. This is very likely to differ from client to client.

You have to do a good bit of digging and really fleshing out the issues with every new client at the outset. That way, you can get a good idea what you might be up against. But even then, you need to let the client know that there are other issues which may arise which would affect the fees - including the attitude and behavior of the other side, which is often very different than the client's initial perception. Provide your potential clients with examples of the kinds of variables or contingencies that are likely to increase (or decrease) the fee.

Some pricing changes are required due to the client’s failure to cooperate, failure to provide information, or a client not being honest with the attorney. Your fee agreement should clearly state that such changes are not considered within the scope of the estimate (and consider your ability to end the engagement on those bases as well).

Frequently, lawyers are afraid to quote clients a ‘high’ price for fear that the client will automatically reject them. But the reality is that lowballing a client and estimating low on purpose creates a poor attorney-client relationship and is bound to mean more time and money spent chasing clients for fees later. Clients that are truly shopping only on price are not the best clients to have anyway. If you can articulate the value that supports your fees, the better clients will be willing to pay for it. And setting the fee up front eliminates the need to chase clients later to get them to pay your bills. Lawyers that quote clients a low fee without explaining the scope of the work that is encompassed in the original fee, or variables that can increase the fee, are setting themselves up for trouble.

Clients are willing to pay a premuim if they perceive that they are receiving value in exchange for their money. If you can pinpoint what the client values, articulate your services in terms of those values, and deliver on the promises that you make, you will find that clients are willing to pay up front for your services.

Many lawyers assume that they can’t account for variables or unforeseen circumstances if they use a fee structure other than billing by the hour. But with a little planning, you can account for those variables.

Using value billing or ‘flat’ fees doesn’t have to mean that you quote one price for the entire engagement at the outset when you may not have complete information. But there are a number of ways to overcome this obstacle.

Some methods for pricing:

1. Provide an estimate or price range, giving a high and low based on your experience (but be careful to specify that this is just an estimate, and be sure you've given yourself some 'wiggle room' on the low end - and be mindful that some clients will assume that the low is what they are going to pay);

2. Price the project in stages, so that you can adjust your fees as the matter progresses and you have more information;

3. Be very specific in your initial fee agreement about what your price quote covers, and provide examples for clients of items that will require an additional fee. For example, if you are handling what appears to be a ‘routine’ litigation case, let’s say that you quote the client a fee of $5,000. The fee is based on the information provided by the client at the outset for a matter that appears to be routine – only two parties, no non-party witnesses, limited discovery, etc. However, as the matter progresses, if additional parties are added to the suit, additional or extensive discovery or investigation becomes necessary, your fee will be adjusted accordingly.

Remember also that value pricing means pricing your services based upon the value of those services to the client, first and foremost - so you'll have to articulate the changes in your fees in terms of the benefits to the client and what the client thinks is important.

Comments

[Michelle Golden]

Allison, great post! In particular, the following paragraph illustrates (from a customer service and expectation setting/managing perspective) the terrible affect of the "safety net" our precious billable hour has become.

"Often lawyers take on a case without fully investigating or exploring not only the facts surrounding the matter, but the client's specific expectations and values. One advantage of changing the pricing structure is that these longer and more detailed conversations will likely help lawyers pre-qualify clients better, alert them to potential problems earlier, and help them weed out ‘nightmare’ clients before they become a headache."

We skip these important conversations and the subsequent thinking about project depth and scope because we know that we won't "lose" later since we'll bill what it actually takes--timewise. This means the client loses because they go in blind--even more blind than us--but they are the ones shelling out for our poor understanding and planning.