The Business of Law
Clients are growing ever more sophisticated in their understanding of the business of law, billing models and how their interests sometimes compete with the financial interests of their counsel. More and more clients are negotiating (or even demanding) fixed fees. In turn, law firms are working to find more efficient ways to deliver legal services to remain competitive. But don’t fear, all is not lost. Moving to a flat fee billing model can be win-win. As we will discuss, savvy lawyers are finding ways to satisfy their clients by providing fixed fees while increasing the bottom lines and profit margins of their law practices.
It surprises most lawyers to learn that the “billable hour” is relatively new and wasn’t in widespread use until the 1950s. In the late 1800s, the “billable hour” was not only rare, it was almost universally deemed to be “unethical”. And where it was permissible, the billable hour had a maximum cap based upon the type of work. These “caps” were established by bar associations for the benefit of clients to ensure that a client would pay no more than a set amount for a particular service, much like ordering from a menu. Based upon these restrictions, the default standard for client billings became the “fixed fee,” which provided attorneys at least a theoretical upside if their work proved to be efficient and valuable.
However, by the early 1900s, the American Bar Association ("ABA") began permitting attorneys to enter into contingency relationship fee agreements. This began a long movement toward attorneys and law firms being permitted to base the “value” of their services on something other than the time they devoted to a client. It further kickstarted an economic model in which attorneys could align their economic interests (at least theoretically) with those of their clients.
Later, in the 1930s, entrepreneurial lawyers (with the approval of bar associations) began adopting the “base fee” (as opposed to a capped fee). With a base fee, a minimum amount is due from the client regardless of the actual time invested by a lawyer for a particular matter or project. This practice became so successful that many bar associations began requiring attorneys to charge base fees pegged to pre-determined rate charts they established. In fact, state bar associations went so far as to fine attorneys who deviated from the pre-determined base fees. In an opinion that seems unimaginable in the modern context, the ABA found it to be unethical for attorneys to charge too little for their services. The stated goal of many bar associations was to increase the income of their members.
By the 1950s and 60s, the ABA and individual bar associations began to encourage attorneys to keep time records. Moreover, lawyers began to challenge the fee schedules promulgated by bar associations as being anti-competitive. These challenges reached the U.S. Supreme Court in 1975. In Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975), the Justices ended the legal profession's exemption from antitrust laws and overturned state bar fee caps and rate schedules.
For good or bad, the Goldfarb decision ushered in the billable hour system that dominates the legal industry today. While firm data is hard to come by, it has been estimated that “billable hours” now represent in excess of 80% of all attorney's fees generated.
The Death of the Billable Hour Has Been Greatly Exaggerated
The long slow retreat of the billable hour is well underway; however, hourly fees remain the dominant fee arrangement for most legal representation, especially in the area of litigation. And while things are changing, there is scant evidence that the billable hour will disappear as the primary way to measure what a client pays for legal advice.
There are two primary explanations for the slow decline. The first is that the billable hour is incredibly profitable! Lawyers are very smart people, and they are unwilling participants in any “evolution” designed to take money out of their own pockets. While the amount of time spent on a matter is becoming an increasingly poor way to measure value, it has served lawyers well for generations.
The second reason is there is no obvious replacement that is readily deployable on a widespread basis. For example, contingency fees work well for plaintiffs work, but aren’t well positioned for transactional work. Portfolio fees are great when a firm has a large number of matters (such as trademarks) for a single client in which efficiency and scale can be reached. To this end, the future of fee structures and business models will be much more tied to the type of work and the type of client. Going forward, the nine most common alternative fee arrangements will likely be:
·Fixed Fees – A set price for a single engagement/matter with a limited (and well-defined) scope of services;
·Portfolio Pricing – A fixed fee (per matter) for a large number of matters from a single client who provides a high volume of work;
·Fee Caps – Hourly rates for a defined matter subject to a maximum fee (in my opinion the worst model lawyers can adopt);
·Monthly Retainers/Subscription – A fixed fee that a client pays on a periodic basis (usually monthly and upfront) for a well-defined scope of services;
·Menu Pricing – A fixed menu of services and corresponding prices for segments of a particular matter in which the client selects the scope of services a la carte;
·Contingencies – Outcome based fee structure, which has been widely used in personal injury and other plaintffs' work;
·Success Fees – A lump sum fee paid at the end of a matter based upon a well defined “successful outcome”, often combined with a hybrid fee;
·Hybrid fees – Usually a combination of discounted hourly billing with either a partial contingency fee or success fee;
·Collared Billing – A billing arrangement in which the lawyer provides a budget and the client pays a bonus if work is completed under budget or receives a discount if work exceeds the budget.
Each of these billing arrangements has pros and cons that we will address in other posts. However, what is clear is that entrepreneurial lawyers and firms are moving toward individual business models that will have increasingly unique fee structures based upon how they provide value to their clients.
Flat fees are especially well suited for lawyers who handle a large volume of a particular type of matter or project. What makes a flat fee successful and profitable for lawyers is when you can employ consistent and standardized workflows. Examples include contracts (with regular and consistent terms), leases, corporate documents (like operating agreements), deeds, estate planning documents and routine business agreements. However, with sufficient volume (scale in the technology world) any time of work can profitably be turned into a flat fee candidate.
There are obvious practice groups that have successfully sold flat fee services for years: family law, corporate law, estate planning and criminal work. But its use is expanding. For example, in the context of litigation (a practice in which flat fees have historically proven difficult) forward thinking firms are turning to flat fee arrangements for research memos, document review and discovery - areas that have historically been the domain of hourly billing.
Types of Work Well Suited to Flat Fees Include:
How does an attorney determine the type of work to bill on a flat fee basis and how to set fee rates? First, you need to take a step back and look at your own practice. What types of projects do you find yourself repeatedly doing for clients? How long does it take on average? Are there ways to incorporate technology to further streamline and possibly automate those tasks? Will there be filing, recording, or other fees that you will need to incorporate into your flat fee?
You know your practice and you can easily gather data on past, similar cases to look for averages to help set flat rate fees (don't forget about filing fees and other costs). For example, if you have written eight operating agreements in the past six months, you can pull the time records for these agreements and establish an average. Obviously, some of the agreements were more complicated than others so you can also see what the agreements cost on the high-end for more complex client needs. You can use this data to set a flat fee rate for operating agreements knowing that if a client comes to you with a particularly challenging list of factors to draft into the agreement, you can increase the flat fee price to account for the extra work.
Also, think about the value you are providing to your client. The truth is that if you have prepared twenty operating agreements, unless there is a complicating factor, the time it takes you to complete them is decreasing as you develop your forms and provision bank. Your clients are receiving the value of your experience and your form and provision bank and should pay for it. Flat fees allow you to be compensated for the value you provide instead of a diminishing rate because of your efficiencies and robust knowledge.
Keep in mind that when you set your flat rates, you are not carving stone. You can adjust these rates over time (and for each client or matter) as your workflow evolves and you see how the use of flat fees plays out in your practice.
Your goal is not just to replace the billable hour with a flat fee. Instead, you should be driving toward efficiency, systems and workflows that allow you to deliver a better product in less time, thereby increasing your profit while simultaneously driving down the cost to clients (which in turn gives you a market advantage).
Incorporating flat rate billing will undoubtedly give you a competitive edge. It has been demonstrated that clients like the certainty of flat fees even if the attorney proposing a billable hour arrangement “estimates” a lower fee. If a client interviews three different attorneys and you are the only one willing to offer a flat rate, my experience is you have the inside track assuming all other factors to be equal. Simply stated, flat fees can be your secret marketing advantage and help close the deal.
Flat fees also help build client trust by avoiding future billing disputes and collection issues. This can lead to clients who are more satisfied with their overall experience working with you and will hopefully also generate more referrals in the future. With the traditional hourly billing system, clients often refrain from calling or emailing you with questions or additional (often material) information for fear of increasing their bill. Which of us hasn’t had that client meeting in which we (often silently) said “why didn’t you mention that fact before today?”
Finally, flat fee arrangements avoid surprises for clients. And this is a bigger deal than most lawyers think. Clients who experience “sticker shock”, even when their surprise is unjustified, are unhappy clients. And unhappy clients make our jobs tougher on EVERY level. But where clients have certainty as to pricing and budgetary control, the attorney/client relationship is more likely to be collaborative, and in my experience, more successful.
Many state bars still want attorneys to record their time, even when using a flat fee billing arrangement. Otherwise, it is difficult to determine what constitutes a “reasonable fee.” And for this reason it remains the best practice to do so. For example, if an attorney charges $100,000 for a service that required only 1 hour of work, it is very likely the fee is not “reasonable” as required by Model Rule 1.5. However, the real world lives in shades of gray. Clients always underestimate how much work goes into a matter. And having time records with reasonable detail (even if not captured in 1/10 of an hour) is the the best way to defend against a challenge by a client that a flat fee is unreasonable. Further, your timesheets will prove invaluable in refining your pricing going forward.
Additional considerations in setting your flat fee (and complying with Rule 1.5) include your experience level, geographic location and the type of client (individual or corporation, for example). We all know that rates charged in some locations are significantly higher than others. And while some of that discrepancy is based upon increased cost of living, most geographic differences in price are simply the result of individualized legal markets with their own price structures. Regardless of the cause, in establishing your flat fee, you must ensure it constitutes a “reasonable market rate”. And while the ethical rules don’t identify what the “market” is, such language has generally been interpreted as including both geographic location as well as the specific type of work being performed by the attorney.
The last ethical issue I would like to address is what happens if the representation is terminated after the fee is paid but before the agreed upon work is completed (which happens with surprising frequency). Your starting point should be to avoid ambiguity on this point by including language in your engagement agreement to cover this scenario. However, regardless of what your engagement agreements contemplates, if you (the attorney) terminate the representation prior to completion of the work, even for cause, you will likely be required to refund the client an amount commensurate with the work not completed.
Depending on your practice area, flat fees can be a boost to profitability if managed correctly. It's obviously easier to get started with transactional work than with complex litigation. But any type of repetitive work can lend itself to a flat fee. The key to getting started is to have enough data to: (1) determine with a reasonable degree of certainty the amount of time a project has historically taken you; and (2) an investment of time in creating efficiency and systems to streamline your workflow.
The first part of the equation is rather simple. Once you you have reviewed your previous time records to determined the approximate amount of time it will take to complete a document, it's easy to set your flat fee based on the number of hours and hourly rate you would ordinarily charge. On some matters you will be a “winner” because you will be more efficient than your historical norm, and on some matters you will be a “loser” because it took you longer than expected. And if you do nothing more than apply this historical average, you will likely improve your practice because you have a marketing advantage over your competitions who don’t engage in flat fee billing. However, the real magic is leveraging your fee using systems, workflows and technology.
The most rudimentary form of systemizing your workflow is to create a form bank. However, this step isn’t going to have a material impact on your productivity or profitability. The easiest way to supercharge your workflow is through the use of technology. A couple of our favorites include Documate, Knackly and Afterpattern. And practice management software systems are beginning to incorporate automation as well. For a thorough review of legal technologies that you can incorporate in your firm visit LawSites and the Lawyerist. Through the use of technology and workflows, many attorneys experience a 25-50% increase in productivity that translates directly into a proportional increase in effective rates. And who doesn’t want a 50% increase in their rate!
The smart way for a small firm to give flat fee billing a try is to dip your toe in. Decide that over the next 12 months you are going to convert 10% of your firm revenue to flat fee billing. As time progresses you will get better and more efficient, and you will see the profit margin on your flat fee billings exceed those of the billable hour.
This post was originally published in November 2018 and updated in July 2021.
Kristin Tyler, Esq. is a founding partner at Garman Turner Gordon LLP, a boutique law firm with a national reputation where she practices in the area of Estate Planning and Probate. Greg is also a co-founder at LAWCLERK which provides virtual associates and freelance lawyers to growing firms focused on increasing their profits.