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Hourly billing is a trap. The only way hourly-based attorneys can improve their situation is to either bill more hours or raise fees. Two options. How limiting is that? But, that is the “practice” model inherent in the industry and we have to stick to it, right?
Wrong.
That is the load of B.S. we were fed in law school by professors who could not make a good enough living in practice. Yet, it is not really their fault because they were fed the same line of B.S too. So were the Principles in most firms. It seems like everyone in the legal industry has a vested interest in charging by the hour, and charging big money per hour. Are you worth $350/hour?
No.
Many times you’re worth way MORE than $350/hour. You are selling yourself short.
So, how do you get beyond the hourly billing trap? First, you admit that there has to be a better way. Second, you have to get past some fear. Third, you have to act.
There are infinite alternatives to hourly billing and we are all smart enough to figure them out. I’ll start by sharing one that has worked well for me.
In May, 2009 I was feeling pretty low. I was exactly a year out from having filed a personal bankruptcy (because I let my ego get WAY out in front of my wallet) and I was not making any progress toward financial success. I had no idea where next month’s rent would come from, nor could I justify hiring help due to the fear I would just have to lay them off.
I did know the definition of insanity is doing the same thing hoping for different results. So at the encouragement of a friend, I decided to make a major change and took hourly billing off the table.
Here is what it looked like:
- Clients could pay me what the project was worth, or;
- Clients could engage for 12 months at a flat monthly fee ranging from $250 up to $3,000/month based on the amount of work we could predict over the next year.
If they chose the flat monthly fee:
- The outlined work is included in the fee. Yes, I’m basically financing the legal work for the client.
- The client receives “as needed” access to me for quick questions via email, phone, or in person.
- The monthly fee is auto-billed to a credit card so I can avoid sending invoices and chasing down fees.
- Litigation and out-of-pocket fees are excluded from the plan.
- I collect the first and last month fees up front.
- The client signs a written engagement agreement stating that they understand that the value of this agreement is front-end loaded so the firm has the option to charge a 3-month termination fee if the client terminates before the end of the 12-month engagement agreement.
I signed six new clients to the program in the first two weeks. I could hire help. I had contractual agreements that paid my office rent for the next year. And best of all, I had a life again.
Now to address the two fear-based questions I know are slowly creeping into your mind right now:
- How do you keep clients from calling you all the time?
- How do you set the monthly fee?
First, get past your fear. Clients are too busy to make up “busy-work.” They have better things to do. You can also set the proper expectation up front by using the phrase “as needed” rather than “unlimited” in your conversation and written agreement. Clients see that they are getting a great opportunity and they honor the agreement accordingly. If you have a feeling from a specific potential client that they don’t understand an honor system, simply say “no” to taking on that client.
Now, to set your monthly fee, simply figure out what the client will need over the first year, add some pad for the “as needed” time, and divide the total by 12. The monthly fee should be significantly less than the fee they would pay you for the initial project they have on the table at the moment.
For example, a mom & pop start-up will pay around $1,250 for an LLC in my area. So, the client looks at my $250/month plan as a great option, especially considering that I will handle their core set of agreements, maybe a trademark, and throw in the as-needed counsel. It’s a no-brainer for them. The benefit to me is moving a $1,250 client into a $3,000/year commitment.
My client-referral rate is way up and I am not in the commodity business anymore. Clients used to pay for the documents and received the advice for free. Now clients pay for the advice and get the documents for free, which is really how our industry should value services.
I am now running a “business” instead of a “practice.” I am not evaluating each hour, day, or client as profitable or unprofitable. I am simply looking at monthly numbers and saying “is there more money coming in than going out?”
There is, and it makes all the difference in the world.
Now I take time off. I no longer have to rush clients off the phone when they call with a quick question. I have help. My life is better because I escaped the hourly billing trap.
Yours can be too.
Kevin Houchin is a business lawyer based in Fort Collins, Colorado. He is also the founder of The Space Between Center for Creative Spirit in Business. He can be found on Twitter @KevinHouchin.
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{ 8 comments… read them below or add one }
Keving, great post. I have looked at something similar for my clients, and I’m glad to hear that this method is effective and beneficial for both parties.
You’re right about the hourly fee BS, since this either under-values our services (to bring in clients), or over-prices our services.
Thanks much for the article; hourly-billing doesn’t seem to be fair to either party in many situations but the profession’s not doing a great job of embracing alternatives.
I am curious how folks handle flat fee billing in states that require IOLTA accounts. For instance, in Oregon the rule states, “A lawyer shall deposit into a lawyer trust account legal fees and expenses that have been paid in advance, to be withdrawn by the lawyer only as fees are earned or expenses incurred.”
Curious if anyone has experience with the above billing scenario & a similar rule. When is a flat monthly fee “earned”?
It’s good to see that you’ve found a pricing model that works for your practice and it’s encouraging that you acknowledge (your #4) that it is much more difficult to implement for litigation. I’ve never understood the argument that hourly fees are too limiting because you can “only” increase your fees or your hours. $350 / hr * 30 hrs/week * 50 weeks = $525,000 a year in gross revenue. That isn’t enough? If the objective of flat fee pricing is to earn more while working the same or fewer hours, then all it does is mask the increased hourly cost for the client. At what point does a lawyer have an ethical obligation to disclose to the client that overall they’d be better off paying hourly? I think there are other arguments in favor of flat fees that are more persuasive (certainty of bills for the client, avoiding large charges for brief e-mails and phone calls, etc).
I would have some concerns about a financial penalty to the client for terminating your services. Do you know if any states have issued ethics opinions about that?
I have read some who advocate flat fees say you still need to track your time to ensure you are charging enough. To me,one of the big advantages of flat fees is not keeping up with a timesheet. Any opinion on that, Kevin?
Kevin,
We are thinking of moving to the flat fee model. Would you mind sharing the “boiler plate” portion of your engagement letter?
Thanks.
I practice family and criminal law. I get into court quite often, but I don’t really “litigate” in the sense that I am reading that term here. A couple of questions:
1. How do you handle the flat fee when one of you desires to terminate the relationship prior to accomplishing the thing for which you were hired (i.e. the divorce has not been obtained)?
2. I realize that most of the folks on this blog appear to be transactional attorneys. Is there anyone who is using flat fees for a family and criminal law practice?
Plenty of the contributors (who do practice) are litigators.
We do not do any traditional hourly billing at my firm, which is a 100% litigation practice, We are getting new practice areas off the ground for representing tech startups (subscription) and estate planning (flat fees).
My understanding from working for two criminal defense lawyers is that flat fees are standard in that business. I know fewer family lawyers who are using flat fees or other alternatives, but those who do seem quite happy about it. There is more than just flat fees, too. For particularly unpredictable cases, I prefer a “menu.” $1,000 for availability, setup, and admin; $1,000 for pleadings, $2,000 for discovery, $3,000 for non-dispositive motions, etc. (Just pulling those numbers out of thin air.)
Keep your eyes open for my Alt. Billing webinar. It should be hitting the webinar archives in the near future. I address most of the concerns you raise.
I have seen flat fees pop-up more often and it is a good thing. “3-month termination fee” – how do you justify that in the view of certain professional rules?