Most of the legal industry is still firmly in the grip of time. With a few exceptions, lawyers track time, bill time, and judge performance based on time.

A vocal minority of lawyers — myself included — think flat fees offer some compelling advantages for lawyers and clients. But flat fees are not necessarily best for every matter, and many lawyers simply dismiss them out of hand. Perhaps that is why flat fees don’t seem to be catching on.

In this Pro/Con, I will take a look at both sides of flat fees.

Pro

It should be pretty obvious that tying compensation to time discourages efficiency. When billing by the hour, the longer something takes, the more you make. Stories of lawyers padding time are pervasive, and it is true that hourly billing mis-aligns the interests of attorney and client.

Flat fees, on the other hand, are fairly neutral. If you quote a fee and the client agrees, your only incentive is to deliver the expected service, document, result, etc. as efficiently as possible. Although I have never intentionally taken the long route to a result while billing by the hour, I have definitely come up with efficient strategies I might have overlooked if I did not have a flat fee as an incentive to get creative. When you do this, you can lower the cost to your client, reap the benefits of your increased efficiency, or both.

Besides, time is not often a good measure of value. This should be obvious especially for often-re-used documents like purchase agreements, which lawyers may be able to provide without putting in much time, but which probably have greater value to the client than .2 hours. Similarly, if you are creating a new document that you know you will be able to re-use, you can charge your client less, while making up the difference when future clients pay the same amount.

Lawyers and clients alike can appreciate the benefit of certainty — knowing what something will cost. I think good lawyers give a degree of certainty even with hourly billing by making estimates and keeping the client advised of any changes during the representation, but estimates don’t deliver the same certainty as flat fees. (Some lawyers attempt to deliver certainty by capping fees, which is just wrong-headed, since it places all the risk on the lawyer, and none on the client.)

Finally, for some lawyers, it is advantage enough not to have to track time any more.

Con

One of the largest obstacles to the adoption of flat fees is that they require lawyers to re-think the way they measure value and performance. This is especially difficult where hourly billing is deeply entrenched. Consider firms where billables are used to measure performance, set year-end bonuses, adjust salary, and determine advancement. Those firms cannot switch to flat fees without restructuring their entire compensation model, which they may not be willing to do.

Part of the difficulty moving away from hourly billing is the concern for cases that “blow up” and take much more time or work than anticipated when setting the fee. This is a real possibility, although the risks can be mitigated by carefully drafting the scope of representation, breaking the representation into smaller chunks, and so on. Even so, it is possible for a case to get out of hand. Family lawyers are often the first to express this concern, presumably because family matters have a tendency to get out of hand.

Using flat fees requires a carefully-drafted description of the work to be performed. For simple transactional tasks, this is usually easy (“draft residential lease”), but for litigation, this can get complicated, especially if you are trying to break the representation into smaller chunks or use a fee “menu.” (Also, not all courts allow this sort of “unbundling.” Bankruptcy courts, for example, are unlikely to allow attorneys to handle the filing but bail out if an adversary proceeding is filed.)

In short, switching to flat fees introduces obstacles. Some require a re-wiring of the way lawyers and law firms think about compensation. Others involve shifting the risk of a representation — and anticipating future shifts in that risk as the representation evolves.

Should you implement flat fees?

Often, those discussing flat fees vs. hourly billing treat the issue and black and white, either-or. In reality, flat fees are simply another way to bill. Sometimes, hourly billing makes the most sense, yet many lawyers insist on fitting every representation into an hourly fee structure. Sometimes, flat fees make the most sense, yet some lawyers insist on applying flat fees to every representation.

I think it makes sense to look at flat fees as just another tool to be used when setting fees. For example, it might make sense to charge a flat fee for a contract you can re-use, but an hourly fee for phone calls related to ongoing representation. In litigation, you might charge a flat fee for an appearance, but an hourly fee for researching and writing a novel issue.

The best use of flat fees, then, is a balanced, holistic approach to setting fees. That means using hourly billing, flat fees, contingent fees, and hybrid arrangements to suit each matter best. A lawyer with a larger toolkit is better able to distribute the financial risk of a representation equitable between attorney and client.

(photo: http://www.flickr.com/photos/telstar/1349810312/)