Alternative Billing That is Friendly for Lawyers and Clients

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This article by Ed Finkel was originally published in the October issue of the Illinois Bar Journal. It is republished here with permission. Lawyerist readers licensed to practice in Illinois can sign up by November 28 to get a free ISBA membership through June 2015, including 15 hours of free online CLE and free Fastcase.

Would you buy a refrigerator from a salesman who told you, “We don’t have a fixed price, and you won’t know what the price is until it’s installed in your house, and you’re legally liable to pay for it.”

Firms that serve corporate clients are no strangers to flat-fee and other non-hourly billing strategies. But more consumer and small business attorneys are finding that client-friendly pricing can be lawyer-friendly as well.

Would you buy a refrigerator from a salesman who told you, “We don’t have a fixed price, and you won’t know what the price is until it’s installed in your house, and you’re legally liable to pay for it.”

Perhaps that sounds ridiculous at first blush. But James Calloway, director of the Management Assistance Program at the Oklahoma Bar Association, draws an analogy to the way legal services are typically priced. “That [scenario] is what, to many clients, the hourly fee sounds like,” says Calloway, co-author of Winning Alternatives to the Billable Hour: Strategies that Work, published by the American Bar Association.

Among the shakeups in the legal market in the wake of the Great Recession has been a trend toward corporate in-house counsel demanding more value from their law firms. The Association of Corporate Counsel in 2012 even began a “Value Challenge” that tracks and rewards firms who deliver the biggest bang for the buck. Alongside that new push have been growing requests for alternatives to the hourly billing method that has been the gold standard in the legal world for decades.

And those requests are not limited to major corporations — small businesses and even consumers want to know upfront how much a given matter will cost them, at least within a modest dollar range. While flat fee and other non-hourly arrangements have been commonplace in cut-and-dried legal areas like tax and estate planning, they’re becoming more common across the practice areas of “Main Street” firms and attorneys.

Hourly pricing creates too much of a black box to suit most consumers …

“Law firms have to behave differently from the way they have traditionally,” Calloway says. “The business community, spurred by the events of 2008-2009, is trying to hold the line on outside counsel fees. For people who are living paycheck-to-paycheck – or middle-class people who need a lawyer even though it’s challenging to afford one – there’s an attraction to giving them a fixed fee they can count on.”

Hourly pricing creates too much of a black box to suit most consumers, says Patrick Lamb of Valorem Law Group in Chicago, the author of the recently released Alternative Fees for Litigators and their Clients (American Bar Association, 2014). “Even if you quote by the hour, how many hours it’s going to take is always an unknown,” he says. “If you buy a house, your broker’s fee is fixed, and in those cases, most of the time, the lawyer’s fee is fixed. But as you start getting into less pure commodity, form-filling-out kind of work, a lot fewer people are willing to provide fixed pricing.”

What Are Your Costs?

“Abe Lincoln certainly didn’t run around filling out time sheets to the tenth of an hour.”

Calloway notes that it’s not entirely new for “Main Street” attorneys to work on a flat fee — misdemeanors, bankruptcies, and estate planning have long been done that way — and that the concept of hourly billing is a relatively recent phenomenon in the legal profession.

“Abe Lincoln certainly didn’t run around filling out time sheets to the tenth of an hour,” he says. “In the olden days, lawyers would send a bill for an amount, and at some point some hypothetical client asked, ‘You did this one time and it was this amount, and now it was that amount. What changed?’ And the answer was, ‘It was more complicated, and it took more time.'”

That led to the rise of hourly billing, but the combination of economic stresses, and perhaps the declining reputation of attorneys over the years, has begun to swing the pendulum in the other direction, Calloway says. “Now, we’re in this time where people are conditioned to all the negative rhetoric about how expensive lawyers are, and they’re searching for certainty,” he says. “That doesn’t necessarily mean doing everything on a flat fee. It may be more like a road map: Here’s the base fee. If these three events occur, or you want to add other work, here’s what those fees would be.’ It’s a lot more objective.”

Lamb says that the more standard and frequent the service, the better it lends itself to alternative billing. “For example, creating an employment contract,” he says. “Obviously, it’s going to be tweaked, but the guts of the document will be the same or similar in almost every circumstance. So you create a fixed price.”

Attorneys at 60-lawyer Levenfeld Pearlstein in Chicago probably meet to talk about pricing at least once a month, and “I’m sure it’s not just our firm,” says partner Patricia A. O’Connor, who heads the firm’s practice representing community associations. Until recently, she says, “We had done the straight law firm model, the billable hour. That’s how we charged the client, and we never did a close examination of what it truly costs us to get the work out the door. It was very difficult to have discussions about implementing alternative pricing because we didn’t have a hard and fast idea of costs.”

Once Levenfeld took that step, the firm found it easier to broach alternative fee arrangements — or to respond when clients asked about them, O’Connor says. “Whenever the client raises it, of course you have no choice,” she says. “But we certainly are prepared, when we go to a client interview, to talk about what kind of alternate fee arrangements we can offer, and what [information] we would need to determine what we could offer.”

Creating or revising governing documents for community associations falls into the category of form-based work that naturally lends itself to alternative pricing, O’Connor says. “My partner and I have been doing this for 20 years. We’ve definitely built a library of form-based documents.… No matter who your client is, or what their budget is, they’re not expecting you to reinvent the wheel. People are coming to us because we know association law.”

Dealing with Contingencies

The main concern with flat-fee billing is that “if you’re skimping on the work, the result might not be as good.”

To satisfy consumers’ concerns about the “black box,” Lamb mentions two possibilities: a flat fee, or a “not to exceed” price. There are pros and cons to each. The problem with the latter is that “the incentive for the lawyer is to spend as much time, to get as close to that [not-to-exceed amount], without going over,” he says. “Whereas if you quote a certain [dollar] number, the incentive is to be efficient.”

The main concern with flat-fee billing is that “if you’re skimping on the work, the result might not be as good,” Lamb says. But Valorem has addressed that by allowing clients to hold back 20 percent of the fee until the end, to be paid only if they are satisfied. He acknowledges, “I can see [attorneys] not wanting to do that, particularly with individuals who are not regular consumers of legal services, because the incentive [for the one-time client] is to not give the remaining money.”

Setting fixed fees requires attorneys to consider various contingencies that could come up with a given matter and perhaps offer a fixed fee plus other fixed amounts if those contingencies come to pass, Calloway says. But first you have to know what those contingencies are, which attorneys sometimes have to learn the hard way, he says. “If there’s an unforeseen contingency that requires additional work and makes the job unprofitable, you work for the experience and know to include the contingency the next time,” he says.

Lamb agrees that attorneys and firms need to break down the components of the work and create fixed prices that work out in the long run. “You pick a [dollar] number that, over time, the highs and lows work out for you,” he says. “We want to avoid a situation where we think a matter is a $100,000 matter, and the client is thinking it’s a $10,000 matter. It’s just a way of getting people into the same general area and developing an understanding.”

That’s more difficult with what Lamb terms “a really complex, exotic kind of thing, where you don’t know what kinds of resources you’re going to have to apply,” he says. “The answer is to say, ‘For the next 30 days, here’s what we’re going to do, and here’s what it’s going to cost.’ You can chunk it out by time, [or] you can chunk it out by issue.”

The whole key is for clients to be making informed choices about how they want to spend their money …

In thinking through how to “chunk it out,” attorneys and firms should consider what the natural decision points might be in a given negotiation or litigation, Lamb says. “You want an earlier go/no-go decision point,” he says. So you tell a client: “We’ll do this much work, and it will cost you that amount. At that point, we will be able to say more precisely what the rest of the matter, or the next phase, will cost. You can factor that into your decision about whether your want to proceed or not proceed.”

He adds, “The whole key is for clients to be making informed choices about how they want to spend their money; so they know the scope and direction before incurring the cost, rather than being told, ‘We did these things, and here’s what it costs,’ [with] them thinking, ‘I didn’t need all these things.'”

‘Change Orders’ for Lawyers

“[I]f it turns out that the smoking gun would have been overturned on deposition 12, it’s not malpractice but a bad business decision.”

Lawyers need to guard against their own tendency to leave no stone unturned and give critical consideration to how much work is absolutely necessary in a given matter, with the caveat that they must make the tradeoffs clear upfront to the client, Calloway says.

“At some point, a lawyer should be able to sit down with corporate counsel and say, ‘We can take 20 depositions on this matter but you probably really only need to take eight. That would save you on costs.’ And then ask the corporate counsel, ‘Does that sound good to you?’ And then if it turns out that the smoking gun would have been overturned on deposition 12, it’s not malpractice but a bad business decision,” he says.

Attorneys also will need to guard against what Calloway terms “mission creep,” and he suggests using a technique favored by home contractors for decades. “It’s very important to have a clear fee arrangement, outlining in painful detail what you will do and aren’t going to do for this flat fee,” he says. “And then I say, take a note from the construction industry. If you had somebody building your house and suddenly you decided you wanted granite countertops, would the contractor say, ‘I’m going to throw them in,’ or would he bring you a change order? Lawyers need to be familiar with that idea, of a change order, [and say], ‘We would be happy to do that [added service] for this additional fee.'”

Lamb agrees that it’s essential to clearly define the scope of work an attorney or firm is taking on in a given matter. “You don’t want [a request that says], ‘Can you do this, at the same time?’ We didn’t price for that,” he says. “We spend an awful lot of time saying, ‘Here’s the list of what we will do. If it’s not included in this, it’s not covered by that price. Then you can decide whether you want us to add it to the fee, or not.”

The Time-saving Power of Technology

If attorneys avail themselves of the advances in computer technology in the past decade or two, they can more easily come up with flat fees or other alternative billing arrangements – and continue to make a profit, Calloway says. On the flip side, attorneys and firms need to realize that if they stick with hourly rates as technology advances and more can be done in less time, it could cost them, he says.

“The whole point of technology is to do things faster and more easily,” he says. “It takes a substantial investment to get there. A lawyer who appropriately employs today’s technology to serve his or her clients, to make the office run more efficiently, is going to run into a wall: I invest money, I invest time, I invest in training, I incur future liability when I update the product. And if the net effect is to take something I used to bill clients 3½ hours for, and I now bill 45 minutes, I haven’t made a good business decision, even if I have done good for my clients.”

“The other thing is, you’ll be surprised at your ability to take shortcuts by reusing work.”

Enter flat fees. “The point is, if this project or service costs, in the hourly world, $3,000 [before you implement new technology], it may make sense for you to set a flat fee of $1,750, or $1,500, and then employ tools like document assembly [software],” Calloway says. “The client gets at least the same quality of legal document, and one can argue that a well-designed assembly program can produce a superior product. And if you charge a fixed fee, the lawyer has made a good business decision. That investment means that you’re charging $1,500 for a 45-minute item.”

Levenfeld Pearlstein has made heavy use of technology in drilling down to figure out what costs the firm incurs in creating documents – and thus, in figuring out what sorts of flat rates would work for clients and still be profitable, O’Connor says.

“Over the last five years, we have completely revamped everything we’ve done and made everything far more automated and, to the extent we could, far more procedural,” she says, using technology like HotDocs and ProLaw. “We had no clue how the clients would embrace this. We originally thought, this is going to be for our benefit because it’s going to make us more efficient. Maybe the clients won’t even see the behind-the-scenes technology and [resulting] efficiencies.”

But clients have embraced Levenfeld’s moves, such as the new extranet through which they can gain updates on the progattorneys’ time. “It frees up our attorneys and our paralegals because they are not getting calls and e-mails and correspondence asking for updates,” O’Connor says. “I have not gone to a client interview probably in the last two years where the question hasn’t been asked, ‘What do you have in terms of technology to make it easier for us to control our costs?’ It’s definitely something the clients are asking and the clients are aware of.”

At the end of the day, Lamb sees two reasons for Main Street attorneys to consider flat fee or other alternative billing methods. “One thing is, it allows you to be paid up front,” he says.

“The other thing is, you’ll be surprised at your ability to take shortcuts by reusing work. You’ll become focused on that sort of thing. You’ll see efficiencies in your own operations and practice. You’ll rely on checklists to control quality. It’s a way of being able, perhaps, for some people to do more than they’re presently doing – and therefore earn more.”

Ed Finkel is a writer, editor and Web content manager with more than 20 years of professional experience. His areas of concentration include education/youth, health/medical, legal, retail business and urban community development.

Featured image: “Decision” from Shutterstock.

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  • I think you forgot about one major benefit – the burden it lifts off of attorneys to be tied to a clock for all of their work. This also can actually improve the value your clients see in you, believe it or not. Instead of tying your value to your time, tie it to your results (or effort to get results). Using an analogy different than the refrigerator but one we’ve all heard of: people don’t buy drills, they buy holes. Most people don’t care how you do what you do, they just care that it gets done.

    And, that brings up one more point that I think this article misses (the tone of this article implies in some ways that there is risk to flat fee billing): you can make a lot more money in a lot less time with value based billing. Okay, I’ll point out the elephant in the room here – yes, that means you won’t need 100 lawyers and 100 staff anymore. You’ll be able to do the work you need with a fraction of that. And all that means is you’ll be able to increase your profits.

    I encourage everyone to move to value based billing. Think about what the client is getting and charge accordingly. Once you try it, you’ll never go back.

    This is getting long now, but I’ll leave you with a story. There was a broken down cruise ship. It had engine troubles. The crew had tried everything they could think of to get it to work. They called in an expert. He took a look and said “I can fix it, but it’s going to cost you $10,000.” Knowing they were losing thousands of dollars a day by not running, they readily agreed to the price. The expert grabbed a hammer, felt around on the engine a bit, and hit the engine. It immediately started back up. The captain of the ship was happy but inquired about the high price. “It’s going to cost me $10,000 for you to hit the engine one time?” he asked. “It cost you $50 for the strike,” the expert said. “Knowing where to hit cost $9950.”

  • As Chris points out, most articles (and most lawyers) are focused on the risk side of the equation for value billing. Often I find that’s because lawyers who have tried it have pretty much come up with the fee by estimating billable hours, and when the estimate proves wrong, they feel like they lost.

    The first mindset shift is to realize that getting off the billable hour isn’t just a fee change, it’s a business model change. One that can dramatically improve your practice if you think through how to create packages that are both lucrative to you, and a huge value to the client (they are not mutually exclusive).

    I wrote a summary of how to do this on my blog: http://blog.practicealchemy.com/grow-your-practice-flat-fee-formula/