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?
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?
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.