Using Flat Fees

Carolyn Elefent posted last Friday about flat fees in a post entitled, Make More With Flat Fees. Carolyn’s post grows out of an article about a Portland, Oregon law firm that increased its revenues by a very significant margin as a result of going to a system of flat fee billing.

Carolyn says,

“I wish that the article had provided more detail on the difference in cost between flat fees and billable hours.  It’s not clear whether the flat fees enabled the firm to attract more business (thus accounting for more revenues) or whether flat fees in essence, enabled lawyers to collect more per hour (e.g., instead of charging $250 an hour for a 2 hour deposition or $500 total, lawyers would charge a flat fee of $1000 for every deposition regardless of length).  Or does the flat fee encourage lawyers to work more efficiently, so that work cycles through more quickly?”

Here are some other possibilities:with a flat fee system, the firm may simply collected more of its fees and didn’t have to write down, write off, or otherwise negotiate fees. Their revenue could have increased as a result of eliminating administrative work involved in billing and collections. This might translate into less of a need for staff and/or more time for attorneys to do work that could generate revenue. The cash flow might be more consistent, allowing the firm to use its income, rather than waiting for it.

The comments to the post are worth reading as well. Ed Poll comments that, “lawyers, generally, don’t know their costs of operation,” which leads to guessing when setting fees. He also says, “As more firms get into the process, they will realize the need to understand their business – and they will then better understand how to be more efficient in the delivery of services.”

Poll’s comment is key – lawyers need to understand their businesses better if they are going to compete in today’s marketplace, offer value to their clients, and make a good living.

For firms that are still a bit gun-shy about value billing, alternative billing, or any billing methods other than hourly billing, here’s a suggestion that may be the first step toward determining whether an alternative billing method might work for you and your firm: start keeping track of the costs involved in they cases you are currently handling. Include time and other resources spent on billing and collections, as well as the hard and soft costs involved in doing the actual legal work. Keep track of what is billed vs. what is collected, including any ‘write offs’ or ‘write downs’ done prior to the bill being sent to the client.

Get to know your business better – what is the ‘average’ for a particular kind of case? What factors make a significant difference in time, difficulty, etc.? What factors bring added (or reduced) value to your clients? How can you be more effective in delivering those legal services?

Once you’ve gotten to know your business better, you may find that offering clients a flat fee up front, based on your experience and with provisions for changes under specific circumstances, works better for both you and your clients.

I will be doing a series of posts about fees, since it’s one of the most frequent topics of discussion among lawyers running their own practices.