Through most of the past 50 years, American law firms grew bigger (both in size and thirst for profits) and the so-called “billable hour” emerged as the gold-standard for attorney pricing. The concept is simple enough; in a service-based profession, the professional’s time is a scarce commodity, so billing for time makes sense. Right?
Of course, it doesn’t take long for an educated observer to recognize a huge flaw in the system. From a client’s perspective, the motivations are all wrong. Simple economics says that anyone who is paid for his time has a built-in incentive to drag his feet. Say you’re a farmer who needs a hundred bushels of apples picked by the end of the week, and you’ve got a $1,000 budget to get it done. Think you’re more likely to succeed by paying $10/hour or paying $10/bushel? Most people would pick the latter. If you are among them, then you might be attracted to the latest fad in pricing for legal services, the “flat rate.”
Flat rates work just like they sound: the lawyer has a pricing menu for the services she provides. Need a will? That will be $500. Need to form an LLC? Easy, $600 plus expenses and it’s done. In a budget-conscious world, this has real appeal: you know up-front how much you’ll pay for legal work, and you can even shop around to find the lawyer who will give you the best price. It sounds like a great deal, but the flat-fee system has its own little secrets that may change your mind.
I’ll forgive you if you haven’t been following the latest “law practice management” blogs or subscribe to lawyer-focused magazines, but they’ve been heralding the benefits of flat-rate billing for many years. “Benefits to clients,” you ask? Try again. Lawyer publications are talking about the benefits of a flat-fee system . . . for lawyers!
The logic goes like this: When an hourly-rate lawyer wants to give herself a raise, she raises her rate by $10 to $25 a year (or more) and hopes her clients go along for the ride. And often clients do, since they’ve built a relationship and changing lawyers can be a pain. But eventually the increases hit a breaking point—the lawyer can’t keep raising her rates without starting to lose some clients. Enter the flat-rate model to open a whole new world of possibilities.
Think about it—for a brand new lawyer, the first time she handles something like an LLC formation it may take up to 10 hours to get it right. Perhaps she gets an unwitting client to pay for that time or maybe she writes off some hours, but she’s green and inefficient and she knows that she’s going to get faster. Soon enough, she can do a simple LLC formation in a few hours or less.
Let’s say she was billing $150 an hour when she got efficient enough to form an LLC in 4 hours, and she found that most clients would willingly pay $600 for that work. She’s raised her hourly rate many times since then to $275, but now she can whip off an LLC formation in about 90 minutes. That means she’s taking nearly a $200 pay cut for the same piece of work if she charges by the hour (and she thought she was giving herself a raise!). On top of that, clients are starting to balk as her rates approach $300 an hour.
The solution is simple—at least according to the lawyer publications. Use flat fees. Think of the benefits: Clients willingly paid $600 for an LLC formation, so why not offer a “sweet deal” by setting a flat fee of $500 for the work? Clients will think they’re getting a bargain, but if the lawyer can do the work in the same 90 minutes, then she’s just increased her effective hourly rate to $333. That’s a 20% gain! And this is before you consider that once she’s moved to a flat-fee model, her legal assistant can do a lot of the work under the same billing arrangement.
Moreover, by moving to flat-rate billing, she’s eliminated the pesky hours she had to list out—and justify—on her client invoices. The client has no way to tell whether he’s getting a good deal or not. $500 seems to be the market price for LLC formation, so he hopes that market forces are working to arrive at the proper price. Besides, it beats the $600 from a couple of years ago.
What’s a business owner to do? Hire an hourly-rate lawyer and you have no idea what your bill will be at the end of the month. Hire a flat-rate lawyer, and you’ve gained price certainty at the expense of accountability. Enter project-based pricing, where you get the certainty of fixed fees with the accountability of hourly work.
If project pricing sounds familiar, that’s because it’s the system that you already use with most of your vendors and maybe with your customers too. The basics are as follows.
Most legal work, particularly work for small businesses, isn’t unique. When you ask a project-based attorney to help you perform a routine task like form an LLC or register a trademark, she will ask you a series of questions up-front to determine the scope of your work. Then, drawing on experience, the attorney will organize your needs into distinct projects and offer you a firm price estimate for each piece of work.
This approach offers clients the same certainty that a flat-fee attorney provides, but once the work starts things get dramatically different. As she completes your project, the lawyer tracks her time just like an hourly rate lawyer would do. Then, at the end of the project, she compares her actual time worked with the original estimate. If the project took longer than anticipated, you’ll see a bill for the estimated amount only (accompanied by a full accounting of time worked). But if the project was completed in less time, then your bill will reflect only the actual time spent on your matter.
Read those last two sentences again—the project-price lawyer is offering clients a win-win. If there is a windfall either way, the client reaps the benefit. The client knows the maximum amount he will spend on a legal project, and chances are good that he’ll actually pay less than that amount.
So what’s in it for the lawyer? There’s nothing tricky here. Smart lawyers recognize that offering clients a superior value is simply a better way to acquire new clients and keep them happy. Happy clients mean good business in any profession.
Of course there is risk for the lawyer that she’ll need to write-off some time when her estimate is too low, or that she won’t have another piece of work to fill her day if she finishes a project early. But those are risks that are appropriately assumed by the lawyer and are fully within the lawyer’s control. By accepting responsibility for them rather than forcing those risks on her clients, she knows those clients are likely to remain loyal and refer new business her way.
So, if you’ve been putting off hiring a lawyer because you’re afraid that the hourly fees will spiral out of control or because you’re not sure what’s going on behind the curtain on your flat-rate project, ask around. A growing number of attorneys are using project pricing on a variety of legal matters. And if you already have a lawyer and you’re unsatisfied with your fees, ask your attorney why he or she doesn’t use project pricing. The answer should reveal a lot about how much your business is valued.
You have the right to demand high quality legal services at a price that you control. Your lawyer should be a benefit to your organization, not a burden.