September 9, 2005
Flat Fee Arrangements for Law Firms
In the commercial world, we often describe a company activity as B to C or B to B - Business to Consumer or Business to Business. BC law firms, those doing business with consumers or individuals, have for the most part adopted the Fixed Fee as a standard.
As a youngster, I remember an Andy Griffith comedy recording. Andy stopped at a store advertising all the orange juice you could drink for a dime. When he asks for seconds, the proprietor explained that his first glass “was all you can drink for a dime." That has been the modern approach of law firms when it comes to fixed fees. “I will draft a will for you but if I have to make changes, they are extra."
That’s not a bad way to go. But if my experience as a consumer is at all representative, it always seems there are extras. The fee never turns out to equal the fixed fee. And how the law firm comes up with the fee for the “extras” is a mystery. In short, the fixed fee approach, like the hourly bill, seems to shift all of the risk back to the customer. That is not really what the customer is looking for. They are looking for a flat (fixed) fee that is flat and fixed. At the consumer level, the tendency is to set the fixed fee at the minimum scope level and charge extra for variations from it. That may well be driven by marketplace competition. But it invariably creates the same wedge of dissatisfaction between client and law firm that the billable hour also creates.
At the BB (business to business) level, the fixed or flat fee has a number of variations:
- First, the law firm and client can agree on a flat fee for a project or case.
- Second, the law firm and client can agree on a monthly fee for ongoing services to the client.
Today’s post will deal with the project side.
Business-to-business law firms generally only offer a fixed fee approach when the client asks for it or demands it. Yet, there is so much more to be gained if the law firm proactively proposes it. The
- For routine services where experience shows what is normally required, so the lawyer can foresee and define the included services and limit the excluded services;
- When the lawyer can estimate both the time required and the mix of standard billing rates or costs;
- For commodity services in a highly competitive mark;
- For repetitive, high-volume work;
When the lawyer is comfortable accepting the risk of unprofitability if the cost of production exceeds the fixed fee.
While the reasons given are excellent defensive advice, none of them really emphasize the opportunity of the law firm to make more money through efficiency. It is the missing reason that should be number one on the law firm’s list. In short, any time the firm has the opportunity through efficiency to lower the cost to the firm of delivering competent and satisfactory services to its client, it should consider offering a flat or fixed fee arrangement. The opportunity to make more requires the law firm to give up something. You can’t fully protect yourself from risk and at the same time retain all of the opportunity to profit from gains through efficiency. What you give the client is predictability and that means that you can’t define scope totally to your advantage. You have to shoulder risk to increase profits. Like any sound business, your job is to assess risk and manage it. You cannot transfer the risk fully to your customer except as a work-for-hire contractor. If the client shoulders all of the risk, your time is all you are worth.
Offering a fixed fee doesn’t mean sticking your finger in the wind to determine the flat fee offer. It means preparing an internal estimate of what you think is going to be required to handle the project. If there are big risk points that would materially change the scope, those can be spelled out with an agreement concerning how fees related to that big risk can be handled. But, the firm’s approach in preparing its estimate should include building in provisions for reasonable scope changes. In short, a fixed fee should satisfy the client’s objectives of predictability. Predictability is the value of a fixed fee to a client. The value is not lower cost.
Proactively proposing a fixed fee is a win/win approach. Even if the client rejects the fixed fee alternative, you have given the client an expectation level regarding the fee and if your traditional hourly billing is within that amount, the client’s satisfaction level will be higher than otherwise. If it winds up billing less than your fixed fee proposal, be sure to remind the client that they assumed the risk and luckily everything broke in their favor this time.
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Filed under Alternative Billing by Tom Collins