Friday Five Profitability Tips
Take the Guesswork Out of Flat Fees
A flat fee is simply a prearranged, agreed-on total fee that is paid up-front, or at least a portion of it is, to complete all work required for a particular matter. To determine if that fee is earned upon receipt or should be treated as a retainer, you need to check with your own jurisdiction.
- Flat fees eliminate surprises — at least for the client.
- Since most flat fees are paid up-front, you have no collection hassles – you simply don’t start work until you get paid.
- The tolerance level for purchasing legal services is raised, meaning access to more clients.
- It can be hard to calculate the total fee beforehand.
- If additional hours are incurred, those may be passed on to the lawyer.
- There’s a potential for reduced profit margins or even losses.
Hourly billing actually did not become of age in the legal profession until the 1950s, after a series of reports showed that firms that charged by the hour were more profitable than those that charged on the basis of the service sold. Those lawyers who kept accurate time records and billed by the hour made more money. Go figure.
Here we are, 60 years later, trying to figure out if flat fees are — or can be — more profitable than the hourly billing system. The focus is shifting away from hours and cost toward value, transparency and improved collaboration between lawyer and client. With so many inherent problems with hourly billing, a good question to ask is: Why continue with it when there are other pricing options — like flat fees?
Questions to Guide You Through Flat-Fee Billing
While flat fees are certainly getting a lot of attention, hourly is still the preferred method of billing. But with the rise of the entrepreneur lawyer, legal technology and a more sophisticated legal consumer, flat fees may become the new normal for legal billing in the near future. If you are ready to try flat-fee billing, here are some questions to consider.
1. Does your practice area lends itself to flat-fee billing? The flat-fee model might not be a perfect fit for everyone, but it is suitable for numerous areas of practice. A number of forward-thinking lawyers are setting up flat-fee billing for litigation-based practice areas. But if you are new at it, start with areas that are low risk, where you have a few cases under your belt and some historical data to help you arrive at your fee.
It is important that you know, or can at least estimate, the average amount of time it takes you to complete the task, or series of tasks. If you are not already tracking time, do so for at least a month, or on a few cases, so you have an accurate measure of the time and effort it takes to complete the tasks involved in the matter. This includes all effort and time: emails sent, client calls and late-night legal research. Also, be sure to track expenses if you are building them into the fee. Really think about anything you may incur while delivering a particular service. Filing fees, court costs, parking at the courthouse, or record requests. Planning for these now allows you to present a very clear picture to your client, and avoid invoice surprises later.
2. Have you clearly defined expectations, fees and scope? Consider creating a fee agreement specific to flat-fee engagements, including exactly when you expect payment. Also consider setting up staged flat fees with defined tasks for each stage. For example:
- Investigation of case: $1,000
- Pre-trial and discovery: $2,500
- Trial: $4,000
Even if you are getting your fee up-front, don’t collect the flat fee without producing an invoice. Going forward, a monthly invoice is an opportunity for you to reiterate the fee agreement and communicate what you will be doing and how much it will cost. It is also a way to list expected expenses and, again, clarify who is paying for these. Remember, one inherent benefit of producing a monthly invoice is that it helps keep the clients up to date on the work being done on their matter.
3. Have you thought about overhead? Overhead is a commonly overlooked set of expenses — and, quite frankly, it is difficult to define if you are not up to date on your accounting and financial reports. At any given time, you should know the monthly costs to operate your business. To help cushion the blurry area of setting flat fees, be sure to account for everything — gas, cellphone, rent, marketing, insurance, home Internet, credit card interest, the coffee you had this morning. Absolutely everything. A rough and simple way to do this is to take your average monthly business expenses (expenses to keep the business running) over a six-month period. Find out how many new cases you average per month over the same period. Once you have this number, figure out how you can build it into your flat-fee pricing model.
Average Monthly Business Expenses/Average Number of New Cases per Month = Overhead Cost per Case
4. How many flat-fee cases do you need per month to cover expenses and pay yourself? After question No. 3, you should be in the mindset to carefully review your numbers and measure your margins. Next you want to multiply the number of cases you estimate you will deliver in a given month by the lowest price you’ve determined you need to charge, minus expenses and overhead. Estimating the number of cases, look back a few years and get a good handle on reality — not what you are hoping to get. The final number provides projected revenue for the month. Are you comfortable with that number? If not, build a spreadsheet with this data and play around with the number.
Lastly, the way you improve your margin on flat-fee cases is to look at ways to shorten the time spent completing the cases. Welcome to the world of project management skills and technology! Consider document automation, integrated intake forms, or using less-expensive resources than you on certain tasks.
5. Are your clients asking for flat-fee options? I guess this question falls into the “Captain Obvious” category. If your practice is not attracting clients that ask for flat-fee billing and you are profitable, why change what is working for you? On the other hand, maybe you could be more profitable if you throw some flat-fee cases into the mix. Change is hard. But looking five years ahead, what if flat fees become the new norm for selling and delivering legal services? You want to be on this train and not left behind at the station.
In the end, flat fees are just another way to bill. Don’t try to fit every case into a flat-fee structure. But if the shoe looks like it fits, give it a try.
Peggy Gruenke is Chief Operating Officer at Hengehold Capital Management, as well as a law firm management specialist in operations, online marketing, technology and accounting at LegalBizSuccess. Peggy is active in the ABA GP Solo Division, a frequent ABA TECHSHOW speaker and she writes on productivity and profitability for Attorney at Work. Read more or her articles here.