In recent years law firm pricing has migrated away from hourly rates to alternatives that include fixed or flat fees, percentage and contingency fees. This movement is driven by law firms as clients increase their efforts to obtain hourly rate discounts and apply greater scrutiny to bills, questioning both hours billed and staffing (numbers and levels of lawyers). In this environment, hourly billers face ever-increasing pressures that actually penalize firms for efficiency. Although this article will focus on one example of alternative pricing—fixed or flat fees—the principles apply to contingent, percentage and other alternatives, as well.
Increasingly more popular in recent years, the fixed or flat fee can create a win/win situation for the client and the law firm. Clients enjoy the certainty of the total fee and the ability to compare law firms on the more meaningful basis of their total cost, as compared to only one element of that total cost (hourly rate). The law firm can budget its revenues more accurately and can even increase its profits through improved efficiency, process reengineering, cost reduction and substituting capital (technology) for labor. Cash flow can be improved by requiring payment up front or on a schedule.
Law firms frequently resist flat fee pricing on the basis that every case is unique and therefore fees can’t be estimated, let alone set, prospectively. Admittedly that is the case, sometimes, even most times. But that is not a reason to reject pricing on a flat fee basis, so long as the firm is protected against the matter that unexpectedly requires a major commitment of resources.
There are two methods of setting flat legal fees—prospective and retrospective. Both may—and should— be used, together.
The prospective method involves matter budgeting based on minimum hourly rates set by the rate formula outlined earlier in this article, adjusted to reflect market strategy and estimates of time involved in each step or phase of the matter.
The retrospective method involves identification of prior matters similar to the instant engagement, resurrecting past billing records to determine the range of resources required to handle similar matters, and setting the fee in relation to that experience. Client fee agreements can be negotiated that provide protection against “the case from hell” which consumes unexpected levels of time and expense.
It is not necessary for every flat fee (or other pricing alternative) to meet or exceed what would have been the hourly fee or even to be profitable. What does matter, however, is for flat fees in the aggregate to be sufficiently profitable. That will occur if matter management concentrates on efficiency, early resolution or disposition of cases and matters, and delegation to the lowest competent level.
Law firm management should examine its pricing policies in terms of economics (the rate formula), price positioning in its legal market, strategic alignment with firm goals, client willingness and ability to pay, and commitment to alternative pricing. All firms should conduct this evaluation, and should do so sooner rather than later.