Thursday, April 20, 2006

The Advantages of Flat Rate Billing

In my last post, I made the following unflattering (but true) statement about doctors and lawyers:
[T]here are only two professions in the western world in which the customer is told, "I can help you, but I don't know how long it will take, and I don't know how much it will cost." Those two professions, of course, are law and medicine. Possibly accountancy too. Try running an ordinary business on that model and you will be out on the street in no time. Yet doctors and lawyers get away with it--although increasingly there are both time and cost pressures, and in the field of law there is a long overdue movement to flat rate billing.

A commentator ("mrspkr") asked the following excellent question, and I thought the answer deserved a separate post. Specifically, he asked:

How would flat rate billing work in a field such as civil litigation? I mean, I can see it for certain services such as patent work, uncontested divorces, adjustments of child support payments, drafting wills, probating uncontested wills, etc.; but just can't see how feasible such a system would be for any work of an adversarial nature.

Mrspkr, by the way, has his own blog called "MrSpkr's random thoughts . . ." So here is my answer.

The answer is that depending on your practice and how specialized it is, flat rate billing may be possible, even in civil litigation.

It's hard, yes, and perhaps riskier than billing by the hour, but the potential payoff may be greater. Perhaps I can best explain my answer by breaking it down into a series of points.

First, flat rate billing is (and should be) fairly prevalent in some smaller-scale practice areas, like wills and estates, real estate closings, etc. But the same principles can be applied to more complex matters.

Second, a complex matter is a complex matter, regardless of whether it is litigation or transactional work. A big hairy corporate deal is full of unanticipated twists and emergencies, much like a big litigation project.

Third, there are firms out there I know of that flat rate some of their big transactional projects. And not tiny projects, mind you: big stuff. My old firm used to do it. Sometimes we took a loss. Not really a loss; rather, it's just that we could have done better billing by the hour. But sometimes we did better through flat rate billing.

Fourth, the key to any flat rate scheme is that you must have the ability to estimate how much time you will be spending on the project and what that means in terms of billables. If you or your firm are good at particular kinds of cases or transactions, for example--if you are, say, specialists in a particular area--then that improves your ability to estimate costs and fees, and thus to use flat rate billing.

Fifth, being able to estimate how much time you will spend on a project means you have to go through the exercise of identifying all the phases of the project and estimating what they will entail. That's a very useful exercise: instead of just saying to the client, "Sure, we can help you, let's get started," you have to figure out up front what you expect to be doing in all phases of the project and what you think it will cost the client for each phase. Your estimate will not be perfect, but it will give everyone a better idea going in of what the project involves.

Sixth--and following up on the previous point--for many larger projects you may not be able to give an exact flat rate, but rather a range. That's not flat rate billing, precisely speaking, but it is helpful to the client.

Seventh--and another follow-up to point to #5 above--if you cannot give a flat rate for the whole project, you still could offer to flat rate bill certain components of the project. In a civil litigation case, for example, you might be able to give separate flat rates for the original complaint, amended complaints, reponses, various motions, depositions, etc. After all, in trying to come up with an overall estimate of cost for the project, you already should have identified likely components or phases of the project and tried to estimate their costs. So the client can be told what the charge will be for each phase or component, even if the exact composition of phases or components cannot be determined in advance. The same can be done for transactional projects. It's sort of like buying a car and choosing optional upgrades--you price them individually or in groups.

Eighth, in all of the above points, the overarching theme is that the lawyer who uses flat rate billing is trying to give his client some sort of fee predictability. Companies and individuals like to have known and quantifiable costs, instead of running a tab. Even a price sheet for possible phases of a project is better than the sales pitch, "Hi, my billing rate is $300 an hour. Hire me!"

Ninth, if you are really good at estimating flat fees, you can build in a premium for yourself: the client pays a bit more, in return for predictability of fees. Enough said.

Tenth, when you offer fee predictability, you tend to look like you know what you are doing versus the lawyer who refuses to use any flat fees. Clients are increasingly unimpressed, in my experience, with lawyers who simply want to do the work without engaging in some sort of cost analysis and strategizing about time and cost. After all, that is what companies do all the time in their businesses.

Eleventh, at least in the transactional world, flat fee billing is already widespread on a de facto basis. In nearly all large (transactional and regulatory) legal projects I was involved with in my later years in practice, the client would ask us for an estimate. In some cases we billed by fixed fee, in some we used a fee cap. And in some we only gave a nonbinding estimate--but woe to the lawyer who gives an estimate and then does not stay at least somewhat close to it without justifying the departure. And note that when we did use a flat fee, we carefully defined the scope of the work, in order to make clear what was and what was not covered. Again, the key is strategizing about what work is needed for the project, and what isn't.

* * * *

So what does all of this mean? It means that lawyers today need to act more like business people, clearly identify where they add value, and assign an actual dollar amount to that value added. Flat fee billing and its various permutations (upward cap, estimate, etc.) are a way to do that. I think you may see more of it in the litigation field in the near future.

These billing trends also, I think, tend to commoditize the practice of law, since on larger projects you break each project down into its sub-parts to try and price it out. That is helpful for making the lawyer think about her value added at each stage of a large project. But it's also helpful for the client too, since the client can pick and choose what you (the lawyer) do versus what the client does inhouse or farms out to someone else who can do it cheaper.

After all, as a lawyer you are supposed to be adding value, right? So tell the client what you propose to do, how much it will cost, and how it adds value. It's a good sales/promotional strategy. It keeps you honest, and it helps keep your clients satisfied, because they get a better sense of what they are getting for their money. And a satisfied client is more likely to be a more loyal client.


Mark said...

Doesn't the fact that most litigation firms are in ongoing relationships with their clients regulate this to some extent? If a firm has a reputation for overbilling for the same product provided at a lower cost at other firms, clients will leave, and the firm won't get much new business. Firms are well aware of this, which is why they often charge their clients less than the hours they actually work in order to keep them happy. It seems to me that this has a very similar effect to flat rate billing, but still addresses the unavoidable fact that sometimes the cost of litigation can't be predicted.

Gregory W. Bowman said...

Mark, that is an excellent point. The long-term client relationship does affect what firms bill, and I have seen many bills reduced to keep the client happy. And often this reduction happens BEFORE the bill goes to the client, not after complaints are received.

That being said, not all clients are existing clients. Firms constantly seek new clients--and often that means luring them away from other firms. And how do largely similar firms distinguish between themselves in the quest for clients? Billing practices are one way.

The final, bottom line difference between billing by the hour and flat rate billing may not be significant (and in fact if a firm is doing it right it should not be much different at all), but in some circumstances it might give you an advantage.