Alternative Fees: There’s More Than One Way to Charge a Client
Alternative Fees: There’s More Than One Way to Charge a Client
Apr 28 2011, 02:17 PM
Joined: 17-July 09
Member No.: 125
The debate continues over the future of the billable hour, but there is little disagreement that billable hour alternatives are here to stay. For example, a 2010 survey of 800 law firms with 50-plus lawyers by the Altman Weil consulting firm showed that more than 75% of the firms see non-hourly billing as a permanent trend, and nearly 95% of the firms offered some alternative fee arrangements – primarily at their clients’ requests. However, that still leaves open the issue how to replace hourly rates with a better billing method.
Requirements for Success
If the lawyer uses alternatives like value billing or flat/fixed fees, and does not help clients understand why, clients are likely to misunderstand what the lawyer did and how it helped them. Fee controversies are too often the result. In any alternative billing method, the skills of a lawyer and the way in which services are marketed and delivered to the client must coincide with what the client wants and needs to have.
A law firm’s commitment to use alternative fees requires three basic requirements for success:
One of the simplest alternative billing approaches is a flat fee stipulated in the engagement letter, before the assignment even begins. It will not vary no matter how much time the lawyer expends, or what the result. There are two ways for a law firm to address creating a flat or fixed billing arrangement. The firm can assess its revenue in light of its existing cost, then determine if those costs must be reduced in order to arrive at a fee acceptable to the client and still make a profit. Or it can assess costs and determine how much revenue is needed to cover them and make a profit, setting a fee adequate for both. In either approach the bottom line depends on selling enough legal services to cover costs and generate a profit.
Cost and revenue are the two sides of the flat fee coin. Consider the example of a contract attorney, doing work for a large law firm, who proposed a new, higher fee schedule that included a volume discount based on a scaled number of hours per month. The client firm’s managing partner asked that the number of hours and the discount to be applied be reviewed retroactively at the end of each three months cycle. A volume discount at a flat fee should be based on a prospective, rather than a retrospective, guarantee of work. A retrospective review fails to offer any security and makes planning impossible. Without the prospective assurance of volume, the lawyer gains little, and the client has every advantage. A firm should consider such a discount if, and only if, the client is prepared to guarantee a minimum amount of work per month for a minimum period of time, such as six or nine months.
By contrast, in transactional work and more traditional litigation work, alternatives are created when both client and lawyer work together to analyze the facts, establish objectives and determine the strategy to reach those objectives. This includes the fee and the method of determining the fee other than by the time expended on the matters. These approaches are still uncommon, despite the great amount of conversation about them. The unifying principle is that the lawyer assumes some degree of risk for the degree of success in the engagement.
Such arrangements require different alternative fee provisions for different results. One way to deal with this issue is to use a success pool in conjunction with an hourly rate. Firm and client jointly determine what percentage of the hourly rate goes into the success pool. If the firm does not achieve success based on the previously determined definition, it does not get the bonus from the success pool. If the result is as budgeted, the firm gets the success pool in full. And if the firm achieves the result for 20% less than reasonably expected, then a percentage bonus above that which is in the success bonus pool would be paid.
The Rules of Professional Conduct prohibit clients and outside lawyers sharing a business arrangement. However, in this type of alternative billing philosophy, lawyers don’t become partners in the clients’ business – they become partners in the resolution of each specific matter. The sharing of the risk is based on the outcome. And that requires lawyer and client setting a mutual success goal at the start. The risk for the lawyer is in not meeting the goal; the reward is in meeting or even exceeding it. There is no universal best billing alternative to achieve this. Client preferences and each firm’s operations differ, and each project or case has a multitude of factors that could accommodate other billing options. Any fee arrangement can be justified if the firm knows the cost structure behind it, and if the client accepts the value that the fee represents.
Check out Ed on YouTube
Follow Ed on Twitter
Join the LawBiz Forum
Become a fan of Ed's on Facebook
8 Steps to Greater Profitability The Lawyer's Path to Prosperity
Are you frustrated with how your law firm or practice is running? Are you looking for ways to jump-start your business? Do you want to make the dream of starting your own successful firm a reality?
This 8-CD set provides the most complete audio guide to law practice management available. From crafting a business plan to selling your practice for maximum value, Ed will lead you from start to finish through the eight most crucial steps to law firm success. Earn the living you deserve and find fulfillment throughout your career - embark on the path to success today!
Special New Release Price: $149 (until March 31)
Regular Price: $199
or Order Online at: lawbiz.com
Ed's Latest Book, Published by WEST ®
Growing Your Law Practice in Tough Times
By Edward Poll
Following the worst economic crisis since the Great Depression, and facing a sea change in clients' demands and expectations, law firms must respond and adapt quickly and effectively. Law firms must choose the kind of law practice they will be; the marketing and business development tactics they will use; the overhead that is critical to their functioning; how to price, bill and collect for services; and how to manage the cash flow cycle. Success lies in identifying and capturing the right kinds of clients, providing the services those clients need in ways that add value, and ensuring prompt payment and the ability to grow profits. This book, based on the experiences of the author and his clients over 20 years of coaching and consulting, provides the keys to successfully thriving in the new era.
Call or Order Online at:
1-800-837-5880 or www.lawbiz.com
2011 LawBiz® Management. All rights reserved.
|Lo-Fi Version||Time is now: 26th February 2015 - 10:38 PM|