The journey from the billable hour to value-based flat fees

  • Subtitle: Managing Partner Forum
Written by  Allison Speigel Posted Date: May 25, 2015
The journey from the billable hour to value-based flat feesMost lawyers will tell you it is impossible to bill on a flat-fee basis. They will claim “our work is too customized” or “there are far too many unknowns to ever predict cost.” Surprisingly, these same lawyers also pitch that they “are experts in their field” and “have handled many cases just like yours.”

This has never made sense to me. On the one hand, they cannot possibly know the future of your case. On the other, you should trust them with it because they know what to expect and how to deal with it.

This dichotomy raises obvious questions. Why are non-legal businesses capable of setting fixed fees despite the fact every business deals with unknowns? Are legal fees incapable of being fixed or are lawyers afraid or unwilling to take the risk that they cannot accurately predict what will transpire?

The answer lies in a related tension. Most lawyers will tell you their fees are calculated based on hours worked, not the result obtained. Yet, in the same breath, they also assure you they intend to be your partner in the matter. Can lawyers ever be true partners if they have no skin in the game?

In 2013, I returned to Toronto after having spent five years practising in the BigLaw world in New York City. When deciding what to do next, I could not wrap my head around the traditional legal model. The same few questions plagued me: Why do law firms believe there is only one way to skin a cat? Why are legal fees not tied to results? Why are firms so inefficient?

With these questions in mind, I convinced my father to let me join his team at Speigel Nichols Fox LLP with the understanding that the firm would be willing to implement real change.

By mid-2014, Speigel Nichols Fox LLP became one of the first law firms in Canada to offer clients value-based, flat fees on all litigation and corporate matters.

The “value-based” aspect of our billing model has actually been a cornerstone of the firm’s business for decades; it ensures that our legal bills account in some way for the result obtained. The firm learned early on that we serve our clients best when we share some of the risk and reward in a matter.

Our rationale for implementing flat fees, however, has evolved over the past year.

Stage 1: Flat fee billing focuses on value, aligns the financial interests of the client and the firm, and provides cost certainty.

We started with the obvious realization that time spent does not necessarily equal value delivered. A lawyer can spend 30 hours researching a topic and come up empty-handed or can have a flash of brilliance that results in a perfect legal solution. What matters most to a client is the result, not the effort it took to get there. Flat fees ensure a firm focuses on the destination, not the length of the journey.

In addition, flat fees incentivize lawyers to complete work in the most efficient manner possible. Conversely, the hourly billing model ensures, to some degree, a law firm’s financial interests are opposite of those of its clients. Hourly billing rewards inefficiency and provides an incentive to undertake make-work or low-value projects: working inefficiently means more money coming in on a given file.

Consider this: if, unbeknownst to a client, a lawyer makes a mistake and then spends hours correcting that mistake, that lawyer will charge more money than had the lawyer done the work correctly in the first place.

Lastly, flat-fee billing provides greater cost certainty. The billable hour model, on the other hand, makes it next to impossible to accurately evaluate the business case for proceeding with a matter. The billable hour shifts the risk of future events entirely on the client despite the fact it is the lawyer who has the experience to predict what is likely to happen.

Stage 2: Flat fees should be offered as one of many choices.

Every client is unique. Each one evaluates risk differently, places value on different things, and has unique needs to be met. Each client should be able to decide for itself what billing method makes the most sense. There is no reason why law firms cannot provide their clients with choices. Our clients may still choose the billable-hour model. When they do, however, it is a true choice, not because it is the only option presented.

Stage 3: Flat fee billing promotes innovation and efficiency.

We recently have come to understand that flat fees are not just better for our clients; they are also better for us (which, in turn, is better for our clients).

Firms modelled on the billable hour are only incentivized to be as efficient as their competitors. Although firms can justify technology investments as generally being good for business, in the sense they can provide a certain competitive advantage, the truth is the investment is a sunk cost with no direct financial benefit to the firm. The lack of direct financial benefit from investing in technology is one reason why the legal sector seems to be so lagging technologically.

Conversely, when a law firm implements flat-fee billing, the firm can easily do a return on investment calculation when evaluating new technology. The firm can say, “this technology will make us two per cent more efficient, which means the firm will earn two per cent more on all flat fees.”  All investments in efficiency (technological or otherwise) have a direct impact on profit. Flat fees establish a framework that encourages firms to invest in their own efficiency.

If the experience in the United States is any indication, clients in Canada will increasingly demand the option of flat-fee billing. This is not a negative. Our experience is that value-based, flat-fee billing aligns the interests of lawyers and client and is better for both. It ensures a firm’s goal is to obtain the best result as efficiently as possible; the very thing that its clients desire. By offering value-based, flat-fee billing, our firm is selling value, not just time.

Allison Speigel is a lawyer at Speigel Nichols Fox LLP, a boutique business law firm in Mississauga, Ont., with expertise in litigation and commercial matters. She can be reached at allison@ontlaw.com.

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0 # Vice President, Ultimate FrisbeeJeremy Secker 2015-11-12 16:29
Firms implementing flat fee billing can evolve from "docketing" (as a verb) to simply tracking time.

With people, process and technology properly aligned to make effective use of this data (time, activity type, revenue), you both correctly price for the client and establish a framework for continuous improvement for the firm.

Is it good business to profit from inefficiency? Is it ethical?
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0 # LawyerImpressed Lawyer 2015-07-13 15:39
Brilliant business model Allison.

To those who question how this can be done, consider the fact that there are businesses that are far more complex than litigation (consider Nasa sending its most recent rover to the Pluto, or really any exploratory engineering endeavour), all of which have to estimate and live by a budget set at the outset of a process.

The magic sauce that allows this process is called costing and is based on basic statistics. Aggregate enough data points and you get a reliable average cost over time. I would bet that this firm will make MORE money with this model because they can price for the statistical mean plus put in a premium surcharge which people will gladly pay to have the firm provide a price ceiling on what was, until they retained the firm, a complete unknowable black box.

Keep up the amazing work.
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-1 # Litigation BoutiqueL Wise 2015-06-04 13:50
I question how realistic a flat fee structure is. 1)The lawyer is not a clairvoyant. Rather, her expertise is the ability to navigate whatever trajectory the litigation takes. 2) What about the difficult client who sabotages her claim or who only sends documents after the 11th reminder? Bills motivate client efficiency instead of shifting the onus of efficiency off of the client. What about the client who does not follow the lawyer's advice and the motion/ trial is lost? 3) One of the tenets of the civil process is that the lawyer is a non-party. The best motivation to do good work is developing a practice and referral network via happy and repeat clients. 4) I'm not sure that invoicing can be tied too closely to the billing model. Lawyers constantly reduce bills or undercharge to permit access to justice and one of the issues seems to be a widespread societal undervaluing of legal services and the public perception that lawyers should work for free.
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+1 # Small firmRoy Wise 2015-06-04 11:30
Very interesting article and I suspect that the system will become increasingly common for lawyers who do specialized work for large clients such as Insurance defence work. How do you take into account however in flat fee billing such factors as the need to obtain and review numerous expert reports or the extensive time involved in chasing clients numerous to obtain documents, to respond to undertakings etc. Does this not vary dramatically on a file by file basis?
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+1 # sole practitionersam laufer 2015-05-28 14:13
interesting... but how do you flat fee when you have absolutely no idea how many motions you are going to face; let alone: the number of exams/crosses and the length of the trial? I have a file that should have required one motion but as a result of the other party we are looking at 5. One set for a full day. Strikes me that in litigation that a flat fee model is the fastest way to bankruptcy.
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+1 # LawyerBoutique Firm Lawyer 2015-05-27 15:31
Interesting article, thank you. I think there are many lawyers who would agree that hourly billing works for almost no one, and are interested in flat fee billing: but how to price it and ensure that it is fair to both client and counsel is rarely discussed (including in this article). Clients like certainty, and counsel need to know their time will be respected. Also, how to price for work that is dependent upon third party decisions that are out of the client/counsel's control, or evolving and new areas of law that change seemingly every day (e.g. technology, privacy, IP developments & new legislation mid-course, etc.)? It would be helpful to hear more about HOW firms that are successful with flat fee billing are making it work for both client & counsel.
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+1 # LawyerAllison Speigel 2015-05-28 10:15
That may just have to be the topic of my next article.
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+3 # https://www.seo-for-lawyers.comLuke Ciciliano 2015-05-26 10:54
One of the biggest points you nailed is efficiency. Law offices traditionally dedicate large amounts of administrative time (which is non-billable) to supporting an hourly billing structure. When that administrative time is greatly reduced, which happens in a flat fee environment, then profits actually go up and not down.
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+3 # Innovation and EfficiencyV Bajpai 2015-05-25 18:54
I was lucky to have an ethical principal when I articled and I am sure many students still do. So to say that lawyers bill for their mistakes because the hourly fee system allows it is particularly insulting. I was taught by my principal to "eat" the cost of my mistake as it was unethical and improper to charge the client for it. I continue to live by that rule and pass that on to my students as well. Further, innovation and efficiency shouldn't be the product of flat fee billing but rather flat fee billing should be achievable because of it. If we in our daily practice are not striving to be efficient and innovative then our business model is flawed regardless of our choice of billing method.
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+3 # Small firmFamily Lawyer 2015-05-25 18:40
Curious, how has your firm decided what the flat fees would be? Do you have a team meeting about it? How can you predict how the other side will behave in negotiation or how far it might progress at court?
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+2 # LawyerAllison Speigel 2015-05-26 10:29
Pricing is a skill set that we are slowly developing. We try to do a lot more work up-front to better predict how the case will unfold and the potential range of results. In setting the price, we evaluate a number of different factors and then rely heavily on the firm's many years of experience in value-based billing. It is an art, not a science.
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