Friday, July 3, 2009

Legal Fees: Flat fees vs. Hourly Rates

In this week’s Lawyer’s Weekly, Lonny Babli discusses the advantages of a flat rate billing model versus the hourly rate model that lawyers have traditionally adopted.

2402698820_6606b5ca8a_m Balbi makes a number of interesting points including a telling anecdote of Merv Griffin writing the theme song to Jeopardy in about a minute. The anecdote illustrates that even though the ultimate value of the song has netted Merv $7 million over the years, that value has little, if anything to do with the time associated with it.

As also pointed out, “most businesses do not equate time with money”. The same can be said for any individual who is facing a legal problem.

Using domestic assault as an example, a person who is charged has very specific goals in mind with certain aspects they are not willing to compromise on. The goals may include: 1) a withdrawal or acquittal of charges, 2) reconciliation and restoration of communication and contact with the complainant, 3) no criminal record that may affect employment, and lastly, an expediency in obtaining these results.

With goals come hurdles that the client may or may not be compromising on. Continuing on the domestic assault example, hurdles might include: 1) whether they are willing to enrol in counselling, 2) whether they are willing to accept responsibility in any manner whatsoever, 3) the length of the proceedings, and 4) the cost of the matter.

Like businesses, people charges with criminal offences look to the bottom line in making assessments in retaining their lawyer and the value they attribute to it. Even though we as lawyers are often selling our time, it is actually results that the client wishes to obtain – the time, manner, or effort required to obtain those results is largely inconsequential to them. Much like Merv Griffin humming and selling the catchy tune of Jeopardy in seven minutes, clients would be delighted if their lawyers were able to obtain the ultimate result in such short order.

Balbi’s suggestions of adopting anew business model for lawyers to operate on flat rates is a wise and one that I implement whenever possible. Having a flat rate has a number of advantages for the lawyer and client that are often overlooked. Those include:

  • Certainty in cost / accounts receivable;
  • Alignment of interests (both parties want the matter to end to each other’s satisfaction as quickly as possible)
  • Clarity in objectives using a task-based model of value
  • Easier administrative aspects to collecting retainers

Although not possible for all files, I highly recommend that any lawyers, particularly those in criminal law, consider a fee-based system of retainer and assess whether the serves you and your client's needs are better met.

2 comments:

gorden said...

Sorry.. But totally Disagree with your article.

Criminal law firms

Dennis Buchanan said...

I read that same article. It was an interesting analysis. If Merv Griffin were an independent contractor tasked to design a theme song for use (and ownership) by the show, you can bet he wouldn't have gotten $7 million for it.

And he probably would have billed by the hour.

When I was a student, I was once told that, as lawyers, all we have to sell is our time. I think a value-based approach is far more intuitive: When you send the client a bill, the first thought that goes through the client's mind is 'what did I get for this'?

Yet the value-based model basically has to take one of two forms:

(1) Contingency fee, which has serious limitations, or
(2) Balbi's suggestion of an up-front guaranteed fee. (Otherwise, you'll invariably end up billing some of your clients for the value of the possibility of a result which they already know they didn't obtain. You don't get happy customers that way.) For a simple transaction, this is fine. Maybe the same goes for representation on a guilty plea. But as you get into anything more complicated, anything that doesn't fit neatly into a cookie-cutter practice, it becomes increasingly difficult to come up with even a rough estimate as to the investment of time and resources that will go into it.

I really like Balbi's analysis. But I think it has serious limitations for most practices.