Professional Services Accounting ARTICLE -
Fixed-fee billing: The wave of the future?
Target Audience: Legal Professionals, Professional Service Firms, Law Firm Partners
Law firms everywhere are feeling the effects of the down economy, as clients are increasingly looking to their legal fees for relief. Rather than cutting back on services, many clients are demanding that their law firms convert from hourly to fixed-fee billing. The good news for attorneys is that the switch can pay off for both their clients and their firm — if the fees are properly calculated.
Why clients like fixed fees
Clients are drawn to fixed fees for several reasons. Perhaps foremost, they take comfort in the certainty that fixed fees provide. The predictability of legal expenses facilitates more accurate budgeting and improved decision making.
Fixed fees also can help assure clients, who may perceive a disparity between their costs and the value they receive in exchange, that they’re getting the services they’re paying for. Further, the structure allows clients to share the risk of unexpected developments with their attorneys, if not outright shift the risk to them.
Finally, a fixed-fee approach can foster a greater sense of collaboration. The process of negotiating the fee allows the clients to participate in estimating legal costs and determining strategy, while also gaining a greater understanding of everything that’s involved with their matter.
Why firms might like fixed fees
Law firms often resist fixed fees, but they stand to reap some benefits from the arrangement, as well. For example, it’s not only the client who enjoys greater certainty. Fixed-fee agreements can provide your firm with predictable work and, in turn, regular cash flows.
Fixed-fee billing can also help improve efficiency and allow more appropriate delegation of duties. And it may help reduce your firm’s per-case investment by eliminating unnecessary tasks and requiring better management. The firm will reduce the overhead generated by operating a complicated hourly billing process, too.
Law firms that are willing to adopt fixed fees can even gain a competitive advantage over those that refuse to abandon hourly billing. This flexibility is an effective way for your firm to stand out among a crowded field.
Setting the fee
Fee-setting is generally a two-step process. First, you and the client must agree on the scope of the services to be provided under the agreement. Rather than simply identifying the services to be rendered, your firm also might consider expressly itemizing the services that are not included. If the parties expect complicated or shifting circumstances, you might seek a provision that would trigger a contingency fee in specific circumstances. Alternatively, you could request two fixed fees, with one applying in the case of the specific circumstance.
Second, once the scope is determined, the parties must agree on the related costs. Establishing the costs will rely largely on historical cost data held by both the client and your firm. Today’s data-mining techniques make it easy to gather information on the range of costs associated with various types of legal services.
Some adjustments to historical data may be necessary, however, because previous bills will primarily reflect hourly rates and, in some cases, the inefficiencies that can result from such rates. In examining earlier billings, you must consider the respective timelines, variable and fixed costs, and direct and indirect expenses.
The fixed fee obviously must exceed your firm’s break-even costs for providing its services. At the same time, though, it will likely balance the value of the services with the marketplace’s pricing pressures.
To fix or not to fix
Fixed fees are typically most appropriate for commodity-type work, such as zoning matters, real estate closings and workers’ compensation claims. If clients insist on fixed fees for other matters, consider securing a reopener provision that allows your firm to renegotiate the fee before pursuing additional work that wasn’t originally contemplated.
A sliding scale approach
Results matter to clients even more than costs, so some clients might prefer a sliding scale fixed-fee arrangement that rewards or penalizes your firm based on the actual results achieved.
In an intellectual property matter, for example, a client could make a monthly payment at 80% of the fixed fee. If the case is settled to the client’s satisfaction (as defined in advance), the client would pay the remaining 20%. But if the results went against the client, the firm would forfeit the remaining fees.
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