Legal Costs – Solving the Puzzle

A significant puzzle faced by clients when retaining legal counsel is determining which firm will provide true value for the client’s money.  Our firm prides itself on its ability to deliver value – not only in an intrinsic sense, but also in an economic sense.

Pitfalls of the Present System

The standard method of pricing for law firms is the billable hour.  Each hour is divided into 10, with every six minutes representing 1/10th of an hour.  Similar to cellular telephone providers that charge “by the minute”, lawyers charge in 1/10th increments of time and round up to the next 1/10th.  (Thus, 7 minutes is considered 2/10th of an hour just as much as 12 minutes is also considered as 2/10th.)  Ironically, however, the billable hour was not the traditional form of billing for lawyers.  Until the middle of the 20th Century, the common practice was to charge flat fees.  By the 1950’s, institutional clients such as insurance companies started to question whether they were obtaining true value for the flat fees they paid.  At the insistence of these clients, lawyers changed their fee methodology to the billable hour.

The clients’ “solution” has proven to be an even larger problem than that posed by flat fees.  The simple reason for the failure of the billable hour is that it rewards inefficiencies.  If compensation is based upon the amount of time spent on a matter, then the longer one works on a file, the higher the fees charged to the clients.  This discourages innovation and efficiency.

In addition to the deficiencies in the use of the billable hour, the economic model employed by most law firms is based upon an “eat what you kill” premise.  Each lawyer’s compensation is directly tied, in whole or in part, to the number of billable hours generated each year.  Again, this discourages innovation and efficiency since, for example, senior lawyers are less likely to direct work to more junior lawyers at lower billing rates because, to do so, would lessen the amount of work available to the senior lawyer (and thus his or her personal compensation).

How We Bill and Why

The simple solution to the problems found in the present system is a return to flat fees for each transaction or stage of litigation.  Unlike the billable hour method, flat fees have the following advantages:

• Clients are aware in advance of their legal expenses and can budget accordingly
• The law firm is more aware of its cash flow and can budget accordingly
• The focus shifts away from a “lawyer-centric” model that focuses on generating fees to a “client-centric” model that focuses on how to produce successful results within the set budget.  If the firm spends more time than originally budgeted and no unforeseen circumstances arose, this is a problem for the firm’s budget – not the client’s budget.

Our office uses flat fees wherever possible.  This, however, begs the question of why should one return to the system that was so problematic by the 1950’s that clients had sought its abolition.  Yesterday’s failure, however, is not applicable in today’s legal environment for two main reasons:  competition and communication. 

Competition

In the 1950’s, even in the mid-1990’s, while smaller law firms could compete with larger law firms on fees, they could not compete in terms of resources.  Today’s smaller firms, however, can compete with the large law firms but only if the combination of experience, technology and technological ability is present.

Technology alone is not the answer.  Underutilized or improperly utilized technology can create, or even increase, inefficiencies in legal services.  Only if the law firm fully implements and synthesizes its technology can it leverage all of the efficiencies.  Similarly, all the technological ability in the world means little if it cannot be applied to complex transactions or litigation by a user with sufficient experience in such matters.

Our firm has strived to achieve the ideal combination of experience in complex matter with technological savvy to provide maximized efficiencies for its clients and to provide real value for their legal issues.

Communication

At its heart, the call for the abolition of flat fees and the rise of the billable hour resulted from the clients’ concerns that the amount charged did not adequately reflect the work performed.  This is not a failure of the fee system as much as a failure of communicating what work was performed and how that work is reflected in the law firm’s invoice.

Law societies and bar associations have encouraged the use of retainer agreements by law firms for decades.  Despite the obvious advantages of having such agreements, their use is surprisingly sparse among law firms – particularly larger firms.

Our firm policy is that all litigation and corporate / commercial files must have a retainer agreement signed by the client before the file is opened.  Our retainer agreements are detailed – and they should be!  After we review the agreement with you there should be no doubt regarding our respective roles and responsibilities.

Communication is also supplemented by regular contact from our firm regarding your matters and detailed accounts that explain exactly what work was performed and by whom.

Conclusion

By providing our clients with a competitive alternative to the large law firms with affordable flat fees, smaller businesses and individuals can proceed with their projects secure in the knowledge that their legal costs will be reasonable and not subject to inefficiencies.