The eternal battle in the legal world is between firms that charge on an hourly basis and clients who just want a fixed fee for the work being performed. Let’s take a dive into the fixed fee world and understand how law firms can charge fixed fees with no worries on losing money in the process.
The Old Model
Law firms have been charging by the hour for their work for well over 100 years. Yet, most service providers have evolved to presenting a fixed fee for their work. When was the last time you went to an auto-repair shop and was told, “we don’t know how much it’ll cost to fix the problem, it really depends on how long it takes”? No! You usually get a detailed, line item list of what’s going to be done, including parts and labor. But how do they know what to charge for labor? Based on experience they know how long it takes to replace a fuel pump or change brake pads. They also communicate during the work if something unusual comes up that is outside the scope of the original plan.
People want to see the value for the work a lawyer is providing. They don’t care how long it takes. Their expectations, based on every other interaction they have with service providers, is there will be a fixed rate for the work performed. So, when they engage with a lawyer, they are already feeling out of sorts in how the transaction for the work will happen, resulting in anxiety.
Law firms, on the other hand, may have charged a fixed fee in the past but lost money on the case because they ended up working way more hours than anticipated and they’re wary of being pinned down on a specific cost for their work.
Tim Williams, a pricing strategist for professional service firms in Utah, wrote about the friction on a LinkedIn in post titled “Rebelling Against the Billable Hour” in 2016. He concluded that “firms that show initiative and charge for the value they create rather than the hours they work are becoming increasingly attractive to the client.”
In addition to this pushback from clients, when you analyze the billable hour concept, many downsides appear.
- No incentive to be efficient—more efficiency means lower income
- No reason to invest in technology—new technology usually means increased efficiency
- Does not promote the best use of resources—you have a $400/hour partner doing work that could be done by a $200/hour junior associate
The New Model
Ok, so as a firm, you are sold that fixed fees really will benefit your firm. But where do you start? How do you calculate a fixed fee you know is profitable?
It helps if you step back first and at a higher-level think about what your goal is as a law firm. At the end of the day, your goal is to produce happy clients. How does this happen? By meeting or exceeding their expectations. This can be achieved in four ways.
- Define the expectations—understand your clients’ needs and present a detailed plan of action
- Explain expected costs—who’s doing the work, for how long and for how much
- Manage expectations—communicate proactively if things change or original expectations have shifted
- Achieve the expected results—execute per the plan, have the tools to not only create the plan but be able to track it in real-time
As the old saying goes, “plan the work and work the plan.” Too often, the execution of the plan is faulty and the result is going over budget on time and expenses.
Using the PERT Method
Calculating a profitable fixed fee comes down simply to project management. And when it comes to planning, turning towards the military is never a bad idea. The U.S. Navy has been executing their PERT method since the 1950s to help manage the creation of weapons and defense projects. PERT stands for Program Evaluation Review Technique. PERT charts are used to plan tasks within a project, assign to team members and schedule time to complete tasks.
For law firms, managing a matter project looks like this:
- Breakdown each matter into specific phases and tasks
- Assign your timekeepers to each task based on expertise
- Allocate the number of hours timekeepers have to complete each task
- Define milestones along the way.
Once you have the number of hours allocated for each task, simply multiply by their normal hourly rate, and you can roll that up to a completed matter budget you can present to your client. This detailed plan can be presented then to the client ahead of the work so they can easily see what’s going to happen. You are showing value for your work. Expectations met.
Requirements to Execute the Plan
We talked earlier about making sure whatever plan is developed is executed properly. To do this, you have to make sure you have the right tools in place. A law firm must have their time and billing system integrated with their matter budgets. A time and billing system that is married to these plans allow lots of good things to happen.
- Each timekeeper easily sees and knows their assigned tasks
- They can see the budget for their tasks in terms of hours
- Real-time warnings can happen when exceeding a task-budget
- A good system will allow the reuse of project templates
While executing the PERT method could easily be done with spreadsheets or other project management software, it’s the integration with time and billing that harnesses the full power of creating and managing fixed fees that are guaranteed to be profitable.
Solutions such as TimeSolv allow law firms to plan, budget, execute and track in real time their matter tasks. The entire plan lives in one environment that ties everything together. So, for example, if one of your timekeepers tries to make a time entry that exceeds the budgeted time for the task, they’ll either get a warning they are exceeding their budget or even be locked out from making that entry until the plan has been modified.
These powerful tools can elevate your time and billing solution from just a utility for time tracking and invoicing to a game-changing weapon in providing the type of value your clients demand.
Fixed Fee Freedom
With this newfound ability to confidently generate and present fixed fees, firms now have the flexibility to meet the demands of their clients. And while some practice areas lend themselves to fixed fees more than others, like transactional legal work and real estate law, many areas of law that have traditionally been purely hourly-based can benefit for a hybrid fixed fee-hourly fee arrangement.
Wading into the fixed fee waters can be a scary proposition for many lawyers. But with the right planning, and most importantly, the right tools, fixed fees can become a great asset that increases firm profitability, increases firm efficiency and serves as a bedrock for firm growth.