alternative-fee-structures-for-law-firms

6 Alternative Fee Structures for Law Firms

Unless you’ve been living under a rock, you’ve heard all the talk about alternative billing going on in the legal industry. The fact of the matter is, clients are becoming savvier and more cost-conscious than they have been in previous times. So if you’re going to make it in today’s modern legal marketplace, you’ve got to adapt.

Here are 6 alternative fee structures for law firms to consider, along with an explanation of the risks and benefits of each. Hopefully you can find a way to integrate at least one of these methods into your day-to-day law practice in order to stay ahead of the curve and keep your clients satisfied.

Alternative Fee Structures for Law Firms

In any exchange of money for goods and services, the purchaser expects a certain amount of value to be delivered. But with legal services, that value is often difficult to perceive and somewhat abstract. You’ve got to work with your clients closely and show them exactly what value you are providing. For a win-win situation to take place where everyone is happy, that value must exceed the dollar amount the client paid for it, resulting in a net profit for both sides.

With hourly billing, the client bears all the risk that the value they receive will not be greater than or at least equal to the money they’re paying. Free from any such risk, the law firm has very little incentive for efficiency, increasing the likelihood that the amount paid by the client will be greater than the perceived value.

The basic idea behind alternative billing is to shift some of the risk off of clients’ shoulders and take it on yourself. In doing so, the client will be more satisfied and more likely to recognize the value you provide, and your law firm is properly incentivized to maximize operational efficiency.

Here are 6 alternative fee structures you might consider employing in your law practice if you haven’t already.

Fixed Fee

A fixed or flat fee is simply a pre-arranged total fee that is paid upfront to complete all work required for a particular legal matter.

Benefits: 

  • No surprises – clients know exactly how much they will pay before work begins
  • Perceived value of the services is likely to be high since they agree to pay upfront
  • No fee collection hassles – you don’t start work until you get paid

Risks:

  • Can be difficult to properly assess the total fee amount beforehand
  • All risks associated with additional hours are passed on to the law firm
  • Potential for reduced profit margins or even losses

Fixed Fee per Project Phase or Time Period

Similar to a normal fixed fee, the only difference with a per project or time period fixed fee is that you are breaking down the project into smaller chunks or time periods rather than estimating the total fee upfront.

Benefits: 

  • Less risk of additional unpaid hours piling up for the law firm
  • Allows you and the client to reevaluate the fees paid and value provided at each phase in the process to make sure both sides are satisfied
  • Greater flexibility, making it a good option for longer term projects and litigation matters

Risks:

  • Not a viable option for all legal matters or practice areas
  • Can be difficult to properly break up a matter into phases and assess the appropriate cost of each phase
  • Potential for reduced profit margins or even losses still exists

Capped Fee

A capped fee occurs when a client pays by the hour, but the total number of hours that can be billed is capped at a predetermined limit.

Benefits: 

  • Gives clients peace of mind knowing there is a limit on their bill
  • Great way to deliver high perceived value, especially if you stay under the cap
  • Provides less risk of unpaid hours when the cap is set high enough

Risks:

  • Difficult to assess the cap amount beforehand and setting too high of a cap may discourage clients
  • Risk of working hours beyond the cap is still passed on to the law firm
  • Billing and fee collection occurs after the fact rather than upfront

Blended Rate

A blended rate is a single, reduced hourly rate that takes into account the lower rates charged by paralegals, associates, outsourced workers, etc. In other words, the client will always pay a set rate, but it will be lower than the normal partner’s rate reflecting the fact that much of the work will be done by less expensive and less experienced staff.

Benefits: 

  • Consistency in the client’s expectations – they always pay the same hourly rate
  • Can increase value perception because the reduced rate seems more affordable
  • No risk of unpaid hours for the law firm

Risks:

  • Not ideal for complex matters where partner will spend considerable time
  • May actually lead to increased legal fees for clients on routine matters
  • Billing and fee collection occurs after the fact rather than upfront

Performance Based Fee

A performance based fee is where the client pays the law firm based on qualitative and quantitative measures of performance. In other words, the client only pays based on the value received.

Benefits: 

  • One of the most client-friendly billing structures
  • Strong incentives for efficiency and quality for the law firm
  • Potential for high profits on matters where there is high inherent value for the client

Risks:

  • All risk is placed on the law firm to deliver value and demonstrate that value to the client
  • Can be very difficult to measure the value of the services delivered
  • Billing and fee collection occurs after the fact rather than upfront

Portfolio Fee

A portfolio fee is where a law firm agrees to take on all of the client’s legal work for a specified time period (usually a longer one) in exchange for a predetermined dollar amount.

Benefits: 

  • Steady source of legal work – you lock in a long-term, paying client
  • Predictability for the client since the fee is determined upfront
  • High incentive for efficiency in order to maximize profitability

Risks:

  • Can be very difficult to determine the proper fee amount
  • All risk of additional unpaid hours passes to the law firm
  • Little predictability for the law firm – unclear what type and quantity of work will be required upfront

Conclusion

It appears that alternative billing is the new norm for law firms, so it’s important to gain a strong understanding of all the different billing methods and fee structures available to you. Depending on what area of practice your law firm focuses on and who your target clients are, certain billing methods may not work well for you.

But, as clients continue to resist hourly billing and alternative legal services proliferate and improve, it’s becoming more and more important to stay up to date with the latest industry trends so you can remain competitive in this new-look legal landscape. Alternative billing is one area where it has become essential to innovate.

Although it may seem risky to test out different fee structures, you will undoubtedly learn a great deal as you go and ultimately you will find a billing method or combination of methods that works well. When that happens, all interests will align as your firm will increase efficiency and profitability while delivering high quality legal work and high perceived value to your clients. And that is always a recipe for success.

 

*Photo Credit: Tax Credits via Flickr (Used under the Creative Commons Attribution License)

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