Starting a Law Firm | Hourly Billing or Flat Fees?

I'm happy to say that I have something to read about because of reader comments! Thanks and keep them coming.

Today's discussion is about billing. Hourly versus flat. I don't know if I've talked about it specifically here before, but I feel like I've mentioned it in a post before. Doing a post only about billing though should make it easier to find in the future.

Here was the reader's comment:

I think that one solution, or at least partial solution, to the "unable to pay" client question is charging flat fees rather than hourly rates. I'm not sure if you've posted a topic on the subject in here yet (I'm reading through everything for the 2nd time now), but it's something I'd like to see a discussion about.

I'm looking at doing immigration law when I open up my own firm, and the first comment I invariably get from people is "Oh, so you're not planning on getting paid?" Well, I am planning on getting paid, but it's going to be a reasonable flat fee for my services rather than a huge retainer or hourly billing.

Before I even get started though, let me tell all of you out there that are thinking about starting a law firm something - there are a lot of people out there that can come up with a lot of possibilities for why you might not be successful at this. And everyone is going to tell you what they've come up with.

When this happens you have two options, believe them, listen to them, and worry about it until you make it happen (the self-fulfilling prophesy) or nod your head and remember all of the planning you've done to prevent the things they talk about.

"What if no one hires you?"

"Oh, so you're not planning on getting paid?"

My response, and pardon my french, is "what the fuck do you know about starting or running a successful business? Oh nothing? Thanks for the encouragement." (That's not literally my response but might be what I'm thinking)

If people have legitimate concerns, things that sound like questions you should answer (and quite honestly, things that we talk about here), then listen. But when people start talking about "what ifs" it's time to tune them out.

When people tell me they are starting a law firm I always ask them a few questions to see how serious they are about it? Have you thought about what your practice areas is going to be? Have you thought of a marketing plan? Have you thought about what you are going to do when someone wants to hire you (the process of it)? If you can answer those questions, and they make sense, then I'm all for it.

Okay, back to the topic, hourly fees versus flat fees.

In my mind this is a no brainer no matter what field you are in. Flat fees win every time. They win for you and for the client. And I'll tell you why.

Before we get too far, let's clarify what each is. An hourly fee is a fee that is charged per your hour of work. The more hours you work, the more you get paid. The flat fee is earned upon receipt. They pay you and it goes right into your bank account. That fee is typically the only fee earned for representing someone in that matter.

Here's why I like flat fees versus hourly fees.

Your Time is More Valuable than That

I enjoy working, believe it or not. But I also enjoy playing golf. I also enjoy sports, a lot. And from time to time I like to have a beer, sometimes even in the middle of the day.

But I can't enjoy my round of golf or my beer in the middle of a Wednesday if all I'm thinking about is how this is directly cutting into my bottom line. An hour lost under an hourly billing concept is literally money out of your pocket.

My time is extremely valuable to me. And I don't ever want to be a slave to the clock. I've billed by the hour before and it isn't fun tracking your life in six minute increments.

Your Job is to Solve Problems, Not Create Them

I don't care what anyone says, when you work under an hourly billing method, the temptation to create problems or make mountains out of molehills is always lurking. And the reason is obvious. How about an example.

Let's say a guy comes into your office and says "I've got a problem that could potentially cost me $100,000. I'm being sued right now. Can you help me?" You sign him up and start looking at the case and immediately recognize a solution that could save him the whole amount. All it takes is a one page letter.

If you are billing hourly do you write the letter and charge him $100 bucks? "Of course you do!" everyone is saying right now. But, if you're billing hourly do you investigate every other avenue to make sure you aren't missing any other defenses just in case the other side balks at what you have to say?

If you are billing at a flat fee rate you write the letter, collect your $5000 (the amount you charge for pre-filing work) and move on to the next matter.

You may think this is impossible, but when you start thinking about the value that you can provide not on an hourly basis but on a project basis, you'll be surprised at how much more money you can make. And your clients will be happier because you're both on the same page. Which brings me to point number 3:

Your Clients Will Trust You More and Value Your Service More

You ever take your car to the mechanic? What happens when you get that bill and it shows how long it took to do the job? When that happens to me I am automatically skeptical. It's human nature to be that way because you have to put your complete trust in the person that they were honest with you about their time.

Same goes with your clients. And, it's say to say, but people are generally skeptical of attorneys - they are groomed to be that way.

But, if you charge a flat fee, they know what they are paying for. They understand the value they are getting and they are comforted to know there aren't any surprises. And you can tell them what you've done without having to justify the time it took to do it.

You Can Apply Flat Fees to Any Area of the Law

Flat fees aren't just for immigration law or criminal defense. You can use them in any area of practice. The key is to make sure you define the scope of work, define client expectations, and remember what it is you are there to do.

Let's take our example from above. In that case your flat fee agreement might be something like $5000 for any pre-litigation work (responding to the demand letter, trying to resole the case, etc.); $10,000 for any everything through written discovery (answering complaint and interrogatories, requests for production); $10,000 for depositions; and $5,000 for a summary judgment motion; and $10,000 for trial. And, and here's the kicker so long as it's not family law or criminal defense, you can negotiate a bonus based on the amount of money you save him, say, 10% or something of the amount saved.

In our example, your letter that makes the matter go away gets you $15,000. $5000 for the pre-litigation work and $10,000 for saving him from paying $100,000 in the suit.

It Works

I don't know what it is with attorneys, but we always like to just shoot down ideas for no particular reason. I'm picturing a lot of you out there right now shaking your head saying "this will never work with my clients because...." Just do me one favor - TRY IT.

If you try and they balk, fine. But then try it with the next guy. And don't do it half-assed. Show them why it's better for them. Let them know the advantages. Work it into your initial client meeting sales pitch (and if you don't have one of these, make one). You'll not only start making more money but you'll be able to spend your time solving your clients problems, and, when you want, spending your time doing what you want.

Specific Help for the Commenter

You ask a question, you get personal help. That's just how this thing works. Here it is.

For immigration attorneys I think flat fees are a no brainer. And they must be up front flat fees - no payment plans. And here's why.

First, if you lose, your client is likely leaving the country. Not only will you not be able to get any money from them but you might not even be able to find them again.

Second, your clients are already pre-conditioned to paying up front. They expect it and are willing to do it, if you don't let them talk you out of it. It doesn't take much to point out to them why you charge a flat fee - and the value proposition makes sense to them (they don't pay for time, they pay for results).

And finally, they typically have some money laying around or have the means to pool it quickly. Facts are facts. Illegal immigrants are liquid. They typically don't have bank accounts, don't live fancy lives, and don't own expensive stuff. They save their money to send back home or for a rainy day. You are the umbrella they buy when it rains.

If you do good work as an immigration attorney you can make a ton of money. People talk, and giving good service to one person typically results in two or three more calling for help. Just remember to get paid up front.

One Final Story About Value

I know I've told this little story somewhere before, but it usually does a good job of getting the message across to clients who are worried about paying you a big fee, you fixing their case fast, and they are left feeling like they got cheated. I'm sure I'm going to butcher it, but you'll get the point (actually after writing this I went out and found it, so this is it exactly.

Pablo Picasso was sketching in a park one day when a woman strolling past recognized him: "You're Pablo Picasso aren't you?" she asked. He replied that he was. "You're my favorite artist!" she exclaimed. "Would you please sketch my portrait?"

After studying her for a minute, he closed his eyes and thought for a second, opened them and drew three lines on the paper.

He passed the paper to the woman who looked at it for a moment, and she gushed "It's perfect! You've captured exactly who I am! I must buy the sketch Mr. Picasso. What do I owe you for it?"

"Five thousand pounds."

"What!?" she blurted. "How could you ask for so much. It only took you a few seconds."

"No madame," Picasso calmly replied, "it took me my entire life."

Not only is this a final story about value, it's also the final reason you should use flat fee billing. Clients aren't paying you to reinvent the wheel. They are paying you to solve a problem. As an hourly biller, wouldn't you feel like shit if someone came in with a problem that was very similar to one you just fixed, and though the problem is huge for the client you could only bill them a fraction of the value provided because it only took you a fraction of the time to solve (because all of the paperwork and research was already done).

How great would it feel to tell the person, "I've handled cases like this before and can do it for X dollars." When they hire you you can actually use the work done in the past to benefit both the client (resolving their case) and you (streamlining your work).