I have made my feelings on hourly fees for knowledge work known (see my blog here). I don’t think that hourly pay represents what we’re really getting paid for – our knowledge and experience. However, I doubt that flat fees are a solution to that problem.
Flat fees are trendy. Flat fees are routinely touted as ‘the next big thing’ in the legal market. Many, many articles are written on the topic. The thing is, those articles have been written for the last ten years of my career and, yet, as far as I can tell no one is actually moving towards flat fees. Why is that?
I actually tried the flat fee model for a few months and found that clients were not interested. This was because a flat fee is synonymous with cheap, at least in the client’s mind. When the flat fee offer was more than they expected, they chose the hourly fees. I’ll discuss this more in a bit.
The pros of hourly fees are:
- The client only pays for what they get.
- Simple/easy cases cost less.
- The cost tends to be spread out.
- Attorneys are motivated to produce work.
The cons are:
- Clients feel nickel-and-dimed. They pay for every phone call and email and can feel buried by the small fees.
- Attorneys are motivated to drag the case out.
- They tend to be unpredictable. Some months could be very little because very little was done, while other months can cost thousands of dollars.
Why do we have problems with hourly fees? Most people would argue that they are unpredictable and the incentives for the attorneys are not in line with what the clients actually need or want. We are motivated to create more litigation, not solve problems. These are fair concerns, but I’m not sure that flat fees solve them. Let’s dissect flat fees.
- They are predictable.
- Hard/complex cases mean that client gets a lot of value.
- Attorneys are (theoretically) motivated to close the file.
- They work well for very predictable cases like criminal and real estate files.
- They require a lump sum payment. Even if the fees are spread out, the payments tend to be higher at specific times.
- Both sides are gambling.
- Attorneys are not motivated to work.
- Clients falsely assume that flat fee means cheap.
What do I mean by gambling? If the case is easy, the attorney wins, but if the case is hard, the client wins. The trouble is that the loser is never happy. If a client hires me on a $10,000 flat fee, and I settle the case in four hours, they might ask for a refund of some of the fees. However, I gambled and won and shouldn’t refund the fee. That risk is built into this fee structure. This creates trouble because clients feel taken advantage of.
What are attorneys motivated to do when paid a flat fee? There is a false assumption that when paid a flat fee, attorneys will try to close the case as soon as possible, but in practice that is not true. They are motivated to do as little work as possible.
Why aren’t these rates cheaper? I have no idea why clients think flat fees mean less expensive cases. The opposite tends to be true because the lawyer has to build in cost for the crazy cases. For example, let’s say the average mandatory arbitration cases runs $15,000-$20,000. I would have to charge close to $20,000 to handle a case on a flat fee because I don’t know if it’s a crazy file. Maybe there will be a dozen motions filed. I have to build in a buffer for those situations.
As much as I don’t care for hourly fees, I don’t think flat fees are the solution. I find that there tends to be more conflict with clients when the fees are flat. That’s because of the problem of gambling. Essentially, the client is betting that the case will be more work than they paid for, and I’m betting it will be less. Someone will be unhappy in the end.
What’s the solution? I honestly don’t know. I have offered the idea of a hybrid approach, where a client pays a flat rate for knowledge and experience and an hourly rate for the literal work produced. By structuring it this way, you don’t encourage the dragging out of cases and the attorney gets paid for the value they are actually adding. I think this model can be pretty predictable and clients may feel less nickel-and-dimed, as well. The exact numbers would matter, of course, but clients and attorneys may prefer some sort of modified approach.