Flat Fees vs. Hourly Fees

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.

Hourly Fees

The pros of hourly fees are:

  1. The client only pays for what they get.
  2. Simple/easy cases cost less.
  3. The cost tends to be spread out.
  4. Attorneys are motivated to produce work.

The cons are:

  1. Clients feel nickel-and-dimed. They pay for every phone call and email and can feel buried by the small fees.
  2. Attorneys are motivated to drag the case out.
  3. 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.

Flat Fees

The pros:

  1. They are predictable.
  2. Hard/complex cases mean that client gets a lot of value.
  3. Attorneys are (theoretically) motivated to close the file.
  4. They work well for very predictable cases like criminal and real estate files.

The cons:

  1. They require a lump sum payment. Even if the fees are spread out, the payments tend to be higher at specific times.
  2. Both sides are gambling.
  3. Attorneys are not motivated to work.
  4. 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.

Conclusion

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.

Law Firm Automation

I’ve been writing a lot about artificial intelligence lately and commenting on what it can and can’t do in workplaces. The truth is, you don’t need artificial intelligence to bring your firm into the 21st century. Many other options exist to add automation to your practice. Most of these options are simple to implement and pretty cheap. There is no excuse but to bring some of these into your office.

Full disclosure, I don’t use all of these products. I use many of them or versions of them, but I’m not vouching for anything here. You should give these options a try and see what works for you.

Practice Management Software

Practice management software is everywhere, and there are dozens of good options for your firm. I was very skeptical before I started using the software. We were using Google Sheets to keep track of tasks, Google Calendar for our calendar, and Quickbooks for our billing (which I was doing 100% myself…). These products worked when it was just me, and they worked when I added a secretary. Where they broke down was when I added an associate.

My secretary and I had been using our “system” for years. We were very used to its quirks, but our associate did not interact with it well. He might have used words like “nightmare” and “stupid”. I don’t really recall. He was a bit dramatic 😉.

But our firm had really outgrown our system so we looked into practice management software. Ultimately, I chose PracticePanther, and I am really happy. But I know people who use Smokeball or Clio or whatever and they all seem happy too. The fact is that these programs all do the same stuff. Some features may be different, but I think most can do the following:

Document Automation

This is a feature that some attorneys swear by. Essentially, you put information into the system, and then it can generate whatever forms are necessary. This is especially helpful in a business that has basic forms that have to be drafted or filed with the court. For example, we use our program to generate releases for medical records.

The one thing I will point out is that these programs can’t recreate complicated documents. It’s not going to draft my eight-count complaint. I think where some of these companies go awry is that they overpromise what their form generation can do. Be real. It can do simple stuff, but you’re still going to have to do some work.

Task Generation

This is a big one in our office. We track all tasks in our practice management software. It’s basically a religion in our firm.

Our software categorizes our tasks based on clients and matters so it’s super clear what needs to be done. It has a calendar built-in, which works great. Though, I linked my calendar to my Google Calendar because I hate new things (actually, I prefer the interface on my phone).

It’s nice because I can see what I’m working on and what my staff has to do, all in one place. It has also made working from home during the pandemic easy.

Billing and Payments

Our software has built-in timing and billing features, which was a must for me. You can manually add time to matters and clients or you can run a timer in the program. I use both functions depending on whether I remember to start a timer (contrary to popular opinion, I am not perfect).

Then when it comes time to create an invoice, I go through the billing and make sure what I want gets on the invoice. It automatically syncs my staff’s billing, and you can easily mark things as non-billable or whatever.

Then, the pièce de ré·sis·tance (fancy for “piece of resistance”) is that it syncs with Quickbooks. I just generate the invoice in PracticePanther and it appears in my Quickbooks. It also tracks retainer amounts easily.

You can email the bill to clients and they can pay with LawPay, which is free if you have PracticePanther. You can also print and whatnot if you want to be old school (or if your clients are old school).

Client Portals

I admit I do not use client portals. I don’t find them any easier than email, though they are probably more secure. I’m not sure if clients prefer them or not, but I’ve heard that some work really well. If your business requires the collection of a lot of documents it might make sense to use a client portal. I think it’s relatively practice specific.

E-Signing Software

We started using Eversign a couple years ago, and I’ve been very happy. There are a ton of programs that allow you to get clients’ signatures via electronic signature. Basically, you email the client a document to sign through the software and they sign it. I have never had a client struggle with the product.

This seems like a small thing, but I find that this is a game-changer. We used to have to email documents and have clients print them and send them back. If they mailed them, they took forever. But worse were the clients who would take a picture of the documents and email that back. The copy was never useable because the picture was terrible. This software has completely solved those problems.

Paperless Office

I used to think the notion of going paperless was like the Easter Bunny: cute, fluffy, and completely made up. How could a law firm go completely paperless? Well, paperless as a term can mean lots of things. You never truly escape the paper, we are lawyers. But we have no physical files anymore. Everything is scanned in and accessible on our computers, phones, and tablets.

You need a bit of infrastructure to pull this off. You need a good scanner and some form of document sharing technology. We use Dropbox. It’s great, but there are other great options. You’ll also need a shredder or a shredding service. Our service costs $180/year.

Then, the hardest thing, you have to commit. Just start scanning and shredding. Stop using the paper files. Within months you will get over the fear of shredding. We have been fileless for about a year and a half. I never worry about it anymore, and, honestly, I think we’ve only fished one document out of the shredding bin. It has made working from home and collaborating with my team so easy. I highly recommend making the jump.

Can Artificial Intelligence Replace Workers?

I read an article a few weeks ago about how Microsoft is cutting dozens of news workers and replacing them with artificial intelligence (article). Microsoft reported that the work of the reporters has been semi-automated for months.

This is nothing new. Many news outlets have been relying on AI to generate their content. The process generally involves an algorithm going through lots of data (likely other news stories) and laying the information out in article form. The AI tends to write in a very formulaic structure and style, mostly providing the readers with names, dates, times, etc. (Wikipedia).

It’s not clear immediately whether this is a good trend or not. Some argue that AI frees journalists from having to write mundane articles about basic current events, but some journalists find it demoralizing that they can be replaced by a robot.

According to an article by Wharton, many large news outlets are using AI in some form, including The Washington Post, The Associated Press, BBC, Reuters, Bloomberg, The New York Times, and The Wall Street Journal (article). In 2018, China’s Xinhua News Agency went so far as to use artificial intelligence to power its news anchor. The anchor was created using computer graphics and fed information via algorithm. I can’t confirm that the anchor is still working, but they also debuted a female version in 2019. There are videos on YouTube here and here.

I think the loss of jobs in this sector is a natural progression in the transfer of basic knowledge work from people to machines. The AI can write faster, cover more topics, and contribute more efficiently to our 24-hour news bombardment.

Bombardment? That might have sounded harsh, but it’s true that our news outlets have been generating far more news over the recent years. We have access to news constantly, via television news networks, websites, and through places like Twitter. How can we possibly keep up with the demands for news? It shouldn’t surprise anyone that we would need to turn to some form of automation to satisfy our needs.

The big question that we should be asking is: who’s next? Knowledge workers are potentially under fire from automated sources. I have been saying for years that people responsible for transactional knowledge work are the next logical targets.

Accountants, for example, could be replaced by AI. Many currently use options like TurboTax to satisfy their basic tax needs, when will that expand to include more complicated matters, like audits? Financial planners are also potential targets. The average family doesn’t need complicated financial advice. Make a budget, start saving, get life insurance, these are basic bits of advice that can easily be replaced by a robot. Will people feel comfortable dealing with a machine? Maybe not, but how long until we create a machine that can pass as human? Probably not long, especially since lots of this work can be done over the phone.

I’m beginning to rant a bit here, but the point is that these types of changes are not merely coming, they are here. We need to start thinking about what other jobs will be replaced and what hurdles will need to be crossed for the replacement to happen.

For example, for AI to write news it needs to understand how humans read and it needs to understand what words we expect to see. It’s not editorializing yet; it doesn’t need a lot of empathy. It just needs to find the facts and lay them out in a way that we expect.

But to replace an accountant or a financial adviser (or a lawyer), AI will need to make people feel comfortable talking about money (and ultimately fears and aspirations around money) with a computer. To do that, AI will need to be more empathetic and learn how to interact with people on a more human level.

Who knows how long it will take to get to that point?