Published on 4/3/06
Legal fees were traditionally based not only on the lawyer's time spent, but also the nature of the service, the result achieved and the amount at stake. Charging an appropriate legal fee was a matter of professional judgment.
In the mid-1960s, when clients began demanding detailed billing statements, lawyers turned to time records as a management tool. Today, most lawyers (like most laborers) are paid by the hour. That has bred dissatisfaction among clients, because self-interest can and often does affect a lawyer's judgment on how many hours to work.
Another problem is that hourly rates don't address value and benefits - the worth, as opposed to the cost, of the service.
Given client dissatisfaction with hourly rates as a measure of legal service costs, it's not surprising that lawyers increasingly apply a variety of alternative pricing methods to their services. Here are some of the primary ones.
- Blended hourly rate
The client is charged one fee per hour regardless of who in the firm works on the matter -- a senior partner with a high rate; a junior lawyer with a lower one. The right balance gives clients a better price, and firms the financial incentive to delegate work.
- Fixed or flat fee
The fee is determined and stipulated in the engagement letter, before the assignment even begins. It will not vary no matter how much time the lawyer expends, or what the result. Flat fees are especially useful for routine legal services, and encourage the use of technology to streamline the provision of those services.
- Contingent or percentage fee
Frequently used in personal injury and collection matters, this fee is a percentage of the value recovered for the client. It is particularly useful for the lawyer skilled at analyzing cases and accepting those with a high likelihood of success.
- Premium pricing
An hourly rate or some other billing method is used as the base, and the lawyer is able to add on an additional premium if the result exceeds client expectations. Of course, there is no premium if the outcome is not successful. Premium pricing gives the lawyer a stake in the outcome and the assurance of a minimum fee even for a "bad" result.
- Retainer
This method sets up a fixed fee for a fixed time cycle (often monthly) during a designated period (often one year). It is sometimes used as a one-time payment to guarantee the availability of the lawyer or firm at a future date. As with other billing methods, the parameters of the retainer should be set in the engagement agreement.
- Value billing
Rather than setting price by a standard unit or result, value billing lists actions taken to benefit the client, beyond the time of how that value is applied. Rapid return of phone calls, personalized service, unexpectedly good results - these are all examples of value-added actions that the lawyer can demonstrate and charge for. Deciding what the value is and who determines it must be done in the engagement agreement.
We've all heard that a cynic knows the price of everything and the value of nothing. When it comes to pricing our services, lawyers can't afford to be cynical. Considering alternatives beyond the billable hour may be the best way to maintain good client relations - and to get paid.
