Looking at Fees and Billing with a Fresh Eye

What if collection problems prevail across your entire clientele – not just a few accounts?  It may be time to turn a critical eye toward your current fee structure and billing practices:legal_document_istock_0

Switch to AFAs – Alternative Fee Arrangements

Combining flat and hourly or hourly and contingent fees may solve at least some of your cashflow problems. In litigation it’s easy to dismiss flat fees as unworkable: “I just can’t do it because the nature of the case is too unpredictable.”

Is this really true or is it an excuse not to change?

Let’s take dissolution.  I would expect nine out of ten lawyers to reject flat fees outright, but wait a minute.  Fees aren’t “all or nothing.”  More accurately, they’re anything you want them to be (almost). Therefore, it is perfectly doable in dissolution to flat fee at least the first stage of the case:  initial client interview, client follow-up, preparing and serving the petition, initial mandatory discovery.  Go hourly thereafter, but look for other opportunities (stages/discrete tasks) where you can propose flat fees.  In short, be more flexible.  Done right, an AFA could mean collecting a flat fee up front for the initial stage of the case with a requirement for an evergreen retainer once hourly billing kicks in.

Do a Better Job of Educating Clients

As I’ve noted before, many a collection problem can be traced back to the initial client interview when the lawyer failed to adequately discuss billing practices. If you don’t have an honest, open discussion about fees, costs, and billing practices, reform now!

  • Reinforce what you tell the client by using billing brochures enclosed with your fee agreement.
  • Or if you don’t like the brochure idea, attach a one page bullet list of your billing procedures.
  • Prefer to be paperless?  Send clients to a private web page that serves the same purpose. Consider requiring clients to read and accept your web-based billing procedures before eSigning your fee agreement.

Why am I suggesting brochures, lists, and web pages?  The brutal truth is that even the shortest fee agreement is probably too long for the average client to digest.  But we can make billing more understandable!

When you separate and reformat billing details using brochures or bulleted lists you improve readability.  [Much like what I did in the preceding paragraphs.]  Improving readability increases comprehension and understanding.  If you go the Web page route, use the same or similar formatting techniques.

Change How You’re Paid

It’s hard to imagine a law firm that doesn’t accept credit cards, but I know you’re out there.  If you’re part of this group, and you’re also experiencing collection problems, start taking credit cards.  Yes, there are a few things you need to know – for example – how to pick a merchant to process payments and what to do about merchant fees (aka credit card surcharges or transaction fees).  But I’ve got your back.  Read the hyperlinked posts included above and you’ll get the answers you need.

Not convinced? Statistics reveal that 43% of consumers prefer to pay by debit card, 35% with a credit card.  Granted, legal fees are not a typical consumer purchase, but still: why would you disregard what many consider a preferable payment method?

Credit cards can be an ideal solution for collecting flat fees earned upon receipt or the cost of an initial consultation.  Many a family law lawyer has shared that clients would not be able to afford their services without the ability to put their bill on a credit card…

Be More Like Bugs Bunny

Yes, this is the carrot/stick metaphor.  It’s this simple: discounts are a client motivator.  If you want to collect a retainer, up-front fee, or take care of an outstanding balance give the client a financial incentive to pay you.

Here are some examples:

  • Your rate is $250 per hour if the client is invoiced, but if the client establishes a retainer, your rate is reduced to $200 per hour.  [Establishing a retainer triggers the lower hourly rate.]
  • You offer preparation of a complete estate plan at $2,500, due and payable upon completion.  If the client is willing to pay up front before work begins, your flat fee is reduced to $2,000.  [The earned upon receipt fee triggers a $500 savings to the client in return for being paid now.  Remember to comply with earned upon receipt payment rules and get your fee agreement in writing.]
  • You offer 10% off your bill if the client remits payment within 10 days (instead of the usual 30 or more).  [Your early payment discount saves the client money and allows you to collect the outstanding receivable in one-third the usual time.]

There is no magic wand in collections, but a willingness to start over and shake things up can make a difference.

All Rights Reserved – Beverly Michaelis – 2017.

Setting Your Hourly Rate

Value billing.  The words alone sounded so good in 2000-whatever or 1990-something. But transitioning from concept to reality?  It was never easy and still isn’t.

Keeping it 100

Here’s the reality: everyone who uses flat fees or AFA/hybrid fee arrangements referenced or started with an hourly rate.  That’s the math, folks.  Unless you’re a 100% contingent fee lawyer who never intends to change practice areas, you need to have a sense of how to price your services on an hourly basis.  Here’s how to go about it.

The Anecdotal Approach to Pricing

We could also call this: “If Susan down the street charges $200 per hour, so should I.”

If you’re basing your hourly rate on what one, two, or a handful of other lawyers are charging, your sample group is too small.  Period.

I’m not saying don’t gather anecdotal data.  It can be informative.  Most of us can learn a lot from talking to colleagues or mentors about pricing and billing practices, especially if we’re new to an area.  But anecdotal data needs to be balanced with something more.

Use the Data the Bar Gave You

Every five years the Oregon State Bar conducts an economic survey.  If the bar adheres to its quinquennial pattern, the next survey will occur in 2017.  For now, use the 2012 survey. The important data on billing practices begins on page 29, “Hourly Billing Rate by Total Years Admitted to Practice,” reported by years of practice and geographic region. To use this data effectively, find where you fit based on years admitted to practice and area(s) of law, then scroll over to your region of the state.

Billable Rates by Years of Experience: Lawyers Admitted 0-3 Years

  • In 2012, the lowest hourly rate billed by this group was $113 in the lower valley versus a high of $246 per hour in Portland.
  • Statewide, lawyers admitted 0-3 years billed an average of $156 per hour.
  • While there are a few geographic blips here and there, the data bears out what common sense would predict: the longer you practice, the higher your billable rate.

Next, jump ahead to page 31, “Hourly Billing Rate by Area of Practice.”  Find your area(s) of law, then locate the rates for your region of the state.

Billable Rates by Areas of Law

  • The average hourly billing rates ranged from a low of $190 per hour for civil litigation-insurance defense to a high of $291 for civil litigation-defendant (not including insurance defense).
  • Other statewide average rates were:  Bankruptcy $269, Criminal $214, Family Law $214, Real Estate/Land Use/Environmental $283, Tax/Estate Planning $239.

Keep on Keeping On With the Law of Averages

Once you know the average hourly rate based on years of admission and area(s) of law, tally the rates and take the average again.  Once you know this number, feel free to reflect back on the anecdotal data you gathered.  If your anecdotal data differs wildly from what the survey says, go with the survey.  Use this hourly rate when calculating flat fee and hybrid fee arrangements.

Cultivate Confidence

Some lawyers low ball their rate because they don’t feel they can charge “what the survey says.”  Newer lawyers often fall into this category.  But perspective is everything: if you did the same work as an associate for a firm, rest assured they would bill clients in the average to high ranges documented by the bar.  Why, intrinsically, should your rate as a solo be any lower?

Nonetheless, part of the process of setting your rate is finding a comfort zone for what you charge.  If you can’t quite stomach the average and need to take it down a tick or two, I respect that decision [even though I may try to talk you out of it].

Either way, you must be able to face potential clients and communicate your rate in a matter-of-fact, businesslike, manner – with confidence and without hesitation.

[All Rights Reserved 2016 Beverly Michaelis]

 

 

 

The 5 Rules of Alternative Fee Arrangements

Call it an alternative fee agreement (AFA) or a hybrid fee agreement (HFA).  Lawyers are looking for creative ways to appeal to clients who are resisting the traditional hourly rate approach.

In this classic reboot, we examine AFA and HFA options and how you can ethically deploy them in your firm.money-tree

Employment Law HFA

Consider the employment law case that is less than a slam dunk.  You could put in many hours only to see no fee. Ah, the life of a contingent fee practitioner.

Or is it?  One creative lawyer decided to offer his client a hybrid fee arrangement: a reduced hourly rate of $100 per hour with a 25% contingent kicker in the event of a recovery. (Lower than the “going” contingent rate of 33%.)  If the client agrees, and your fee agreement passes the test below, there is nothing wrong with such an arrangement.

Family Law HFA

Among family law practitioners – who are forbidden to take a contingent fee – a popular hybrid fee arrangement incorporates a flat fee earned upon receipt with an hourly rate that kicks in at a specific stage. The flat fee compensates the lawyer for work done in the early stages of a case: initial consultation; file opening; drafting and finalizing the Petition for Dissolution (or preparing a response); serving the opposing party; drafting and serving the first request for production of documents.  The flat fee could encompass additional services – each lawyer can determine where the cut-off should be – but charging a flat fee for time spent from the first consultation through initial discovery is predictable and easy to do.  Again, if the client agrees and your fee agreement passes the test below, this is a perfectly fine arrangement.

Does your HFA or AFA Pass the Test?

To create an ethical alternative fee arrangement, apply the rule of the 5 “C’s:”

  • Clarity
  • Completeness
  • Compliant
  • Common sense
  • Can’t be excessive

Clarity

If a fee agreement is ambiguous, it must be construed against the lawyer. Cf. OSB Formal Ethics Op No 2005-15.” Oregon State Bar (OSB) Formal Ethics Opinion No. 2005-124.

If you decide to experiment with your fee agreements, strive to be as clear as possible.  With the employment law scenario, the main challenge is the math.  Conceptually the idea is pretty clear.  With the family law scenario, the number one problem is failing to explain what the client is “buying” with the initial flat fee earned upon receipt.  Just how far does the $1,000 initial payment go and when does the $200 per hour rate kick in?

Completeness

Consider all possibilities.  A good example in the employment law context: if you have the right to recover attorneys fees, address this in your agreement.  See OSB Formal Ethics Opinion No. 2005-69  [Attorney fee awards are the property of the client unless “the terms of the fee agreement expressly provided that Lawyer was entitled to the greater of the fee computed thereunder or the court-awarded amount.”]

Fee agreements should address all conceivable outcomes.

Compliant

May I also suggest reviewing this excellent article: Helen Hierschbiel, “Alternative Pricing Models: What’s in a Fee?,” Oregon State Bar Bulletin (November 2011).  Practice Tip: flat fee earned upon receipt fee agreements must include special “disclosure” language set out in Oregon RPC 1.5.

Common Sense

Don’t torture yourself or the client trying to figure out the math of your hybrid fee agreement.  Once you’ve developed a sample, run it by your next door neighbor or another lay person.  Ideally, run it by several nonlawyer friends.  Does it make sense to them?  If not, go back to the drawing board.  Remember: “If a fee agreement is ambiguous, it must be construed against the lawyer. Cf. OSB Formal Ethics Op No 2005-15.” Oregon State Bar (OSB) Formal Ethics Opinion No. 2005-124.

Can’t be Excessive

“The Oregon State Bar Legal Ethics Committee has also said that split contingent/hourly fee agreements do not automatically violate the rules of professional conduct. See OSB Formal Ethics Opinion No. 2005-54. However, the committee cautions lawyers that a fee that appears to be lawful at the outset, may turn out to be clearly excessive in the end….” Helen Hierschbiel, “Alternative Pricing Models: What’s in a Fee?,” Oregon State Bar Bulletin (November 2011).

All fees are subject to a look-back at the end of the case. The employment law HFA is more likely to be challenged than the family law HFA.  In the employment law scenario, tabulate the total hourly fees charged to the client and your contingent fee share of the recovery.  Add the two together.  Do these exceed the standard contingent rate of one-third?  If they do, you may be on perilous ground. Helen’s article, Alternative Pricing Models: What’s in a Fee? discusses all the factors that go into gauging the reasonableness of a fee.

Parting Thoughts

Developing alternative fee agreements that are ethically compliant and legally enforceable can be done – don’t get discouraged.  Check out the ABA book: Alternative Fees for Business Lawyers and Their ClientsIf you are an Oregon lawyer but do not belong to the ABA, use the Professional Liability Fund discount code at checkout to save money: OSBPLF.

[All Rights Reserved 2016 Beverly Michaelis]

Postscript

Thanks for joining me during Finance Month.  March will begin with two posts on technology.