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Thursday, October 18th, 2012 technology  research  practice

A Practice Tip

  • Practice

Many lawyers are fearful of moving away from hourly-rate billing because they are concerned that alternative-billing will be a risky bet.  Is there a way to ensure that you, the lawyer (or the “house” in betting parlance) will win the majority of the fixed-fee bets?

Of course there is, but you have to lay the groundwork before moving to this type of billing.  Here is one suggested method.

First, track or review your actual time and amount billed for all files of the type for which you are considering moving to fixed rate billing.  You should probably review not less than five such matters unless the vast majority of such cases are extremely routine.  Next, do the stats.  Running a statistical regression in Excel will provide you with the average fee you earned on the cases reviewed and the average time that you put into these types of files, as well as the first standard deviation above the average fee.  The standard deviation is a measure of how widely values are dispersed from the average (mean) value.

Once you have these calculations they provide you with a couple of options to offer to clients.

  • an hourly rate quote or
  • a fixed-fee quote that is one-standard deviation above your ‘average’ fee for this type of matter.

Even if the client selects the fixed-fee quote option, you have still placed the odds that you will make money on the matter in your favor because your fixed-fixed quote is priced statistically well-above what it costs you to handle an average matter of this type.

Setting your pricing in this fashion is essentially the same way a casino makes sure that it always comes out ahead.  The house doesn’t win every game every time but, on average, they win more than they lose because they set up the bets and the payoff odds in their favour.

Because clients are often more than willing to pay a bit extra for the comfort of security – in the form of a known top price that a particular legal service will cost – you can also go into this type of arrangement fairly certain that, most of the time, you will come out ahead.  In addition, you will have every incentive to do the work more efficiently than if you did it on an hourly rate basis, since every minute  you save in providing work under a fixed fee quote is a dollar in your pocket.

And, unlike our casino analogy, in this case everyone wins!

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