The Death of Hourly Billing, Part 2: Alternative Fee Structures Your Firm Will Love

5 min read

Here are just some of the ways you can move away from hourly billing and start gaining economies of scale.

Hourly billing has been the go-to billing method for law firms for over a hundred years. It’s a well-established and deeply entrenched part of legal culture; increasing billable hours is easily one of the most common goals law firms share.

But what if hourly billing wasn’t all it’s cracked up to be? What if, instead of enabling your firm to succeed, hourly billing was holding you back from increasing your revenue?

In our previous article on billing best practices, we outlined the history of hourly billing and explained the many reasons why hourly billing is problematic for both clients and firms. Now, it’s time to examine some of the different ways that your firm can move away from hourly billing and start realizing the benefits of alternative fee structures. Here are some of the unique and lesser-used billing methods that hold the most promise.

Flat-Fee Pricing: Great for Standardized Work

Flat-fee pricing is exactly what it sounds like: Your firm charges a fixed, flat fee for each deliverable you provide. So, for instance, you could charge $1,000 for an incorporation or $800 for a simple will.

If your firm tends to perform many of the same types of professional services for your clients, a flat-fee pricing structure could benefit you in a number of ways. Flat fees make it easier to achieve economies of scale by decoupling your time from your value; they also help to create a more predictable and stable revenue stream. Flat fees also enable you to bill clients upfront, which can help with cash flow.

Many clients also prefer flat fees because they offer something that hourly billing doesn’t: Predictability. Retainers can run into overages, and hourly billing can exceed clients’ budgets; with flat fees, your clients know exactly what they’re getting into.

Coming up with a menu of flat fees doesn’t have to be painful or time-consuming. Simply look over some past client bills to see how many hours the average incorporation takes, for instance, and then multiply that by your hourly rate to get a flat fee.

Monthly Subscriptions: Ideal for Ongoing Arrangements

Monthly subscription billing has become popular in the consumer and B2B spaces for a variety of different services. Now, some innovative professional services firms are using monthly subscription fees to maintain predictable revenue while giving clients an affordable means of accessing legal and professional services.

A monthly subscription is exactly what it sounds like; your clients pay you on a monthly recurring basis much in the same way that one would pay for a Netflix subscription. When your clients start their subscription plan, they choose a set menu of legal and professional services that they want to access every month – for instance, contract reviews. Your clients would then utilize those services on an ongoing monthly basis for the duration of the contract.

Monthly subscriptions offer law firms the benefit of guaranteed monthly revenue for a set volume of work; they also enable firms to develop a deeper client relationship over time that can then grow into more services. 

Portfolio Billing: Coverage for All Work in a Set Timeframe

Portfolio billing is similar to flat-fee pricing, except that the amount paid is one large sum that covers a variety of legal services. So, for instance, if your corporate legal department or firm is working on an incorporation, a series of one-off tax matters, and an annual maintenance all for the same client, you can bundle all of the fees for those different services together into a single portfolio fee.

Alternatively, if you know that your client will require the same amount of work every year, you can bundle your prices into a portfolio fee for the entire year.

Portfolio fees offer several advantages for clients and firms. First and foremost, your firm can bill upfront for a vast amount of work, which can aid your firm’s cash flow. Secondly, your clients will have the peace of mind of knowing exactly what they’ll pay for services – with no possibility of overage fees.

Fee Collar: Flexibility and Peace of Mind

A fee collar is a modified flat fee that partially incorporates hourly billing. To establish a fee collar, the client and the firm first agree on a flat fee. Then, they agree on an overage percentage – for instance, 20%. The law firm tracks it’s time spent on the file; if, by the closing of the matter, the time spent on the matter falls within the overage percentage, the fee stays the same. If, though, the firm spent significantly more or less time on the matter than anticipated, then the fee changes.

For example, assume a $1,000 fee with a 10% collar. If the billable hours add up to between $900 and $1,100, the lawyer will be paid $1,000. If the firm’s billable hours only add up to $800, though, then the remaining $100 is split between the firm and the client. If the lawyer goes over $1,100 – and performs, say, $1,200 in billable work – then the lawyer is paid 50% of the difference, making the final bill $1,150.

While a fee collar is one of the more complex fee arrangements that law firms could use, it provides law firms with flexibility to go over or under the predetermined number of hours while still receiving fair compensation – and it provides the peace of mind of knowing that every hour worked is an hour at least partially compensated.

Hourly billing is old hat; it’s an outdated relic from the 1800s when the only other fee arrangement that existed was contingencies. With emerging new technologies making it easier for firms to gain economies of scale, and certainty, your value is no longer tied to the number of hours you work; that’s why alternative fee arrangements are soaring in popularity. You can even increase your billings by leveraging time-saving technology to get more work done in less time, enabling you to take on more clients. With the state of legaltech where it is, there’s no reason to continue billing hourly – not when just a few tweaks to your billing processes could net you much higher revenues.

What alternative fee structures has your firm tried? Let us know in the comments!

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