Pros & cons of fixed fee vs hourly billing in the legal sector

Both pricing models have their benefits and drawbacks for lawyers and clients and in this article, we look at each in more detail.

Published on 17 October, 2020 by Michael Fleuchaus

Tags: Profitability

The legal sector is experiencing a shift in how services are delivered as new pricing models are emerging in the market. Traditionally, hourly billing has been the standard for law firms. Clients are billed on an hourly basis for the length time a lawyer spends on a case.

However, in recent years, fixed fee billing has become more common. According to Bloomberg Law’s most recent Legal Operations & Technology Survey, 74% of the AmLaw 100 mentions ‘alternative fee arrangements on their website. With this pricing model, the lawyer and client agree the total cost up front and payments are typically spread out over the course of the case.

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Both pricing models have their benefits and drawbacks for lawyers and clients and in this article, we look at each in more detail.

Hourly billing: the pros

Perhaps the biggest benefit of hourly billing is its familiarity. Lawyers are used to billing by the hour and clients are used to paying an hourly rate. For some clients, this familiarity provides a clear way of comparing one law firm to another. For law firms themselves, hourly billing can be very profitable, particularly in long, or complex cases.

When the length of a case is unknown, it can be challenging to estimate the workload. An hourly fee enables lawyers and clients to proceed on the basis of recurring need, allowing for increases in workload when required.

For many clients, hourly billing is clear and understandable. It allows for flexibility if the workload of increases or decreases and it can reduce administration time on small matters.

Hourly billing: the cons

The most obvious drawback of hourly billing is that it could be seen to incentivize inefficiency on the lawyer’s part. After all, the longer a case goes on, the more money the law firm makes with an hourly billing model.

Hourly billing also creates an element of uncertainty for the client. When work is charged per hour, clients aren’t able to budget for the entirety of a case and may end up spending significantly more than they first anticipated.

It’s also said that hourly billing encourages performance to be measured against financial targets, rather than the value provided to the client. The success of a lawyer becomes determined by their billable hours rather than their skills, experience or innovation.

Fixed fee billing: the pros

According to a 2016 survey conducted by law firm Altman Weil, law firms that embrace alternative fee arrangements, enjoy a seven-year trend of success. From a client’s perspective, fixed fee billing provides cost certainty, enabling them to plan their finances more effectively.

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A 2016 report from LexisNexis found that nearly 7 in 10 clients on fixed fees said they would ‘wholeheartedly’ recommend their lawyer, compared with 45% of those on hourly fees. This predictability means there are no surprises for clients when the final fee is invoiced.

Fixed fees also enable clients to make better decisions as they can weigh the costs of legal representation against the benefits and drawbacks of winning or losing the case.

With fixed fee billing, the focus is on value rather than billable hours, which aligns with the interest of the client and the law firm. Lawyers are encouraged to work efficiently to add as much value to the client’s case as they can. In a word, fixed fee pricing encourages problem solving.

One example of a law firm that operates on a fixed fee basis is Danish company Legalup. Their subscription service offers a range of packages at various fixed prices, which enables clients to make more informed decisions about whether to pursue legal representation.

Fixed fee billing: the cons

One drawback of fixed fee billing is that lawyers may overestimate or underestimate the amount of work involved in a case. With the former, a law firm could find itself out of pocket if a case takes longer than expected. And with the latter, the client could be the one who is left feeling short-changed if a case is wrapped up quicker than expected.

For some clients, the idea of fixed fee billing might be daunting. The idea of paying a large sum, albeit in staggered payments, can feel riskier than simply paying an hourly rate on an ongoing basis.

Long or complex cases aren’t always well-suited to fixed fee pricing. For example, the introduction of new evidence can significantly extend the length of a case, in which instance, an hourly fee might be better suited to minimise financial risk to both parties.

How technology is impacting pricing in the legal sector

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Technology is providing law firms with an increasing number of ways to collect, analyse and leverage data in regards to pricing their services.

For example, legal tech software like WiseTime, enables law firms to autonomously track where their time is being spent. This historical data can then be used to estimate the workload of future cases and to provide an accurate cost to the client.

With this data, law firms can compare the actual time spent on cases with the time that was billed to gain insights into whether hourly or fixed fee pricing is working best.

Autonomous timekeeping software also enables law firms to see where they could be losing out financially. Analysing historical data can help firms adjust their workflow processes to be as efficient as possible.

 

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